GSS bonds come of age

Green, Social and Sustainability (GSS) bond financing has now firmly established itself as a core element of global indices. With issuances growing rapidly in the last ten years[1], GSS bond volumes broke through $4 trillion in 2023[2]. 

Meanwhile, 20% of all European bonds are now in GSS format[3], a significant increase on pre-2020 levels. And as green bond sales from corporations and governments reach record levels[4], they are consistently outperforming the global bond market in the secondary market.[5]

This signifies not only a coming of age for the GSS market since the first green bond was issued in 2008, but also a strength in the fundamentals of this relatively new area of debt issuance.


Long-term demand

So, what’s behind the increasing prominence of sustainable financing? 

Partly it reflects the demand from corporates and governments across the world to fund their regulatory or stakeholder-driven sustainability commitments. It also indicates a continued appetite from investors to allocate capital in an asset class that can offer heightened transparency and alignment with sustainable goals.

Debt capital markets also have a vital role to play in our transition to net zero, with green financing pivotal in directing the necessary capital required to achieve Paris Agreement ambitions of limiting the global temperature increase to 1.5°C above pre-industrial levels.

This sectoral and geographical dispersion of investment is vital for ensuring a more sustainable and diversified base of UK economic growth.

A key driver of UK economic growth

There is huge benefit in the structural maturing of the UK’s GSS market, supported by the demand drivers behind it.

As well as the positive societal and environmental outcomes targeted from the issuances of these bonds, this specific type of funding can act as a crucial driver for UK economic growth.

Businesses are often keen to access the growth and benefits of moving towards sustainable business practices, but they can sometimes struggle to obtain the requisite financing to undertake such ventures. The specific ‘use-of-proceeds’ lending criteria of GSS issuances therefore helps unlock and redirect investment capital to UK businesses in ways not always possible for traditional financing.

Importantly, with sustainable financing typically also offering a longer investment horizon than the shorter-term lifecycle of mainstream lending, businesses can also set growth plans more easily over the long term.

Funding these investment gaps not only adds value to previously underfinanced areas, it also means financial institutions are enabling growth across a broader range of segments and regions of the UK economy. The outcomes are often tangible. In our recently published GSS Impact Report, we estimate that 9,700[1] FTE jobs have been created or enabled across diverse industries and areas in the UK as a result of the loans included in our Social Bond for Employment Generation.[2]

This sectoral and geographical dispersion of investment is vital for ensuring a more sustainable and diversified base of UK economic growth.


Growth opportunities

In pure market terms, sustainable financing can also play a fundamental role in satisfying demand factors that look set to persist into the long term.   

Social housing, in particular, is a crucial element within the burgeoning GSS capital markets. Extensive waiting lists for homes and a reduction in the number of available units has led to a critical point where funding is increasingly required for investment into building new homes and improving living standards.

NatWest Group was proud to recently announce a £5 billion lending programme to the social housing sector and we remain supportive of GSS issuances within this area. The advantages of this lending are twofold: firstly, through the primary funding benefits to recipient businesses, but secondly, as the finance cascades through local economies.

The ‘multiplier’ effect of this investment is even more impactful in regions with lower socio-economic levels where there are higher rates of personal consumption.

Elsewhere, the unprecedented levels of private and public finance required for the UK to meet its commitments of becoming net zero by 2050 will require a continued, and undoubtedly growing, participation from sustainable bond markets.

This will be a vital part of stimulating growth, innovation, and job creation as part of the net-zero transition.   

This will add value to previously underfinanced areas and help financial institutions facilitate growth across wider areas of the UK economy.

Banks breaking new ground

The continued scaling of GSS funding can act as a significant growth driver for UK plc. Importantly, it can achieve this where it matters most: at a grass-roots level, providing individual businesses in under-served areas of the economy with the finance they need to fulfil their long-term growth plans.

As the GSS capital markets mature and a greater number of issuances emerge, previously unexplored terrain is becoming possible. However, financial institutions must be considered in their approach to sustainable financing, identifying the markets in which they can launch innovative products to fulfil any funding gaps.

Breaking new ground in this way can also represent sound commercial logic for banks. This was demonstrated recently for NatWest Group, when we became the first European financial institution to issue a social bond linked to women-led enterprises. This has proved particularly popular with investors, being 2.5 times oversubscribed when launched and continuing to attract strong engagement.

As new areas are explored for funding, such as blue and biodiversity-themed issuances, many other financial institutions are likely to feel the benefits of the first-mover advantage. This will add value to previously underfinanced areas and help financial institutions facilitate growth across wider areas of the UK economy.

About Donal

Donal Quaid is the Group Treasurer at NatWest Group. Commencing his career at Allied Irish Bank, Donal joined NatWest Group in 2012 within the Treasury Markets team and has been in his current role since 2019. As Group Treasurer, Donal has continually supported the GSS programme and overseen issuances of green, social housing, and women-led bonds. Donal also serves as a Non-Executive Director for Reclaim Fund Ltd.

The material published on this page is for information purposes only and should not be regarded as providing any specific advice, or used by consumers to make financial decision. Terms and conditions apply to any products or services mentioned.

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