The unfettered boom in ESG debt has created some accounting concerns that are in urgent need of regulatory attention, according to Europe’s markets watchdog.
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Firms are booking the value of so-called sustainability-linked bonds and loans in inconsistent ways, the European Securities and Markets Authority has found. The development has the potential to “negatively affect the decision-making of financial market participants and thus the efficient functioning of capital markets,” ESMA told Bloomberg in an emailed response to questions.
Demand for such debt products has soared in recent years and Moody’s ESG Solutions expects the ESG bond market alone to hit about $1.4 trillion in 2022, as issuers try to tap into seemingly insatiable demand for ethical investments. But accounting rules for determining their asset and liability values aren’t keeping pace with the market boom, leaving firms to apply varying valuation models.
ESMA says it’s concerned that existing plans by the International Accounting Standards Board to regulate the market are moving too slowly, and is now calling on IASB to treat the valuation of ESG debt as a matter of urgency. The board should set specific guidelines for valuing instruments whose interest rates change based on environmental or social targets, according to ESMA.
The IASB says it’s reviewing the rule known as IFRS 9, which determines how financial assets are valued, and is going over the feedback it’s received on accounting for ESG elements in loans, bonds and structured instruments.
The board says that review includes a closer look at “market changes since the accounting standard was issued” back in 2018, “and how responsive the accounting standard has been to those market changes,” a spokesperson said. “In that context, many stakeholders have provided information about the development of loans with interest rates that vary depending on whether the borrower meets pre-determined ESG targets.”
But that review process — and any potential action based on its findings — is in danger of being too slow, according to bankers, businesses and regulators.
Read the full article here by Frances Schwartzkopff, Advisor Perspectives
