2024 ESG outlook for financial institutions | NatWest Corporates and Institutions (2024)

Sustainability

Our sustainability specialists share what they expect from the financial institution (FI) sector in 2024, discussing anticipated further market growth and the continued dominance of green labels.

24 Jan 2024 . 7 min read

Stuart Foster, Head of Financial Institutions, reflects:“Financial institutions have a powerful role to play in tackling climate change and building a more just society, and therefore it’s encouraging to see that the rise of GSS issuances from the sector continues.”

Stuart also adds:“A sign of sustainability moving to the top of FIs’ agendas has been the publication of many inaugural transition plans in 2023, which we expect to continue this year. While the continued launch of new products such as retrofit financing, social banking products, innovative GSS formats of Commercial Papers, Sustainability-linked Loan Bonds, and new ESG deposit products, indicate that FIs are putting all their weight behind the mobilisation of the capital required to drive decarbonisation of the real economy, in a socially minded manner".

2024 Primary Market outlook

In 2023, $229bn* was issued in Green, Social, Sustainability / Sustainability-Linked (GSS/S) format from within the FI sector, representing a 9% outperformance year-on-year (YoY).

Banks led the way, with a 12% YoY increase, partially offset by insurance and other FI sub-sectors which saw GSS/S issuance decline. Unlike the corporate and SSA segments of the GSS market, the FI sector has been the only one to see annual YoY growth since 2018, even in 2023 when the aggregate GSS/S market declined by 6%.

For 2024, we expect further growth of 3-5%, corresponding to $235-240bn of GSS supply. In 2023, 77% of supply was with a green label - a significantly higher proportion than in the broader market (59%). We do not expect to see material changes to the composition of the GSS/S mix in 2024.

*Source: Bloomberg Finance L.P., 31/12/2023

Cross-sector upward drivers

  • Green product launches, such as retrofit financing, and a marked rise in social banking products, are driving sustainable lending volumes and supporting asset tagging.
  • There are new entrants from within the FI sector, for example private equity.
  • Green Asset Ratio (GAR) disclosures are supporting asset identification.
  • There is innovation and new structures such as Sustainability-linked Loan Bonds (SLLB).
  • The ‘Cost of Living’ challenge could encourage increased social issuance, including from those issuers that don’t currently have Social Bond Frameworks.
  • Financing will likely stretch beyond climate change mitigation, for example climate change adaptation or biodiversity.

Cross sector downward drivers

  • The reduction in sustainable asset registers. For some issuers, GSS issuance volumes have likely exceeded sustainable asset growth in 2023, meaning there is less ‘dry powder’ heading into 2024 than there was 12 months ago.
  • Although GSS bond maturities in 2024 are slightly higher than 2023, they are still modest compared with 2025 or later, leaving little headroom for banks to refinance maturing GSS bonds against previously used GSS assets.
  • Banks continue to face macroeconomic challenges, which is suppressing overall lending volumes, including sustainable lending.
  • Increased scrutiny over impact reporting and additionality may lead banks to issue fewer ‘well-structured’ GSS bonds vs frequent issuance.
  • The reduction of the ‘greenium’ is eroding the financial incentive for FIs to maintain active GSS programmes.

Global financial institutions’ GSS/S issuance by year

Source: Bloomberg Finance L.P, 31/12/23

Global Financial Institutions’ GSS/S issuance split by label

Source: Bloomberg Finance L.P, 31/12/23

Thematic trends

  • Net zero progress: Several banks published their inaugural transition plans in 2023. We expect the number of banks voluntarily publishing transition plans to increase in 2024, alongside the number of banks with Science Based Targets initiative (SBTi)-validated interim decarbonisation targets.
  • Bank treasury ESG integration: We’ve observed an increase in the number of bank treasuries making public commitments to ESG integration or purchasing GSS bonds for their investment portfolios. This could prove to be a valuable source of demand for GSS issuers in 2024.
  • Structural innovation: Nordea and Bank of China brought the SLLB structure to a broader range of investors by issuing in the EUR and USD markets respectively in 2023, whilst Bank of China also issued a transition bond. Other issuers may follow in 2024, although we do not think this will materially affect overall volumes.

Global EUR/GBP Financial Institution Group (FIG) GSS issuance [1]

EUR Senior: GSS issuance of €60.4bn in 2023 (+14% vs 2022), with total senior supply at €257.9bn (+10%); resulting in GSS as a % of total issuance of 23% which is same as 2022.

GBP Senior: £3.7bn of GSS issuance in 2023 (+208% vs 2022), with total senior supply at £32.0bn (+1%); resulting in a notable increase of GSS as a % total issuance to 12% (2022: 4%).

EUR Covered: GSS issuance of €22.7bn in 2023 (+16% vs 2022), with total covered supply at €192.7bn (-6%); resulting in modest increase in GSS as a % of total issuance to 12% (2022: 10%)

GBP Covered: 2023 GSS issuance is nil (2022: £0.5bn), with total covered supply at £19.6bn (+24%), resulting in GSS as a % of total issuance of nil (2022: 3%).

European banks and insurance GSS/S issuance [2]

GSS/S activity reached new heights with unprecedented issuance of €91bn in 2023. Total volumes surpassed 2022 levels by 14% – continuing the trend of YoY increases in contrast to most sectors / geographies, which witnessed a decline. Green issuance (c. €72bn) maintained its longstanding dominance representing 79% of GSS/S issuance in 2023, marginally down on 2022 (85%) due to a rise in social issuance of 16% (+4ppt vs 2022). Sustainability (5%) and other labels (SLLB, Transition, etc.) made up the balance. Issuance was concentrated around Senior format, with Senior Non-Preferred (36%) almost being equal to Senior Preferred (35%), followed by Covered (24%), which has proportionally increased YoY, at the expense of GSS capital issuance (5%)

European Bank and Insurance GSS/S supply 2023

Source: Dealogic (31/12/23)

European Bank and Insurance GSS/S issuance breakdown 2018-2023

Source: Dealogic (31/12/23)

2024 cross-sector ESG outlook and key themes [3]

GSS+ markets themes

  • Environmental use of proceeds continue to dominate: Despite developments in other labels, green remains the cornerstone of the GSS/S market; representing c. 60% of the GSS/S market in 2023, in line with 2022.
  • International Capital Market Association (ICMA) provide guidance on blue bonds: Alongside other stakeholders, ICMA released new guidance on blue themed bonds earlier this year. The guidance builds on existing sustainable market standards such as ICMA Green Bond Principles and classifies blue use of proceeds bonds as a subset of green use of proceeds bonds. This should support additional blue economy financing in 2024.
  • GSS execution dynamics remain favourable: Use of proceeds bonds, for example, achieved on average 0.3x higher o/s for EUR Corporate issuance in 2023; for Financial Institutions EUR Senior issuance the equivalent figure is 0.5x which ultimately drives the ‘greenium’.
  • EU Green Bond Standard (GBS): The European green bond regulation will apply 12 months after entry into force, so from December next year, issuers can officially start marketing bonds as European Green Bonds, which may result in ‘premium pricing’.
  • Product development and innovation: We have seen several developments in 2023, particularly with regards to Commercial Papers (CP), Trade Finance, Sustainable Hybrids for Multilateral Development Banks (MDBs), Sustainable-linked Loan Bonds and new ESG deposit products. These instruments could continue to come to the fore in 2024, driven by increasing precedents in the market and further market guidance.
  • SLBs remain resilient amongst softer supply: SLBs account for almost a quarter of total corporate GSS/S supply in 2023, and whilst overall supply has fallen, the structure has remained resilient, accounting for the same proportion as 2022 – and structures are more robust.

Environmental themes

  • Nature, the next ESG frontier: Key disclosure and investor initiatives in this area (such as the Taskforce on Nature-related Financial Disclosures (TNFD) and NA100) alongside enhanced data infrastructure will likely result in enhanced action and accountability.
  • Adaptation acceleration: The increasing frequency of adverse climate events is driving urgency around climate change adaption into 2024. Companies and investors are expected to enhance stress-tests and properly embed physical risks events.
  • Time for transition: A combination of government policy developments and product innovation could lead to a scaling up of transition finance in 2024 – across entities, activities and instruments, driving transition frameworks by sovereigns.
  • Carbon impact on supply chains in the spotlight: Organisations will likely look more to improve the carbon impact of supply chains, amidst pressure from stakeholders, enhanced regulatory scrutiny and enhanced data solutions.

Find out more

As always, if you would like to discuss any of the above further, please reach out to our authors:

  • Caroline Haas, Head of Climate and ESG Capital Markets
  • Doug Shuffman CFA, Vice President, Climate and ESG Capital Markets
  • Jake Hallam, Vice President, Climate and ESG Capital Markets
  • Pulkit Khurana, Associate, Climate and ESG Capital Markets
  • Siobhan Wartnaby, Analyst, Climate and ESG Capital Markets

* For further analysis and information on the Primary Market, take a look at the full monthly newsletter onMarket Insights. If you do not have access to Market Insights,please contact us. Also, for any unfamiliar terms used within this article please refer toour insights glossary.

Additional information

1Source: NatWest Markets Syndicate (31/12/23), includes Global Financial Institutions EUR & GBP Issuance.

2Includes European Bank & Insurance GSS/S Issuance

3 Source: Bloomberg Finance L.P (31/12/23)

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I'm an expert in sustainable finance and environmental, social, and governance (ESG) practices within the financial institution (FI) sector. My deep knowledge is grounded in extensive research, industry insights, and a comprehensive understanding of the dynamics shaping the sustainable finance landscape.

Now, let's delve into the concepts mentioned in the article you provided:

  1. GSS Issuances and Market Growth:

    • The article highlights the rise of Green, Social, Sustainability / Sustainability-Linked (GSS/S) formats within the FI sector, indicating a 9% YoY growth in 2023.
    • Financial institutions, particularly banks, are actively contributing to sustainability with a focus on decarbonization and social responsibility.
  2. Market Outlook for 2024:

    • Anticipated further growth of 3-5% in GSS supply for 2024, reaching $235-240 billion.
    • Continued launch of new sustainable products such as retrofit financing, social banking products, and innovative GSS formats.
  3. Cross-Sector Drivers and Challenges:

    • Upward drivers include green product launches, social banking products, new entrants like private equity, and innovative structures like Sustainability-linked Loan Bonds (SLLB).
    • Downward drivers involve the reduction in sustainable asset registers, macroeconomic challenges for banks, and decreased financial incentives due to the erosion of the 'greenium.'
  4. Thematic Trends:

    • Net zero progress is observed, with banks publishing transition plans and committing to Science-Based Targets initiative (SBTi)-validated interim decarbonization targets.
    • Bank treasuries are integrating ESG commitments, potentially becoming a significant source of demand for GSS issuers in 2024.
    • Structural innovation, such as Sustainability-linked Loan Bonds (SLLB), is gaining traction.
  5. Global Financial Institutions’ GSS/S Issuance:

    • The FI sector led GSS/S issuance in 2023, with banks showing a 12% YoY increase.
    • European banks and insurance witnessed unprecedented GSS/S issuance of €91 billion in 2023, surpassing 2022 levels by 14%.
  6. 2024 Cross-Sector ESG Outlook:

    • Environmental use of proceeds, particularly green bonds, continues to dominate the GSS/S market.
    • Introduction of blue bonds and the EU Green Bond Standard (GBS) is expected to support additional financing in 2024.
    • Product development and innovation, such as Commercial Papers, Trade Finance, and new ESG deposit products, are likely to continue in 2024.

These insights provide a comprehensive understanding of the sustainability landscape within the FI sector for 2024. If you have specific questions or need further clarification on any aspect, feel free to ask.

2024 ESG outlook for financial institutions | NatWest Corporates and Institutions (2024)
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