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ESG bond market shrinks significantly in 2022
By Anna J. Park
With increased external and internal economic uncertainties, corporations have opted for survival as their top priority over considerations of economic, social and governance factors ― ESG principles ― in their management strategies.
As a result, the weight of ESG bonds issued by corporations aiming to achieve environmental, social or governance improvements with the raised capital has been significantly reduced this year. It is a stark contrast from last year, when companies in various sectors, ranging from construction, to energy and retail, focused on issuing sustainable bonds.
According to data by the Korea Exchange (KRX), the proportion of ESG bonds out of aggregate local bonds issued in the third quarter of this year dropped to 12.5 percent, which is about 10 percentage points lower than the same period last year. In particular, the weight of ESG bonds issued by general enterprises plunged to 1.6 percent in the third quarter of this year, which is down considerably from 18 percent logged in the first quarter of last year. In just a year, the atmosphere surrounding it has completely shifted.
Now that general companies tend to avoid issuing ESG bonds, the sustainable bond market has mostly been dominated by state-run companies or financial institutions. It is considered a reversion to a few years back, when general corporations in Korea did not have much room to include ESG goals into their management priorities.
Korea Investors Service (KIS) assessed during a recent seminar that Korea's ESG bond market has somewhat retreated from achievements made in the previous year, adding that it demonstrates that ESG principles have yet to take root firmly in the Korean enterprise scene.
Some view that this year's shrinkage is due to a base effect, meaning that last year's expansive growth in the ESG bond market was such a rare one that this year's performance appears worse off due to the unfavorable year-on-year comparison to last year's exceptional figures.
Whether this year's shrinkage is pronounced due to the base effect or it really does show a regression of the sustainable principle in the country, one thing market participants agree upon is that the key factor attributed to the reduction is that corporations now face more urgent priorities and goals than ESG criteria.
"With continual interest rate hikes, along with liquidity crunch crisis in attracting necessary capital, companies' utmost importance at this juncture is proving their financial soundness for their key business models. The importance of the sustainable and social responsibility agenda has relatively been pushed back in priorities," a market analyst focusing on credit ratings pointed out.
Meanwhile, a research paper published Tuesday by Samil PwC also shows that global CEOs feel the pressure of the dilemma as they face divergent targets of satisfying ESG goals while also seeking short-term profits. The paper advised that corporations are required to find a balance between long-term ESG strategies and short-term profits.
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