ESG structured products rise to meet investor demand

Bloomberg Market Specialist Luca Wappenschmidt contributed to this article. The original version appeared first on the Bloomberg Terminal.

Background

Global structured note issuance rose 53% last year, partly driven by investors seeking customized exposure to environmental, social and governance plays. Among popular ESG investments are notes that offer high coupons on condition an underlying equity index breaks a certain level.

More ESG-linked investment products are being released as the European Union supports sustainable investment activities, including a taxonomy of activities regulators will promote or punish.

ESG’s momentum will be accelerated by such policy support, shareholder activism and growing demand. “Investment banks are almost always driven by what customers want, and demand for environmentally-friendly bonds isn’t going to wane anytime soon,” Jeff Harte, an analyst at Piper Sandler Cos., told Bloomberg Green.

The issue

Structured note issuance totaled $175 billion in 2021. Sales surpassed $114 billion in 2020 but remained less than half of the highs seen in 2010. France, Germany, U.K., Luxembourg and Switzerland ranked just after the U.S. in issuance in 2021.

The market is showing demand for structured products that allow buyers to build specific exposure to ESG sectors while maintaining bespoke risk characteristics. Bloomberg’s Derivatives Library function, as shown in the following example, allows both investors and sell-side players to explore structured product ideas.

Type “derivatives library” and select DLIB.

For example, a standard autocallable linked to the MSCI World ESG Leaders Index pays a coupon if the underlying index passes an upside barrier, at which point it automatically matures and the investor’s principal is returned. So if the ESG index goes up by 10% in its first year, the note is redeemed early and the investor can accrue a coupon of around 21%, while being protected against any decline in the ESG index of less than 20% on a structured note priced at 100.

Tracking

The League Table function can monitor ESG structured product issuance.

Run ESG <GO> for ESG Metrics and Analysis.

For more information on this or other functionality on the Bloomberg Professional Service, request a demo with a Bloomberg sales representative. Existing clients can press <HELP HELP> on their Bloomberg keyboard.