The launch of the world's first environmental, social and governance, or ESG, bond by a steelmaker is expected to encourage other companies in the metals and mining sector to make similar issuances, but analysts said the ESG bond market is still nascent for the sector and many companies are adopting a wait-and-see attitude.
POSCO earlier this month became the world's first company in the steel sector to issue ESG bonds by raising US$500 million to expand its investments in electric vehicle battery metals and renewable energy projects.
The issuance coincided with a string of South Korean companies issuing ESG bonds in recent months as the country aims to reduce greenhouse gas emissions by 37% from 2018 levels by 2030. Among the issuers in June include the Korean government, raising US$500 million from investors and Korea Electric Power Corp., which issued US$500 million in green bonds.
An ESG bond is a type of debt offering aimed at financing corporate activities related to the environment, social responsibility and governance improvement.
Some South Korean companies engaged in the EV battery metals-related business such as SK Innovation Co. Ltd. and LG Chem Ltd. may issue ESG bonds when they have financing needs, Shawn Park, an associate director with S&P Global Ratings covering POSCO, said in an interview.
William Goh, a fixed income analyst with asset manager Lion Global Investors in Singapore, said another prospective issuer is mining company Korea Resources Corp. However, he added that it was less likely the company would make its debut on the U.S.-dollar bond market as an ESG issuance due to its more onerous disclosure requirements.
Paul Milon, senior ESG investment specialist of APAC at BNP Paribas Asset Management, also expects more companies in the metals and mining sector to issue ESG-related bonds. "When one company in a sector issues a sustainable themed bond, its peers take notice and will also issue similar deals within the next 12 months, similar cases can be seen in the telecommunications and supermarkets industries," Milon added.
But Milon cautioned against "issuing for issuing's sake." "Companies must first have a coherent, credible, and meaningful strategy for transitioning into a more sustainable company, and then look for financing opportunities to help them with the transition," he said.
When launching ESG bonds, metals and mining companies may face challenges in articulating the sustainability credentials of financed projects, said Matthew Kuchtyak, an analyst with Moody's.
Mineral extraction and smelting are among the most power-intensive and environmentally disruptive industrial processes. The environmental risks for companies in the metals and mining sector are among the highest across all sectors, according to a June 3 S&P Global Ratings report.
In POSCO's case, analysts believe the main benefit to the company is the enhancement of its brand image as an environmentally conscious steelmaker, which outweighed the benefits of meeting its financing needs.
"The implication of POSCO's issuance to the bond market is not that significant. POSCO is a high-profile company, and I don't see POSCO can financially benefit that much from issuing these bonds," Junhong Park, a director and credit analyst with S&P Global Ratings said.
Steelmaking is carbon emission-intensive and this is a good way to enhance their brand image, S&P's Shawn Park also said.
Meanwhile, analysts do not expect steelmakers in China, home to the world's second-largest green bond market, to issue ESG bonds in the near term.
According to the S&P Global Ratings report, Chinese coal miners and steelmakers rank at the top of a list of issuers exposed to environmental credit risk due to the Chinese government's decision to reduce air pollution, which so far has led to the closure of more than 150 million tonnes of steel capacity.
Danny Huang, director and lead analyst of China commodities at S&P Global Ratings, does not expect Chinese steelmakers to have significant initiatives in renewable energy or related technology that require financing through green bonds in the near term.
BNP's Milon said the current drivers pushing the green bond market in China are clearer environmental and economic objectives from the government, mandatory disclosure on ESG issues for listed companies by 2020, and increasing effectiveness of regulators via monitoring technologies to identify pollution violations by companies. Thus, he said he would not be surprised if the market sees an internationally aligned green bond from a Chinese steelmaker in the near future.
Moody's Kuchtyak said he expects continued growth in Korean sustainability bond issuance in coming years as issuer awareness continues to grow and investor demand throughout Asia for such instruments continues to expand.
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