Was it the weak banking sector outlook alone spurring the investor sellout of ESG assets, causing the asset decline?
Or did Credit Suisse particularly have a bigger play on ESG assets, unlike other banks?
It did.
Unlike other banks, Credit Suisse was a leading player in a (very) less known ESG asset class. This asset class links not to the mature, developed markets but to the developing world: It is the Debt-for-Nature Swaps (DNS).
This swap is usually applied by developing countries with debt.
Debt-for-nature swaps help a country restructure its debt. The interest on their selected debt is lowered giving the country relief. Its proceeds go to nature conservation work or “green projects” in the receiving country. At times, instead of lower interest rates, the restructuring could also be in the form of the country receiving an extension for repayment of debt.
It is said that Credit Suisse not only played the Debt-for-Nature Swaps market well, but it quietly conquered it! In other words, despite going bust and being later rescued by UBS, Credit Suisse has brought significant value to the global ESG industry by enlisting the developing countries-the “rainforests”!
Natasha White, writing in Bloomberg, provides a detailed account on this. An extract:
“Credit Suisse had quietly become a major player in an obscure market that purports to help developing countries ease their debt burdens in exchange for protecting nature. Known as debt-for-nature swaps, the complex financial instruments help governments restructure their debt to raise money that can be used to fund conservation efforts. Credit Suisse was the sole structurer and arranger of the world’s largest debt-for-nature swap, a $364 million deal that it orchestrated in 2021…” (“Before Collapse, Credit Suisse Quietly Conquered an Obscure Debt Market” – By Natasha White- March 21, 2023-bloomberg.com)
It is in Credit Suisse’s such value-adding work (that too, at significant levels) on the Debt-for-Nature Swaps and then unexpectedly going bust (due to reasons unrelated to Debt-for-Nature Swaps) that led to an ESG investor panic. The significant value added by Credit Suisse’s work on Debt-for-Nature Swaps was unexpectedly overshadowed by unrelated issues, leading to ESG industry panic, though temporarily.
How temporary?
Very temporary…less than one month, at best.
By the first week of April, ESG fund flows were bouncing back. Tommy Wilkes and Patturaja Murugaboopathy report via Reuters:
“Investment funds with environmental, social and governance (ESG) goals appear to be back in vogue in 2023, although the banking crisis that roiled markets last month removed some of the shine as investors withdrew cash towards the end of the quarter…Across ESG debt, equity, and multi-asset funds, net inflows hit $25.5 billion, the best quarter since early 2022, the data shows..” (April 6, 2023)
