Growing the ESG product suiteIssue Your Greens

While sustainable finance for many people is still synonymous with green bonds over recent years wersquove seen widespread innovation within the ESG financial product spectrum Whether credit cards leasing mortgages securitisation or equity the financial markets around the globe are offering ldquogreenifiedrdquo versions of all these products linking the green label to sustainability criteria that have to be met

Dr Arthur Krebbers

Head of Sustainable Finance Corporates

What is driving the greenification

Therersquos been a seismographic shift in the thinking across stakeholder groups that ESG and in particular sustainability isnrsquot a nice-to-have but a MUST to tackle climate change and a key factor for achieving future growth and profitability

Corporate treasurers have started applying a green treasury strategy seeking to follow sustainability considerations when drafting corporate finance policies and choosing the financing tools - and a public bond is not necessarily the appropriate green instrument for each corporate

Equally institutional investors are looking to incorporate ESG criteria across their portfolios not just those that manage senior bonds The most tangible way of doing this is often through ldquoflagshiprdquo holdings in instruments with a greensustainability or social structural component

Also financial intermediaries are playing their role in broadening the ESG product range feeling both regulatory and competitive pressure to grow the sustainable finance asset class Hence a number of them are driving innovation of green investment products in their respective niche markets

Green products support eco-friendly behaviours and the transition to low carbon economy

The greenification has gathered speed in the last three years and today individuals and corporations looking to go green can pick and choose between green debt and investments products supporting their ambitions Green credit cards offering economic incentives for eco-friendly behaviours and green mortgages rewarding borrowers for energy efficiency improvements in their home are two examples of personal banking products going green

In the corporate space senior unsecured bonds remain the most common green bond format but other bond types are catching up While green securitisation stood firm as the second largest green bond format in 2018 with $246 billion of issuances we also saw a surge in popularity for green covered bonds ($6 billion in 2018) MTNs sukuk and green loans last year Green loans for example jumped from $31 billion in 2017 to $51 billion in 2018

The growth of this product suite is likely to boost demand for associated derivative instruments as

market participants seek to manage ESG risks inherent in their portfolio and business operations

Equally the launch of numerous green bond and equity indices is not only helping ESG investors in particular those that are new to the green market to take a first dip into green investments but hopefully will further we their green appetite

The 4 Arsquos can guide ESG due diligence

As this expansion continues ESG investors will need to stay vigilant about the credibility and transparency of new products and labels being introduced As with green bonds when conducting their due diligence ESG investors ought to focus on the 4 Arsquos which I introduced a few weeks back

1 Level of Ambition Is this business as usual or an issuer seeking to be industry leading in embracing the carbon transition

2 Alignment with the issuerrsquos overall strategy Is it a ldquoside showrdquo project or truly congruent with a companyrsquos overall operations And are they setting the right incentives

3 ldquoAdditivenessrdquo of the projects What portion of proceeds is being used for new initiatives

4 Analysis offered on projects What measurable environmental impact is expected

The greenification product map

Below map gives an overview of the greenification thatrsquos taking place It shows that green is the new black of financial markets products

bull Green ESG Deposits

bull Green commercial paper (use of proceeds commitment)

bull Green credit cards (rewards translate to carbon offsets)

bull Green leasing (eg electric vehicles)

bull Green asset backed finance (eg energy efficient equipment)

bull ldquoESG Leaderrdquo Commercial Paper investor put option if ESG rating drops below a given ranking

bull ESG Money Market Liquidity Funds

bull ESG-based guarantees bonding facilities

ProjectAsset focus

Issuer focus

Short Term lt 3 years

bull Sustainability performance loan PP margin grid linked to sustainability performance

bull ESG bonds indices

ndash Associated ISA and wealth management products

bull Labelled senior bonds

ndash ICMA labels Green Social Sustainability bonds

ndash ldquoNicherdquo labels eg Climate Action Gender Equality Blue

ndash Retail-targeted structured green bonds

bull Green securitisation (AFME dedicated working group)

bull Green covered bonds (ie portfolio of Green mortgages)

bull Green private placements project finance

bull Green term loans

bull Green mortgages

Medium term [3-12] years

bull AT1 Carbon footprint capital trigger (in development)

bull ESG equity indices

ndash Passive smart beta

ndash Associated ISA and wealth management products

bull Green equity

bull Green corporate hybrids

bull Green Sustainability AT1 Tier 2

Long term Capital

This article has been prepared for information purposes only does not constitute an analysis of all potentially material issues and is subject to change at any time without prior notice NatWest Markets does not undertake to update you of such changes It is indicative only and is not binding Other than as indicated this article has been prepared on the basis of publicly available information believed to be reliable but no representation warranty undertaking or assurance of any kind express or implied is made as to the adequacy accuracy completeness or reasonableness of the information contained in this article nor does NatWest Markets accept any obligation to any recipient to update or correct any information contained herein Views expressed herein are not intended to be and should not be viewed as advice or as a personal recommendation The views expressed herein may not be objective or independent of the interests of the authors or other NatWest Markets trading desks who may be active participants in the markets investments or strategies referred to in this article NatWest Markets will not act and has not acted as your legal tax regulatory accounting or investment adviser nor does NatWest Markets owe any fiduciary duties to you in connection with this andor any related transaction and no reliance may be placed on NatWest Markets for investment advice or recommendations of any sort You should make your own independent evaluation of the relevance and adequacy of the information contained in this article and any issues that are of concern to you

This article does not constitute an offer to buy or sell or a solicitation of an offer to buy or sell any investment nor does it constitute an offer to provide any products or services that are capable of acceptance to form a contract NatWest Markets and each of its respective affiliates accepts no liability whatsoever for any direct indirect or consequential losses (in contract tort or otherwise) arising from the use of this material or reliance on the information contained herein However this shall not restrict exclude or limit any duty or liability to any person under any applicable laws or regulations of any jurisdiction which may not be lawfully disclaimed

NatWest Markets Plc Incorporated and registered in Scotland No 90312 with limited liability Registered Office 36 St Andrew Square Edinburgh EH2 2YB Authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and Prudential Regulation Authority NatWest Markets NV is incorporated with limited liability in the Netherlands authorised and regulated by De Nederlandsche Bank and the Autoriteit Financieumlle Markten It has its seat at Amsterdam the Netherlands and is registered in the Commercial Register under number 33002587 Registered Office Claude Debussylaan 94 Amsterdam the Netherlands Branch Reg No in England BR001029 NatWest Markets Plc is in certain jurisdictions an authorised agent of NatWest Markets NV and NatWest Markets NV is in certain jurisdictions an authorised agent of NatWest Markets Plc

Copyright copy NatWest Markets Plc All rights reserved

639_0819NWM | October

market participants seek to manage ESG risks inherent in their portfolio and business operations

Equally the launch of numerous green bond and equity indices is not only helping ESG investors in particular those that are new to the green market to take a first dip into green investments but hopefully will further we their green appetite

The 4 Arsquos can guide ESG due diligence

As this expansion continues ESG investors will need to stay vigilant about the credibility and transparency of new products and labels being introduced As with green bonds when conducting their due diligence ESG investors ought to focus on the 4 Arsquos which I introduced a few weeks back

1 Level of Ambition Is this business as usual or an issuer seeking to be industry leading in embracing the carbon transition

2 Alignment with the issuerrsquos overall strategy Is it a ldquoside showrdquo project or truly congruent with a companyrsquos overall operations And are they setting the right incentives

3 ldquoAdditivenessrdquo of the projects What portion of proceeds is being used for new initiatives

4 Analysis offered on projects What measurable environmental impact is expected

The greenification product map

Below map gives an overview of the greenification thatrsquos taking place It shows that green is the new black of financial markets products

bull Green ESG Deposits

bull Green commercial paper (use of proceeds commitment)

bull Green credit cards (rewards translate to carbon offsets)

bull Green leasing (eg electric vehicles)

bull Green asset backed finance (eg energy efficient equipment)

bull ldquoESG Leaderrdquo Commercial Paper investor put option if ESG rating drops below a given ranking

bull ESG Money Market Liquidity Funds

bull ESG-based guarantees bonding facilities

ProjectAsset focus

Issuer focus

Short Term lt 3 years

bull Sustainability performance loan PP margin grid linked to sustainability performance

bull ESG bonds indices

ndash Associated ISA and wealth management products

bull Labelled senior bonds

ndash ICMA labels Green Social Sustainability bonds

ndash ldquoNicherdquo labels eg Climate Action Gender Equality Blue

ndash Retail-targeted structured green bonds

bull Green securitisation (AFME dedicated working group)

bull Green covered bonds (ie portfolio of Green mortgages)

bull Green private placements project finance

bull Green term loans

bull Green mortgages

Medium term [3-12] years

bull AT1 Carbon footprint capital trigger (in development)

bull ESG equity indices

ndash Passive smart beta

ndash Associated ISA and wealth management products

bull Green equity

bull Green corporate hybrids

bull Green Sustainability AT1 Tier 2

Long term Capital

This article has been prepared for information purposes only does not constitute an analysis of all potentially material issues and is subject to change at any time without prior notice NatWest Markets does not undertake to update you of such changes It is indicative only and is not binding Other than as indicated this article has been prepared on the basis of publicly available information believed to be reliable but no representation warranty undertaking or assurance of any kind express or implied is made as to the adequacy accuracy completeness or reasonableness of the information contained in this article nor does NatWest Markets accept any obligation to any recipient to update or correct any information contained herein Views expressed herein are not intended to be and should not be viewed as advice or as a personal recommendation The views expressed herein may not be objective or independent of the interests of the authors or other NatWest Markets trading desks who may be active participants in the markets investments or strategies referred to in this article NatWest Markets will not act and has not acted as your legal tax regulatory accounting or investment adviser nor does NatWest Markets owe any fiduciary duties to you in connection with this andor any related transaction and no reliance may be placed on NatWest Markets for investment advice or recommendations of any sort You should make your own independent evaluation of the relevance and adequacy of the information contained in this article and any issues that are of concern to you

This article does not constitute an offer to buy or sell or a solicitation of an offer to buy or sell any investment nor does it constitute an offer to provide any products or services that are capable of acceptance to form a contract NatWest Markets and each of its respective affiliates accepts no liability whatsoever for any direct indirect or consequential losses (in contract tort or otherwise) arising from the use of this material or reliance on the information contained herein However this shall not restrict exclude or limit any duty or liability to any person under any applicable laws or regulations of any jurisdiction which may not be lawfully disclaimed

NatWest Markets Plc Incorporated and registered in Scotland No 90312 with limited liability Registered Office 36 St Andrew Square Edinburgh EH2 2YB Authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and Prudential Regulation Authority NatWest Markets NV is incorporated with limited liability in the Netherlands authorised and regulated by De Nederlandsche Bank and the Autoriteit Financieumlle Markten It has its seat at Amsterdam the Netherlands and is registered in the Commercial Register under number 33002587 Registered Office Claude Debussylaan 94 Amsterdam the Netherlands Branch Reg No in England BR001029 NatWest Markets Plc is in certain jurisdictions an authorised agent of NatWest Markets NV and NatWest Markets NV is in certain jurisdictions an authorised agent of NatWest Markets Plc

Copyright copy NatWest Markets Plc All rights reserved

639_0819NWM | October