Taking two Sustainable Debt Awards, NatWest can look back on a strong 2023 – and ahead to further innovation in 2024. Caroline Haas and Gustavo Brianza talk to Environmental Finance.
Environmental Finance: NatWest won the award for Lead manager of the year, green bonds – financial institutions in this year's Sustainable Debt Awards. What are your expectations for supply from this part of the market in 2024?
Caroline Haas: Our projection is that overall supply will be around the same as in 2023 and that some 77% of labelled issuance will be green. This is driven by the work that banks are undertaking to understand and further support the climate solutions and transition assets they are financing: that mapping of their balance sheets is enabling stable green bond issuance.
As they help their customers to decarbonise, and as the tools and methodologies improve, banks will have a better understanding of the assets on their balance sheet and the green and transition products they're offering to their customers. This will further drive green and broader transition-type financings while starting to incorporate biodiversity assets.
EF: Do you expect the EU Green Bond Standard to drive issuance from the financial sector?
CH: Banks with more monoline businesses, such as real estate or infrastructure, will be able to align with the EU Green Bond Standard (GBS). Those with multi-asset and more diverse customer bases will take longer to get their balance sheets aligned with the EU Taxonomy, as is needed to issue EU GBS-eligible bonds.
There is also a question as to whether, at this point, one necessarily benefits from tightening the potential categories of asset financed sufficiently for EU GBS-eligible bonds. Although investors appreciate the clarity of the EU Taxonomy and the EU GBS, they are also conscious of the reduced supply of green bonds that would result from a pursuit of EU GBS eligibility. Banks may not want to give up issuing International Capital Market Association (ICMA)-labelled green bonds, to ensure that they can meet investor demand.
EF: NatWest also won Lead manager of the year for social bonds in the sovereigns, supranationals and agencies (SSA) category this year. What specific needs do you find issuers have in this market segment?
CH: The primary challenge for social bond issuers is being able to clearly identify the target population that is benefiting from the financing, articulate that impact, and track the related data associated with that benefit. Those benefits often extend far beyond the immediate activity that's being financed. For example, sport financing, particularly in disadvantaged neighbourhoods, can reduce crime rates and drug use, sometimes over a much longer period of time than the tenor of the bond.
EF: What about on the investor side? How do they tend to approach the social bond market? What considerations are front and centre for them?
CH: We are actively engaged with the investor community and spend a lot of time brainstorming with them and answering their questions with regard to issuers, structures and macro developments. Investors may have different perspectives on what they would like to achieve through their investments, subject to the sustainability mandate or their asset owners' preferences.
In general, however, transparency is one of the most important things they are looking for, to give them as much information as possible on which to make educated investment decisions. Investors are aware that social impact can be more challenging to track; however, they are willing to support this sector given its important impact on communities.
We've come a long way in terms of that transparency, and the investing community has definitely seen the wider advantage of using sustainability metrics. Increasingly, those metrics can provide insights into the likely overall performance of the issuer in ways that can influence its conventional bonds as much as its labelled ones.
EF: Statnett won the Sustainability-linked loan (SLL) of the year award in the corporate (EMEA) category for 2023, for which NatWest was lead manager. What are the key characteristics of that transaction?
Gustavo Brianza: First, the SLL carried ambitious and innovative KPIs – including a KPI reducing SF6 [Sulfur hexafluoride], a potent greenhouse gas used in the Norwegian transmission system operator's high-voltage switchgears, and one reducing serious injury frequency, which is a more proactive safety indicator than the usual lost-time injury frequency rate.
This NOK8 billion ($747 million) SLL, provided by eight banks, complements Stattnett's use of proceeds financing via green bonds to finance the full range of ESG projects and targets which it undertakes.
EF: How do you see the market for SLLs evolving in 2024?
GB: We have seen lower volumes of sustainability-linked financing in 2023, as lenders increase alignment and scrutiny of KPIs and borrowers adapt to the work and cost of selecting and reporting solid KPIs, to avoid any perception of greenwashing. Ultimately, these developments are positive for the credibility of the market, which is inherently a transition finance product.
As more borrowers establish their transition plans and commit to science-based targets and other objectives, sustainability-linked financing will be ideally suited to finance companies' credible transition plans at lower cost. We also see an increase in the use of green use-of-proceeds loans by smaller borrowers, focused on specific environmental activities, and by pure-play green borrowers.
EF: Finally, what are your expectations for issuance trends in the labelled bond space in 2024?
CH: Nature and biodiversity will get a much bigger share of the conversation. Investors are beginning to allocate to this asset class, and the first targeted funds are being established. It will be a question of finding the right projects – moving to some extent from conservation projects to those offering nature-based or blue economic development, where there is revenue generation.
The second, as noted above, will be a greater focus on transition, as we've already seen with Japan and the transition bond that they launched. Transition plans, transition finance and the decarbonisation of portfolios will be key themes in 2024. This, ultimately, is the impact that we've all been looking for to really move the needle towards 1.5C.
Caroline Haas is head of climate and ESG capital markets and Gustavo Brianza is head of debt advisory and ESG advisory at NatWest in London.
For more information, see: www.natwest.com/corporates/climate-esg-and-sustainable-finance.html
