Financial Institutions ESG Monthly – 10 February 2022

Green, Social and Sustainability (GSS) issuance was largely limited to the middle two weeks of January. However, it did pick up again w/c 31 Jan. In total, we saw a notable €10.6bn equiv. of issuance across 15 tranches.

Primary market activity

Islandsbanki came to market with a €300m Senior Preferred Sustainable bond – the first sustainable bond issuance since Bank of America’s $2bn Senior Unsecured transaction on 1 December 2021. EUR remains the dominant currency (11 of the 15 tranches); there was one Sterling transaction, a £500m 5-yr Social Covered Bond for Yorkshire Building Society, and two USD issuances (totalling three tranches) from Citi and Sumitomo Mitsui Financial Group.

NatWest led Yorkshire Building Society’s (YBS) £500m SONIA Social bond, which represents the first ever Social SONIA Covered Bond and also the first GSS-labelled SONIA product across asset classes. The final spread of S+27bps marks the tightest ever spread for a UK SONIA Covered Bond.

Read a full summary of the transaction

ESG-related bond market overview

Western Europe year-to-date (YTD) issuance of GSS bonds and Sustainability-Linked Bonds (SLBs), from FIs, is down 25%. However, this decline closely tracks the reduction in overall FI supply.

The result of this is that GSS and SLB issuance, as a proportion of total issuance, was the same as in January 2021 (8%). We expect this number to increase as the year progresses, as seen last year.

By contrast, global GSS volumes in the FI sector are up 77% year over year (green: +107%, social: +70%, sustainable: +20%). Green continues to account for the majority of GSS FI issuance (c. €8.2bn), followed by Social (c. €5.2bn) and Sustainable (€2.1bn).

Virtually all of the GSS issuance has been in senior format (Senior Preferred (SP): 88%, Senior Non-Preferred (SNP): 9%); YBS’s Social Covered Bond marks the only issuance outside the senior format. After heavy supply of GSS Tier 2 in 2021, there has not yet been any GSS Capital this year. A handful of clients have expressed interest in Green AT1, as well as sustainability-linked bonds. A number of insurers are also looking to establish frameworks.

Global FI GSS Supply 2021 - 2022 YTD

Source: Dealogic, Bloomberg, 07/02/22
Source: Dealogic, Bloomberg, 07/02/22

FI and market announcements and developments

  • Citi has set its 2030 emissions targets. A 29% absolute reduction in financed emissions for the energy sector, and a 63% reduction for the power sector - in portfolio emissions intensity. This will put Citi firmly on track to meet their 2050 net zero commitment. Read more.
  • Danske Bank announced new interim climate targets. These include: a 50% reduction in lending for oil and gas productions, a 20-30% reduction in emissions per unit transported, as well as a 30% reduction in carbon emissions per kWh for power and heat generation. Read more.
  • Deutsche Bank announced their ESG-related financing and investments reached €157 billion by 2021 year-end. And, that they will likely achieve their target of at least €200 billion in 2022, one year earlier than originally set out. Read more.
  • 19 major North American banks, including Bank of America, Royal Bank of Canada and Wells Fargo announced the launch of the ‘Risk Management Association (RMA) Climate Risk Consortium’, which will develop standards for banks to integrate climate risk management throughout their operations; preparing the industry to help economies transition to a low-carbon future. Read More.
  • Barclays has announced the launch of their Green Home Buy to Let Mortgages. This scheme will reward customers who choose to buy an energy efficient new build home by providing lower interest rates on their mortgage. Read more.
  • Deutsche Bank announced it has signed a memorandum of understanding with the Development Guarantee Group.  Under the agreement, Deutsche Bank will act as an Origination Partner for the Green Guarantee Company, which will be managed by Development Guarantee Group. Read more.
  • SEB updated its green bond framework to include three additional categories (biodiversity, transition to a circular economy and climate change adaptation) and align with the EU Taxonomy. The updated framework provides details around how the eligible project categories exceed (or fall short of) the EU Taxonomy Technical Screening Criteria (TSC). SEB launched a €1bn green bond into the market five days later. Read more.
  • European Investment Bank (EIB) has approved the first group-wide environmental and social policy and backs €3.2 billion of new financing for a series of projects: €1.3 billion for sustainable transport, renewable energy and water, €1.2 billion for education, health, housing, and urban renewal and, €630 million for private sector investment and COVID economic resilience. Read more.
  • HSBC announced it’s investing $100m as an anchor partner in Breakthrough Energy Catalyst, a ground-breaking programme that leverages private-public capital to accelerate the development of clean technologies that will help achieve net-zero emissions by 2050. Read more.

Investor developments

  • BlackRock sent a letter to clients to help guide investors through the net zero transition, committing to provide the most sophisticated, up-to-date analytics and the deepest understanding of how the transition will unfold, whilst also helping identify the right investment options. Read more.
  • Candriam launched a Sustainable Bond Impact Fund, designed to help deliver positive impact on society and the environment by following the United Nation’s Sustainable Development Goals. At least 75% of the fund’s bonds will be sustainable. Read more.
  • Brown Advisory launched its Global Sustainable Total Return Bond strategy. The Global, sustainable and dynamic approach to fixed income seeks to deliver attractive long-term returns while producing positive environmental and social impact. Read more.
  • AXA IM launched a short-duration green bond fund. The fund will invest at least 75% of its assets in labelled green bonds and at least 70% will be invested in 'short duration' bonds with maturities of five years or less. “Our short duration product meets the immediate need for a diversified, low volatility fund with limited interest-rate risk that has all the benefits of green bond exposure." Read more.
  • Invesco launched its Invesco Environmental Climate Opportunities Bond Fund. It will invest in green, transition and sustainability-linked bonds, as well as companies that have made commitments to net zero carbon emissions, but will have an exclusion list e.g. thermal coal. Read more.
  • Dow Jones launched a sustainability data service. The initial offering is designed to help asset managers make sustainable investment decisions and better engage the growing audience of purpose-driven investors. Read more.

Government and regulatory updates

European Commission published its Delegated Act on the inclusion of Nuclear energy and Gas in the EU Taxonomy. The Commission did not make any other significant changes with regard to the exclusion of the actual economic activities. Read more.

European Banking Authority (EBA) published its final draft of implementing technical standards (ITS) on Pillar 3 disclosures on Environmental, Social and Governance (ESG) risks. Read more

The European Central Bank (ECB) Banking Supervision launched its 2022 climate risk test. The test is a learning exercise to assess banks’ climate-risk preparedness and results are expected to be published in July 2022. Read more.

International Capital Market Association (ICMA) has published their views on the amendments to the EuGB Regulation proposed by the European Parliament. According to ICMA, the measures proposed would fundamentally change the liability and costs incurred by sustainable bond issuers and would discourage issuers from using it. Read more

California Senate has passed the Climate Corporate Accountability Act (CCAA), which is the first law in the U.S. to require U.S based companies to disclose all their greenhouse gas emissions. Read more.

The French Financial Services Regulator (AMF) has published its supervisory priorities for 2022 where Sustainable Finance is stated as a key priority for action. Read more.

ESG and credit rating agencies developments

  • European Securities and Markets Authority (ESMA) published a call for evidence on ESG ratings. The aim is to gather information on the market structure for ESG rating providers in the EU. Read more.
  • S&P announced the acquisition of climate risk solutions and provider The Climate Service (TCS) to take its climate risk capabilities to the next level. Read more.
  • S&P published a report which outlines several key, interlinked key trends that will drive the ESG agenda in 2022. Read more.
  • ISS ESG launched a one-stop, fully integrated ISS ESG Labels and Standard Solutions. These solutions leverage robust data from its wide range of highly specialized proprietary solutions, to support Asset Managers and Asset Owners in meeting these requirements. Read more.
  • ISS ESG launched the global regulatory initiative comparative report. The new report identifies six key topic areas in sustainable financial regulation and green bond guidelines. Read more.
  • MSCI announced a partnership with GIST, a pioneering data and analytics company which will be used to enhance MSCI clients ESG and Climate integration and reporting. Read more.
  • Fitch Ratings published a compendium of 106 unique ESG sector templates across analytical groups. These are used by credit analysts in their assessment of each entity, transaction or programme when assigning ESG Relevance Scores. Read more.

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

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