NatWest won three lead manager awards for social and sustainability bond issuance in Environmental Finance's Bond Awards. Caroline Haas explains how the bank is helping its clients to finance social impact

Environmental Finance: The shape of the social bond market is changing, post-Covid. What patterns of issuance are you seeing?

Caroline Haas: We've been involved in the social bond market since 2019, both as issuer and intermediary. We've always felt that the sustainable bond market needs to address social as well as environmental aspects, and obviously Covid provided that push. Since Covid, we've seen a real maturing of that side of the market.

What we're seeing is more clearly defined social bonds. There are many challenges trying to measure social impact, and quantifying the benefits you might get from a social bond financing. The social housing sector is getting much better at doing that. We're seeing bonds linked to SME [small and medium-sized enterprise] lending in disadvantaged areas, something that we have issued against ourselves, as NatWest Group.

On the investor side, there are a lot more focused social and sustainable bond funds than in 2020. That is helping to support a recovery in social bond issuance from the post-Covid dip in 2022.

EF: NatWest has had particular success advising on and structuring bonds for social housing issuers, for which you won the Lead manager of the year, social bonds – corporates award. What particular challenges do these issuers face?

CH: Initially, the biggest debate was around the additive nature of the issuance, and whether issuers should be able to tap the social bond market for what is, for many, business as usual. We have always been strong proponents of the market recognising social impact from issuers when it's part of their core purpose.

That issue has definitely dissipated. Certainly, for UK housing associations issuing in sterling, we're typically seeing strong demand and pricing benefits, given limited issuance in the currency. It's an area we've historically been very active in, having committed £13 billion ($16 billion) to 250 housing associations, and arranged £7 billion in capital markets issuance. What is interesting here is the cross-over with green impact – many of these issuers are also looking to improve the energy efficiency of their housing stock, hence the sustainability component.

EF: You also won the award for Lead manager for social bonds from financial institutions. What trends are you seeing in that part of the market?

CH: Again, we're seeing a recovery in issuance focused on what banks already have on their balance sheets. Financial institutions have often underestimated how much of their lending has social purpose: for example, building societies lending to entrepreneurs or sole traders who are more challenged to attain a loan from the high street banks, or to young people struggling to get on the housing ladder. In addition, they are continuing to launch new products, commitments and initiatives to support financial inclusion

To take NatWest Group, as an example, we issued a €500 million ($544 million) bond in March to finance and refinance loans to women-led enterprises. That will help address the greater challenges that women entrepreneurs and sole traders face raising finance, as highlighted by our CEO Alison Rose, in the 2019 Rose Review she produced in conjunction with the UK government.

EF: The bank also won the Lead manager of social bonds for sovereigns, supranationals and agencies (SSAs) award. What stand-out transactions would you point to here?

CH: The one we are really proud of is the $1 billion Social Inclusion Bond that we joint lead-managed for the Council of Europe Development Bank (CEB) last year, with proceeds directed to help Ukrainian refugees fleeing the war. The CEB was the first multilateral development bank to disburse grants to provide immediate aid to refugees from Ukraine. Despite the geopolitical challenges, we were able to mobilise finance quickly and the book attracted high quality demand while diversifying the Council's investor base.

EF: What appetite are you seeing for social bond issuance from corporate clients?

CH: If you look to the United States, there is much more issuance from corporates that includes meaningful social project categories. We've had issuers like Alphabet supporting social housing, given the effects on their employees of living in areas with high property prices. There's also been considerable issuance around gender equality and supporting ethnic minorities.

In Europe, corporate issuance is still low and concentrated amongst those in the public sector. But there is potential around initiatives in digitalisation, for example – it often has a social component, in supporting social inclusion and education. And there is potential in supply chain finance, linking bond proceeds to sourcing from SMEs in less economically developed areas.

EF: What developments are you most closely watching in the social bond space in 2023?

CH: The EU has paused its work on its Social Taxonomy, partly because of the complexities involved. Nonetheless, we would welcome further guidance from policymakers on what they consider social impact to mean. For example, we're seeing lots of new issuers coming forward with new social impact reporting metrics, and trying to identify the positive societal knock-on effects of their social lending and financing. We arranged a social bond framework for CFB, a Belgian regional authority, for example, which included educational programmes and public sports provision: these interventions will help to reduce crime and drug use over the long term; however, these impacts are very difficult to quantify over the short term or directly link to the financing.

We are also closely watching developments around loss and damage, which was called out at COP27. We need to think about how we can ensure capital flows to the Global South to help these regions and protect their social well-being.

Caroline Haas is head of climate and ESG capital markets at NatWest Markets, based in London.

For more information, see: www.natwest.com/corporates/climate-esg-and-sustainable-finance.html