(Bloomberg) -- Debut issuance as a share of the sustainable bond market has dipped to a record low amid rising borrowing costs, dampening companies’ efforts to raise trillions of dollars needed to tackle climate change. 

First-time issuers around the world have contributed just 21% of the roughly $677 billion raised in sales of new green, social, sustainability and sustainability-linked bonds this year through September 15, according to Bloomberg-compiled data. That’s the smallest contribution since the inception of the green debt market in 2007. 

The sales slump follows a jump in average dollar, euro and sterling borrowing costs for corporations as many central banks hike interest rates to tame inflation. The high cost of capital and economic uncertainties are among short-term headwinds debut issuers face, according to Andrew Poreda, a senior research analyst at Sage Advisory Services. 

Issuance of green bonds, the largest sustainable debt category by amount, has historically been dominated by real estate investment trusts, utilities and energy companies, he added. “For those that haven’t, now might not be the best time,” he said.

First-timers must incur costs to develop a bond framework outlining how the proceeds will be used, get external verification and an additional burden of reporting to investors on the use of proceeds annually. The bond market has gotten “incredibly more sophisticated,” with ESG considerations now baked into conventional bond spreads, according to Moshe Tomkiewicz, head of investment-grade debt capital markets at Mizuho Financial Group’s Americas arm.

“There’s not really a tangible economic benefit for issuing an ESG transaction,” said Tomkiewicz at the bank’s Finance Leaders Summit last week.

To be sure, the sales slump for inaugural issues hasn’t been enough to slow the ESG funding machine — overall sales in ESG bond markets are booming and set to approach the record levels seen in 2021. S&P Global Ratings expects increased investor demand in key regions, issuers’ continued focus on the energy transition and supportive climate policies to also fuel ESG-bond sales in the second half of the year.

Net Zero Race

Companies and governments are spending billions of dollars on environmentally friendly projects amid pressure from regulators, investors and consumers. Thousands of protesters gathered in New York City on Sunday to call for an end to the fossil fuel use ahead of the United Nations General Assembly. They urged President Joe Biden to do more to fight climate change.

Energy transition investments — including in renewable energy and electric vehicles — hit a record $1.1 trillion last year, according to BloombergNEF. Still, investments must triple for the rest of this decade to get on track for net zero.

“It’s just a phenomenal amount of capital that’s going to be required and private credit is going to be part of that solution,” said Don Dimitrievich, energy infrastructure credit portfolio manager at Nuveen. 

The green bond market, while not the sole source of funding for companies and governments looking to fund their transition, will be an important mechanism, according to Andrew Karp, head of the sustainable banking solutions group at Bank of America Corp., the biggest underwriter of corporate bonds globally, according to current Bloomberg rankings.

“As the overall amount of capital that is allocated and required for these projects grows, you’re going to see a similar growth trajectory in the green bond market,” he said.

BNP Paribas SA, the biggest bank arranger of green bonds, expects sales of the bonds to hit a record $600 billion this year. Borrowers could raise as much as $1 trillion in all types of ESG bonds, according to S&P. Sovereigns and supranational agencies have historically been the trailblazers when it comes to climate funding, a trend that continues to this day, said Anne van Riel, BNP’s head of sustainable finance capital markets for the Americas.

The public fixed income market’s greatest strength and ability is the opportunity to scale, according to Stephen Liberatore, who oversees over $18 billion of fixed-income ESG and impact investments at Nuveen. But the precursor to scaling is getting investors comfortable with the structure, which can take a while, he added. 

“When you think about the opportunity to do a transaction of size, the public fixed income market is the easiest place to get that done,” said Liberatore. 

ESG Politics

ESG bond sales in the US have plunged amid a pushback by some politicians. The backlash is eroding the price advantage that borrowers get for selling dollar-denominated sustainable bonds, the so-called greenium, according to HSBC Holdings Plc.

Liberatore, who helped write the widely used green bond principles, says the green debt market is misunderstood. 

The structure was meant to help all borrowers, including those in high-emitting sectors, evaluate operations and identify opportunities to invest in environmentally friendly projects that can improve free cash flow in the long run. That improves the borrower’s credit profile and is a win for the environment, the borrower and credit investors, he said.

To mobilize more capital toward the energy transition, issuers will need to do more than just sticking a green label on a bond and actually deliver in terms of outcomes and impact, said Jules Kortenhorst, partner at Vision Ridge Partners. 

“Being precise about what sits behind that label from everything I can see is still a major step to be taken,” said Kortenhorst.

--With assistance from Jiayu Liu and Nina Trentmann.

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