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ESG Concerns Are Finally Showing Up In the Bond Market

Debt investors are beginning to differentiate between energy firms that are more or less polluting in a potentially meaningful way.

A pump jack stands in the Permian Basin area of Loving County, Texas.
Photographer: Angus Mordant/Bloomberg

Here’s a bit of good news from ESG land, a place all too often marked by overly-enthused press releases, limited oversight and a patchwork of regional rules and incentives that can sometimes result in worse outcomes for the planet.

ESG concerns finally seem to be showing up in the funding costs for oil and gas companies, with bond investors beginning to differentiate between energy firms that are more or less polluting, according to new data from S&P Global Ratings. They’re also differentiating between European energy firms that have typically committed to much more ambitious climate change goals versus their American competitors.

That means the bond market may finally be ‘punishing’ more polluting energy firms with higher funding costs.

Or as S&P credit analysts led by Michelle Dathorne put it: “[We’ve] recently observed contracting bond tenors and widening spreads for North American oil and gas debt issuers, relative to those of European peers and the broader corporate fixed income universe, suggesting that investors' growing focus on ESG and credit risk may be affecting demand for new issuance from oil and gas companies.”

You can see some the variations in funding costs in the below S&P charts, which estimate new-issue yield curves for more and less carbon-intensive U.S. and Canadian energy firms. The implication here is that greener oil and gas companies are able to sell new debt at a lower cost than their more polluting peers. Of course, there 

Meanwhile, European oil majors have potentially been rewarded by lenders for their emissions-reduction targets and billions of dollars devoted to renewable energy projects — and are now able to term out their debt by potentially selling longer-maturity bonds, as the below S&P chart shows.

While it’s hard to disaggregate everything that could be leading to European oil firms issuing more longer-term debt, the trend might be interpreted as bond investors quite literally expressing their belief that companies with more ambitious climate agendas have a more viable future than those who don’t.