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(Bloomberg) — The global artificial intelligence frenzy is driving demand for energy-intensive data centers, which could end up being a factor that boosts sales of green debt in the US, according to Morgan Stanley. 

Sales of ESG-linked bonds in the US have plunged over the last few years as Republicans push back on ESG investing and investors fret over greenwashing concerns. But data centers’ growing electricity needs to sustain the AI boom could fuel demand for more energy, including from renewable resources. That’s likely to bolster sales of green debt, said Melissa James, vice chairman of global capital markets at Morgan Stanley.

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Even with slowness in the US, as of June, green debt issuance globally is running at the fastest pace since the market’s inception in 2007. By the end of 2024, Morgan Stanley expects sales to soar to the trillion-dollar mark seen in 2021.  

“We’re on pace to actually meet or maybe even exceed slightly that record issuance level,” said James.

James spoke with Bloomberg News in a series of interviews ending on July 10. Below are highlights of the conversation, condensed and edited for clarity.

What’s fueling the record issuance we’ve seen in the global sustainable bond market?

Climate is perceived to be the single biggest existential threat of our time. Issuers are focusing more narrowly on their climate and transition objectives, particularly as we start to approach the 2030 deadline that a lot of clients have set interim emission reduction targets by.

2021 was the high water mark for ESG-labeled issuance, with just over a trillion dollars. Theoretically, we’re on pace to actually meet or maybe even exceed slightly that record issuance level.

Companies, especially in the US, aren’t selling a lot of labeled bonds. Is that going to change any time soon?

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Corporate issuance has been relatively flat over the last several years. With the maturation of the market, some of the issuers who had their one or two projects to fund have funded those projects, and so, they’re not going to be repeat issuers necessarily every year. They may come back in two or three years, or during their next capex cycle. So, there’s a certain percentage of the market that I think falls in that category where they’re sort of one-and-done for the time being.

There are the other perennial issuers who will be repeat issuers with some degree of periodicity. But those will be smaller relative to the overall size of the market. 

So, what’s going to drive corporate issuance in the US?

For companies that have the opportunity to invest in projects where the economics make sense, where the return on investment is justifiable and where they can decarbonize, those companies will do that all day long. We’ve seen a number of issuers in some of the hard-to-abate sectors like basic materials — chemicals in particular — come to market and in some instances, they will finance those with green-labeled issuances. 

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The second driver, in our judgment, is the tremendous demand for power as a consequence of the AI boom. This phenomenon is putting increased demand on the need for additional power sources, renewable or otherwise, including alternative power sources. Some of these data centers, if they’re operated at a certain threshold in terms of their energy efficiency, they themselves actually qualify for ESG-labeled or green-labeled transactions. We think that that has the potential to also help fuel activity.

What about green convertible bonds?

We did a lot of convertibles for companies last year that were kind of in the energy transition space. You tend to see higher-growth companies that are still evolving, or earlier in their life cycle from a cash flow perspective, accessing the convertible market to take advantage of the fact that they have equity that’s perceived to have a lot of upside. And they can use that perceived upside as a way to lower their interest coupon today. These transactions are also typically issued in the 144A market and that can be an advantage to some borrowers as well.

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What do you think might drive issuance outside the US? Latin America has been very active, for instance. 

The Latin America region has been an emerging growth area of ESG-labeled issuance due to its unique geographic characteristics and proximity to extensive natural resources. For example, Brazil has the potential to be the world’s lowest cost producer of green hydrogen due to its abundance of water. The climate crisis and geopolitical conflict has also advanced a need to rethink and relocate supply chains. Nearshoring or “friend-shoring” present an opportunity for Mexico and others in the region, as global supply chains become more difficult to secure.

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