scott forrest

The UK bank’s second green bond, and fourth issuance under its green, social and sustainability framework, incentivises purchases of energy efficient properties. Shanny Basar reports.

On November 2, just two days after the 2021 UN Climate Change Conference, or COP26, began in Glasgow, NatWest Group reached its own green milestone, selling a £600m green bond with proceeds that were linked to the bank’s green mortgage book.

The UK bank had launched its green mortgages just a year earlier, offering a discounted interest rate to new or existing customers purchasing a property attracting one of the two highest-possible energy efficiency ratings.

As Scott Forrest, head of treasury debt capital markets at NatWest Group, explains, the bank had expanded its green, social and sustainability (GSS) framework in October 2020 to include commercial and residential green buildings, as well as social and affordable housing sectors and female-led enterprises. “It is quite a comprehensive framework and future-proofing what we would potentially look to do on the liability side,” he adds.

The green mortgage book helps NatWest meet several goals. In October 2021, the bank promised to deliver an additional £100bn of climate and sustainable funding and financing by the end of 2025. The product also aims to decrease the UK’s total climate emissions, as 15% comes from the property sector. In addition, green mortgages meet customer demand; a survey by the bank had found that 70% are concerned about climate change.

By the third quarter of 2021, NatWest had completed £565m of green mortgage lending. As a result, the green bond issue was set at £600m, which also met the bank’s minimum requirement for own funds and eligible liabilities (MREL) target. Mr Forrest says that NatWest Group’s MREL issuance had a total requirement of approximately £3.3bn in 2021 and the senior holding company had issued £2.7bn, leaving £600m.

The seven-year, non-call six, green mortgage bond was priced at gilts plus 127 basis points, and was more than two-times oversubscribed, with an order book of £1.3bn.

Our target in 2021 was to have at least 25% of our MREL issuance in the green, social and sustainability format, but with our two issuances it was around 43%

Mr Forrest says: “We did see a number of new names so I think the green component was additive to incremental demand.” He also estimates that the demand for the green component improved pricing by between three and five basis points.

NatWest also used an environmental, social and governance (ESG) scorecard that gave investors scores of between one and three as part of its allocation decisions. Ranking was determined by criteria such as whether investors were signatories to the UN Principles for Responsible Investment, or whether they have a dedicated ESG analyst or dedicated ESG funds. “We implemented the scorecard on our inaugural social bond in 2019 and we are keen to continue to use it on any green, social or sustainability bonds that we issue,” Mr Forrest says. “We discussed the scorecard with the other bookrunners in order to reach a consensus across the board.”

NatWest Markets acted as global coordinator, GSS structuring advisor and joint lead bookrunner on the green mortgage bond. JPMorgan, Goldman Sachs, Royal Bank of Canada and ABN Amro were additional bookrunners. Half of the green mortgage bond proceeds, £300m, will be used to refinance existing green mortgages and the other to finance new lending over the next 12 months.

Mr Forrest says: “My personal view is that the funds will be allocated in five or six months, as the average origination completion rate is around £50m to £60m per month.”

The proceeds were not wholly used for financing new mortgages to allow investors to review their experience of £300m of existing green mortgages in their portfolio. Mr Forrest explains that the bank had used a similar approach with its second social bond in February 2021, when it allocated €750m to refinance affordable and social housing and €250m to new loans.

The green mortgage bond is the fourth under the group’s GSS Bond Framework and the second green bond. Issuance under the framework is set to continue with a potentially wider use of proceeds.

“Our target in 2021 was to have at least 25% of our MREL issuance in the GSS format, but with our two issuances it was around 43%,” says Mr Forrest. “I think going forward, we will aim to have between 25% and 40% of our MREL issuance in GSS format.”

In terms of impact, NatWest would like to look at gender. According to Mr Forrest, the bank has set goals internally and it has launched a dedicated £2bn fund for female-led enterprises.

“I think we need to be reflective of what type of assets we are originating on the balance sheet, but we have tried to be as innovative as possible to ensure that there’s good dialogue in the industry and others can see what is possible,” he adds. 

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