(Bloomberg) -- While US state and local government borrowings have slumped this year, a growing share of the deals are labeled as environmental, social and governance debt, and such issuance will climb roughly 20% next year, according to Bloomberg data tallied by Barclays.
ESG muni-bond issuance will likely reach $45 billion to $50 billion in 2023, the bank forecast. New money deals are expected to rise as some governments struggle with higher costs amid inflation and federal Covid funds near exhaustion. Plus the Inflation Reduction Act of 2022 allocated funds for climate and energy. If the total amount of new money deals and the ESG share both rise, the amount of ESG bonds will also “likely increase,” according to Barclays.
“We believe that the trend of increasing ESG issuance is firmly entrenched for the foreseeable future,” Barclays municipal strategists led by Mikhail Foux wrote in a research note published Monday.
“Although greeniums in the municipal space remain small compared with other fixed income asset classes, more and more investors are buying ESG bonds, as substantially more funds are being dedicated to this subset of the municipal market,” the group said.
Such sales are expected to grow to roughly $40 billion this year from around $10 billion in 2019, according to Bloomberg data analyzed by Barclays.
Municipalities have ongoing capital needs from repairing roads and bridges to upgrading water infrastructure, and some issuers are focusing on the ESG implications of the projects they’re financing. The $4 trillion state and local debt market is showing increasing interest in such debt.
Just this month during the midterm elections, New York voters approved a $4.2 billion environmental bond measure to strengthen climate and flooding resiliency. The new debt will pay for green-building projects, water quality improvement and shoreline restoration in a state still recovering from weather-related disasters.
Lauren Kashmanian, a portfolio manager at Parametric Portfolio Associates, said that ESG-labeled bonds could reach $50 billion to $55 billion based on supply projections for next year.
“Issuers are looking to gauge investor demand and as more investors are interested in aligning their investments with their ESG values and goals, issuers are responding by highlighting the positive environmental and social attributes of the projects they are financing by labeling these bonds with a green, social, or sustainability label,” she said.
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