The Green Deal (EN) #responsiblebanking

• Primary market: Solid start to the year with surprisingly strong participation of sustainability bonds
• ESG secondary market unchanged solid
• US ESG equity funds show net outflows in 2024 - Fixed income as positive outlier
• Deal of the month: Italian Utility A2A crowns itself as first EuGB issuer
• ESG Handbook Corporates AT: Austrian companies remain global pioneers, yet we find reporting and KPI differences among AT corporates

Solid market start for the EUR ESG primary market despite Donald Trump, but the volume of EUR 46 bn in January was significantly lower than in the two previous years. The high proportion of sustainability bonds (23% of the January EUR ESG issue volume) and social bonds (20%) was particularly striking at the start of the year, especially compared to the trend of recent years. However, we believe this is a short-term phenomenon. In the previous week, there were already many signs of “normalization”, with the share of green bonds back above 80%. Who is issuing? The presence of Supra issuers (20%) and Italian market participants (17%) was remarkable at the start of the year. The main driver of this start to the year was government issuers, which were responsible for almost 60% of January issues. Overall, we see the EUR ESG primary market remaining solidly supported, despite Trump's headwinds.

The first month of the new year did not bring any significant changes to the prevailing trends in the EUR ESG secondary market. Bund movements were once again the decisive factor for the overall return ytd, especially towards the end of January. The three ESG asset classes continued to trade at a premium to the overall index in January, showing a high correlation with the overall market. The German Greenium remains in positive territory, albeit driven by the short dated twin bond maturing in October 2025. But even excluding the latter, the Greenium remains at essentially 0bp. After having seen only two deals, it is difficult to estimate the extent to which EuGB have the potential to change the momentum of the greenium. However, we will monitor this and examine it in more detail at this point when the data is available.

2024 was the second consecutive year in which US equity funds with a sustainability focus suffered outflows. According to Morningstar, net outflows amounted to USD 19.6 bn, compared to 13.3 bn in 2023. The outflows look all the more dramatic when viewed in the context of the fact that overall funds reported inflows totaling USD 740 bn amid an overall very bullish 2024. This means that ESG funds show an 6% organic contraction which compares to an overall organic growth of 2.8%. The fund outflows reflect the current “anti-ESG” environment, particularly in the US. More and more US banks, most recently JPMorgan, are turning their backs on the Net Zero Banking Alliance, and corporates have also recently revised their diversity strategies. With President Trump back in office, the headwinds are likely to increase even further. Against this backdrop, there were only ten new funds launched in 2024, compared to 66 in 2023 and 116 in 2021 - the peak year. However, the fund outflows were not necessarily unwarranted. According to Morningstar, only 38% of (equity) sustainability funds were able to land in the first or second quartile ranked by total return.

Fixed income ESG funds, on the other hand, held their own in 2024 with inflows of USD 2.7 bn, bucking the trend on the US equity market. The higher yield level, which attracted investors, was probably also helpful. But performance was also better. 48% of ESG fixed income funds rank in the upper half.

• Italian utility A2A is officially the first issuer of a European Green Bond (EuGB). The EUR 500 mn deal enjoyed solid demand with an order book of EUR 2.2 bn (B2C: 4.4x), which is, however, not standing out in the current environment. The fact that demand was not overwhelming is also shown by the example of Autostrade per L'Italia's SLB, which was able to achieve a significantly higher oversubscription (5.6x) on the same day, albeit with a more convincing pricing. The pricing for the 10y A2A bond was set at ms+125bp, hence 40bp below the IPTs. This corresponds to a new issue premium of -5bp compared to the A2A Green Bond curve, which means the EuGB was priced more attractively vs other green bonds issued by A2A. It remains to be seen whether this is an isolated case or if the EuGB curve will establish itself as a new benchmark. As we explained in our last Green Deal, we are not surprised to see the first EuGB from the utility sector. The sector has the highest average EU Taxonomy alignment among EUR Green Bond issuers and also leads in Green Bond volumes. Utilites are also at the heart of the green transition by providing the relevant infrastructure for renewable energy. The projects to be funded by the bond proceeds include the development of an electricity network and renewable energy, energy efficiency and waste collection. Although the standard came into force on December 21^st last year, it has had to wait for the first issuer since then, probably due to still unclear and increased reporting requirements. However, Ile-de-France Mobilités has already followed suit.

ESG is playing an increasingly important role in corporate reporting. This is partly driven because transparency offers capital market players the basis to get a complete understanding of the investment case. With this in mind, we have once again published our ESG Handbook Corporates AT this year, in which we examine and analyze Austrian companies from the ESG perspective.

AT corporates continue to be global pioneers. For the Austrian universe, the median score is currently a very high 54 points, slightly above the previous year. With this scoring, Austrian companies can generally be found in the top 10-20% worldwide as the global median stands at 44 (score ranges from 1-100). Nevertheless, we find significant differences between Austrian companies and thus a considerable need to catch up in some cases in terms of the quality of ESG reporting. In addition, the KPIs themselves play a crucial role – here we see clear winners year-on-year while others lose ground.

That said, a large number of Austrian companies are making a significant contribution to the green transition with their respective product offerings or business models. These include utilities such as Verbund and EVN, which are seeking to significantly expand their portfolio of renewable power generation and are thus providing essential infrastructure for the green transition of many industrial companies in Austria. However, industrial companies themselves also play an important role for a greener future. For example, Andritz offers technologies for CO₂ capture, the production of green hydrogen or batteries for e-mobility, while FACC contributes to the decarbonization of the aviation industry with its lightweight products. Staying in the transportation sector, Kapsch TrafficCom offers a portfolio of traffic management systems that can reduce CO₂ emissions from road traffic. In addition, Mayr-Melnhof Karton, with a production process that predominantly uses secondary raw materials, is to be highlighted with regard to the circular economy, while RHI Magnesita enables the production of green steel with refractory products for electric arc furnaces. The latter is also a goal of voestalpine, as Austrian companies are also working hard on the decarbonization of their own production. For example, voestalpine - Austria's largest CO₂ emitter, accounting for 15% of annual emissions - is currently implementing its flagship project “greentec Steel”, which will save around 5% of Austria's annual emissions from 2027. By 2050, steel production should be completely CO₂ neutral. Many other companies, for example in the construction and related real estate sectors (Wienerberger, Porr, CA Immo, Zumtobel), are also making a significant contribution to a greener future.

On the Austrian debt capital market, however, ESG issuers continue to have a certain unique selling point despite their appropriate business models or projects. Of the companies listed below and scored, only 11 out of 28 are currently reporting ESG-related financing. In addition to Verbund, which currently has the most ESG-linked debt outstanding, RHI Magnesita, with EUR 1.4 bn of ESG-linked debt and a EUR 600 mn undrawn RCF, are clear pioneers in Austria. voestalpine also joined the select group of AT ESG issuers with a EUR 500 mn green bond in the past calendar year. In addition, Wienerberger and CA Immo are worth mentioning as regular ESG issuers, but several other AT issuers have also ventured into the debt capital market with SLB or green structures. ESG debt thus remains a opportunity to stand out in the AT corporate sector while expanding the investor base. In any case, the business models and comprehensive reporting of the peer group we analyzed would already be a good fit in many instances.