Bank of America Corp. (BofA) issued a $2 billion bond that aims to advance racial equality.
The initiative, backed by Vice Chairman Anne Finucane and Chief Operating Officer Tom Montag, is the company’s eighth environmental, social and governance-themed bond, bringing its total issuance in the category to almost $10 billion, the bank said in a statement.
The offering, which priced earlier this week, has the potential to help Black and Latino communities through activities such as mortgage lending, financing for businesses and medical practices, and equity investments, with some proceeds going towards renewable-energy and clean-transportation projects, Bank of America said.
“We want to be an example for other issuers,” Karen Fang, the bank’s head of global sustainable finance, said in an interview. “It doesn’t matter if it’s a bull year or a bear year, we need to be committed to these causes.”
Companies looking to fund environmentally friendly projects are tapping the green-bond market at the fastest monthly pace ever, figures compiled by Bloomberg show. September’s global green-bond issuance has already exceeded $30 billion, beating the prior record of $26 billion, set in November 2018. Issuance is expected to remain brisk as companies see an opportunity to show their green credentials and potentially reduce funding costs while investors increasingly focus on sustainability.
“I don’t think that trend will diminish even in the face of market volatility,” said Andrew Karp, the bank’s head of global investment-grade capital markets. “ESG activity will no doubt grow in the months and years to come.”
BofA’s five-year bond, which is callable in four years, will pay interest semi-annually at a fixed rate of 0.981% for the first four years, and quarterly at a floating rate after. The bank served as the sole bookrunner, while three minority-owned broker-dealers were joint lead managers: Loop Capital Markets, Ramirez & Co. and Siebert Williams Shank.
Within a year, the bank will publish a report on the bond’s asset allocation, and it will be updated as long as the notes remain outstanding, according to a statement.
Buyers pay up for
top-ranked ESG firms
Stocks with high environmental, social and corporate governance scores have outperformed the broader market and traded at higher valuations this year, according to Bank of America Corp.
During the first quarter’s selloff, S&P 500 members in the top quintile of ESG rankings beat the index by more than five percentage points, the lender said. Meanwhile, investors have also begun to pay less for stocks with lower ESG scores, with relative valuation premia rising on those deemed more socially responsible.
“Good ESG companies typically have better return on equity, lower earnings volatility and lower share price volatility,” Sameer Chopra, head of Asia ESG research at Bank of America, said at a briefing Wednesday. This year the ESG stocks that have grabbed investor attention include those focused on employee health and safety, he added.
Flows into ESG strategies were four times higher than the “historical run rate” of money going into such funds this year through July, BofA reiterated, reaching as high as $4 billion in some weeks this year.
The MSCI Asia Pacific Index’s members with the top 20% of ESG scores by the index compiler were trading at forward price-to-earnings ratios that were five points higher than peers at the bottom quintile at the end of 2019, up from the two-point gap in 2017, Chopra said. Asian companies with below-median emissions were trading at multiples that were about two points higher than their peers.
Meanwhile, the cost of debt for S&P 500 companies in the top decile of ESG scores was also lower by almost 200 basis points than those in the bottom decile in 2019, the bank found. Still, Chopra warned that even companies that have high ESG scores could potentially be negatively affected by carbon taxes. Due to their high carbon exposure and low margins, industrials and airlines stocks in Asia could see earnings being hit, he said.
The global push into ESG investing has gathered pace this year as governments channel virus-related recovery funds into health and environmental projects. Asset managers including BlackRock Inc. have touted the performance of their ESG investments as a shield against volatility and price declines. Still, some academic research has raised doubts about outperformance theories based on ESG scores, citing more traditional metrics such as leverage and intangible assets as reasons for returns.