In December, there were just four transactions, limited to the first 2 weeks before the holidays. In total €3.5bn was printed, with the majority from the Bank of America’s (BofA) $2bn transaction, under the new framework focused on social themes. 100% of the proceeds were allocated to new financings, highlighting “additionality”.

Across the two months, Green bonds dominated with 13 transactions; accounting for €8.0bn equiv. of issuance. By contrast, there were just four Social bonds (€2.3bn). After a complete absence of Sustainable bonds in October, Standard Chartered re-opened the market in November with a €500m HoldCo Sustainable bond – the issuer’s preferred label – followed by BofA’s $2bn issuance on 1 Dec. EUR remained the dominant currency, with 13 out of the 17 issues being EUR; one £600m HoldCo Green GBP transaction from NatWest and three issued in USD. In November, NatWest Markets led a £600m Green bond for NatWest Group where proceeds were used to fund NatWest’s Green mortgage product and limited the re-financing element to 50% with the other 50% allocated to green mortgage origination over the next 12 months.

In 2021, there was c. €139bn of GSS bond issuance by financial institutions globally. In Western Europe, this represented 7.8% of total FI issuance volumes versus 3.1% 2020, a notable jump as banks increased their proportion of total funding as GSS. Overall funding volumes for financial institutions were down c.7% this year; however, despite this decline, FI GSS volumes were up 87% YoY, (Green: +93%, Social: +38%, Sustainable: +146%). Green continues to account for the majority of GSS FI issuance (c. €95bn), followed jointly by Sustainability and Social at c. €22bn each.

The majority of issuance has been in senior format (Senior Preferred (SP): 58%, or Senior Non-Preferred (SNP): 17%). However, there were 14 GSS Tier 2 transactions (12 green / two sustainability), representing c. 11% of labelled issuance, that were well received by investors. EUR remains the dominant currency at 63% with USD in the #2 position (33%). GBP continues to comprise a smaller share of GSS issuance (c. 5%); however, there has been a wave of European issuers accessing the GSS GBP market for the first time, including Caixabank (£500m Green / May-21) and Swedbank (£350m Green / Jun-21). 2021 also saw the first Sustainability-Linked Bond (SLB) by a financial institution, Berlin Hyp, as well as the first Sustainability Re-Linked Bond (SRLB) from the Bank of China.

FI GSS Supply 2021

Total $, £, € Issuance

ESG is expected to continue on its upwards trend in terms of its importance / relevance to both investors and issuers due to regulatory pressure as well as underlying asset owner demand.

EUR Covered Bond

ESG covered issuance was ~13% of total covered issuance in 2021, given limited “Greenium” for Covered vs. other asset classes; aside from in Q4’21 where we saw larger over-subscription rates, which drove the greeniums wider. We expect a decrease in GSS-labelled covered bond issuance next year; however, this asset class may attract SLBs given the ‘mono-line’* nature of the assets, where targets can be more readily established.

*An asset class which involves only one type of assets. For example: in Covered Bonds, this would be residential mortgages.

SP / OpCo and SNP/ HoldCo

ESG supply should maintain a sustained pace and given the reduced but still notable pricing advantage for issuers, we expect many clients to return to the GSSS markets with supply next year. Our expectation is for an increase in both SP / Operating Company (OpCo) as well as SNP / Holding Company (HoldCo) supply in sustainable format. The sterling-denominated GSS market has developed in 2021 and can be considered as an alternative. In addition, banks are looking to ‘greenify’ their assets or products giving rise to more GSS issuance, which benefits the greening of the liability side of the balance sheet. We have experienced much more ESG-related liability management to align with corporate strategy.

Tier 2

Similar to Senior, we expect GSS issuance in Tier 2 format to increase next year as issuers take advantage of considerable pricing advantages in this asset class. In addition, there is limited investor or regulatory resistance to labelled Tier 2 instruments vs Additional Tier 1 (AT1).

AT1

Issuers continue to be more hesitant to issue Green or Social AT1 given the undertones from the European Banking Authority (EBA). However, there is a distinct pool of investors that are keen for labelled AT1, particularly in the US market. Nevertheless, the demand comes from AT1 buyers who are familiar with the nuances of the securities vs labelled, extending to AT1.

• NatWest signed an ESG repo with its customer Silbury Finance with a discount given to the borrower on exit if the development’s BREEAM rating is "very good".
• BNP Paribas signed a "green" repo agreement with EDF. This green repo instrument enables EDF to draw financing from BNP against individual green assets as they are originated. Read more about BNP and EDF.
• Barclays and SaveMoneyCutCarbon announced a collaboration to help Corporate Banking clients reduce carbon, energy and water use. Read more about Barclays and SaveMoneyCutCarbon.
• Credit Agricole CIB expanded its climate focused financing policies, ending financing for projects directly related to shale oil, shale gas and oil from tar sands, and instead focussing on non-carbon energies. Read more about Credit Agricole CIB.
• HSBC and CDP assisted Walmart with a supply chain finance programme that will use a science-based targeting system to issue credit in line with the United Nations’ goal of limiting global warming to 1.5°C by 2050. Read more about HSBC and CDP.
• HSBC unveils its policy to phase out its financing of coal-fired power and thermal coal mining, targeting exits by 2030 in EU and OECD markets and by 2040 worldwide. HSBC states that it is phasing out finance to clients whose transition plans are not compatible with its net zero by 2050 target. Read more about HSBC's targets.

• BNP Paribas AM launched a €125m social bond fund. The fund will invest at least 75% in labelled bonds and 25% in unlabelled bonds and includes up to 10% of assets invested in microcredit instruments. Read more about BNP Paribas AM.
• Nippon Life, Sumitomo Life and Meiji Yasuda Life joined the Net-Zero Asset Alliance, adding a combined $1.4tn assets. This is significant as it represents c.15% of total Assets under Management (AuM), previous total; $9tn, from just these 3 insurers. Read more about Net-Zero Asset Alliance.
• Bruce Power issued the first ever Green Bond specifically for nuclear power generation (life extension and increasing output of existing units). The market is still divided over the ‘green-ness’ of nuclear. Read more about Bruce Power.
• Credit Suisse and JP Morgan AM launched a $250m ‘sustainable nutrition’ fund which will focus investments on companies that make food systems less carbon intensive.
• HSBC launched Euronext ESG Biodiversity Screen Index, which is intended to exclude companies that are found to pose a risk to nature. Read more about the Euronext ESG Biodiversity Screen Index.

Biden ordered the US Federal Government to achieve Net Zero by 2050, accelerating major actions across the government’s buildings, vehicles fleet, procurement activities and operations. Read more about the US Federal Government's NetZero target.

European Central Bank (ECB) published its supervisory priorities for 2022-2024. Climate and environmental risks is one of the top three priorities within the Eurozone financial system vulnerabilities. Read more about European Central Bank (ECB) priorities.

European Commission (EC) officially delayed application of detailed reporting rules (for the second time) under the Sustainable Finance Disclosure Regulation (SFDR) until 1 Jan 2023. The initial deadline was 1 Jan 2022; then 1 July 2022. Read more about the delayed detailed reporting rules.

The Bank of England (BoE) became the first central bank to adopt a green lens for its corporate bond buying programme. The scheme now supports the transition to a net-zero economy as a secondary objective. Read more about the BoE's objective.

ECB published the first of its kind report assessing banks’ progress in meeting supervisory expectations, concluding no supervised bank is close to meeting the expectations and progress is slow. Read more about the ECB's progress.

FCA set out its ESG strategy; aiming to support the financial sector in transitioning to net-zero. Based on five core themes: Transparency, Trust, Tools, Transition and Team. Read more about the FCA's ESG strategy.

FCA published a discussion paper on a new classification/labelling system for sustainable investment products and sustainability disclosure requirements for FCA-regulated asset owners. Read more about the FCA's disclosure requirements.

Australian PRA published its final guidance for banks to manage their climate risks, recommending that short and long-term views of evaluating climate risk and opportunity should be taken. Read more about the Australian PRA's guidance.

European Securities and Markets Authority (ESMA) published its preliminary report on the EU carbon market. The report presents an overview of the financial regulatory environment for the carbon markets under Market Abuse Regulation (MAR), MIFID II and European Market Infrastructure Regulation (EMIR) and the tools available. Read more about the ESMA's report on the EU carbon market.

European Commission (EC) published a proposal to set-up the European Single Access Point (ESAP) that will aim to provide a uniform platform to make all public corporate data centrally available in the EU, including sustainability data.

Read more:

Proposal For European Single Access Point - Financial Services - European Union

Establishing a European single access point providing centralised access to publicly available information of relevance to financial services, capital markets and sustainability (PDF)

• Sustainalytics launches its Corporate Supply Chain ESG Solutions, which includes online access to company-level ESG ratings and data within Sustainalytics. Read more about Corporate Supply Chain ESG Solutions.
• Fitch Ratings recently released that climate change’s credit implications for structured finance could be visible in transactions issued within the next 10 years. Read more about Fitch Ratings.
• S&P launches Net Zero 2050 Climate Transition Select Index series and S&P Net Zero 2050 Paris-Aligned Climate ESG Index Series. Read more about the Net Zero 2050 Climate Transition Select Index series.
• MSCI published a report on understanding MSCI Climate Indexes: Methodologies, Facts and Figures. Read more.
• S&P Global Platts and Xpansiv announced an agreement to collaborate on the development and distribution of assessed daily closing prices for voluntary carbon markets instruments. Read more about S&P Global Platts and Xpansiv.
• Morningstar has expanded its rating coverage by 25,000 new funds with the addition of Sustainalytics’ Country Risk Rating. Read more about Morningstar.
• S&P Dow Jones Indices and the Lima Stock Exchange launch the S&P/BVL Peru General ESG Index. This is the first of its kind index for the Peruvian market. Read more about S&P/BVL Peru General ESG Index.
• ISS ESG announces the forthcoming launch of its suite of dedicated Net Zero Solutions with automated portfolio reporting which will go live in Q1 2022. Read more about ISS ESG.
• MSCI published a report “In transition to a new economy: corporate bonds and climate change risk”. The report focuses on portfolios of developed market corporate bonds and studies the financial materiality of climate-change risk for these portfolios. Read more about the MSCI paper.
  

For those looking to discuss any of the above further, please reach out to our authors:

📧 Caroline Haas, Head of Climate and ESG Capital Markets

📧 Doug Shuffman, Vice President, Climate and ESG Capital Markets

📧 Jake Hallam, Associate, Climate and ESG Capital Markets

📧 Siobhan Wartnaby, Analyst, Climate and ESG Capital Markets