Rapid interest-rate hikes deployed by policy makers have brought to an end a four-decade bull market in bonds. That’s creating a difficult environment for investors, with bonds and stocks sinking in tandem. MSCI's Index of global stocks has slumped 19% this year. Fixed-income investors are showing plenty of demand for government bonds as yields rise.

The share of green and sustainable bonds rose from 2% of all bonds globally in 2018 to 12% at the end of 2021, but investors have become less willing to pay the premium. They have wised up to bogus environmental claims, or so-called greenwashing. But the outflows from ESG bond funds in 2022 have been much lower than outflows from other bond funds.

It has become more difficult for European companies to raise money in the bond market. Bond transactions are being withdrawn. Fund managers are demanding much higher returns, but companies are balking at this higher price tag. The Bank of England wants to sell down its corporate bond portfolio and the ECB asset purchase programme is finishing.

Greening of “grey” industries offers interesting investment opportunities to withstand a high-inflation regime. EU’s green taxonomy sees investments as either green or not. But only 2% of the revenues of Europe’s top 50 companies would be judged to have come from green operations under the EU taxonomy, according to a study by ISS ESG.

Sales of stocks and debt decline. Businesses globally raised $4.9tn through new bonds, loans and equity in the first half of 2022, down 25% from the $6.6tn raised in the first half of 2021. The slide in new fundraising was concentrated among lower-rated companies, while high-quality, investment-grade issuance remained more in line with its historical trend.

Article 8 fund is an EU “light green” tag on over 600 funds that “promote” sustainability. It is still unclear what that means. Even EU regulators do not see eye to eye. It is “impossible” to do a meaningful comparison across products. Clients withdrew more than $30 billion from such products. A stricter ESG classification Article 9 funds saw $6 billion of inflows.

Police searched the offices of Deutsche Bank AG and its fund unit DWS Group under the allegation of greenwashing. In the US, SEC is looking into the ESG claims of Goldman Sachs. The rules by which asset managers need to abide are uncomfortably vague and there is a “huge divergence” in how EU's SFDR rulebook is being interpreted.

The term ESG may be coming to the end of its useful life. ESG investing is the fastest-growing segment of the asset management industry. ESG’s critics say some companies are using the loosely defined term to make misleading claims. The term has come to mean all things to all people. On top of that, there is the impact of Russia’s invasion of Ukraine.

France has raised 4 billion euros. The bond has a 15-year maturity and a yield of -0.415%, harmonised with the European consumer price index. The order book was nearly 7-times oversubscribed at over €27 billion. More than 220 investors participated. Lead managers included Barclays, BNP Paribas, Crédit Agricole CIB, Natixis and Société Générale.

The torrent of cash for anything related to cutting carbon emissions mean green bonds will remain a cheaper source of financing. The greenium will hover around 4 to 5 basis points for the rest of the year. Barclays also found no evidence of green-bond outperformance in the recent debt selloff. ESG bond indexes have underperformed broader gauges.

The proposed green bond rules were designed to help facilitate the financing of sustainable investments through the creation of a ‘gold standard’ for how companies and public authorities can use green bonds to raise funds on capital markets, while meeting rigorous sustainability requirements and protecting investors from greenwashing.

A benchmark for government and corporate debt total returns, has fallen 11% from a high in January 2021. Rising inflationary pressure around the world is fueling concerns. For investors, it means the allure of holding debt is diminishing given how sensitive valuations are to interest rates. Corporate bonds are particularly vulnerable to mounting stagflation.