Financing a Sustainable World: Global Banks Take Center Stage

17 August 2023

3 min read

Tiffanie Wong, CFA| Director—Fixed Income Responsible Investing Portfolio Management; Director—Global & US Investment-Grade Credit

Patrick O'Connell, CFA| Director—Fixed Income Responsible Investing Research

Progress toward a sustainable world would be hamstrung without the backing of global banks and their sponsorship of green and sustainable bonds.

While companies such as clean energy providers and electric vehicle manufacturers bask in the limelight, an entire sector driving the shift to a sustainable world goes largely unnoticed. Step forward the world’s banks, indispensable providers of capital and crucial agents of change.

Ask a typical investor about the leading companies in sustainable progress, and chances are you’ll hear a string of technology and consumer products names in reply. That’s only natural, as many of the stock markets’ standout performers feature in these sectors. But for fixed-income investors, the world’s banks should rank high on the priority list too.

Banks Are Central to Sustainable Development

Financial companies are large issuers in global debt markets and hence big constituents in fixed-income benchmarks. That makes them a key part of most fixed-income portfolios. Fixed-income investors have an array of bond instruments to choose from across a bank’s capital structure (unlike the relatively limited choice of bank equity for shareholders). Sustainable fixed-income investors can select from banks’ conventional bonds—via both senior and subordinated debt—and their green, social or sustainability (GSS) bonds.

Banks provide capital for specific green or social projects linked to sustainable objectives, and regularly opt to finance them using GSS bonds, with a whopping US$367 billion issued globally at the end of 2022, Bloomberg reports.

In most countries, it is typically banks—not capital markets—that are the main source of credit. This makes the banks central not only to the clean energy transition and to carbon-reducing initiatives, but also to wider positive social changes.

Banks’ Drive to Sustainability Is a Global Phenomenon

While European banks have led the way in sustainable financing initiatives and the issuance of GSS bonds, these examples show how sustainable lending best practices have spread across the banking world:

Empowering women. Canada’s Bank of Montreal (BMO) pioneered bonds that support female entrepreneurship, issuing in 2021 a Women-in-Business social bond aligned with: UN Sustainable Development Goal (SDG) 5, “Gender Equality”; SDG 8, “Decent Work and Economic Growth”; and SDG 10, “Reduced Inequalities.” Proceeds are allocated to women-owned enterprises, including micro, small and medium-sized businesses, based on a stated aim of supporting an inclusive society with zero barriers and a thriving economy by doubling support for women-owned businesses in Canada.

Driving global development. Itaú, a major retail and commercial bank in Brazil, has been an early emerging-market adopter of GSS bonds. Its Sustainable Bond is flexible and funds renewable energy, micro enterprises and middle-sized enterprises in Brazil’s poorest regions. This bond is used as a template for a partnership between Itaú and the International Finance Corporation (a division of the World Bank) to channel additional socially focused funds into Brazil. The bond strongly aligns with SDG 8, “Decent Work and Economic Growth.”

Transitioning from bank lending to green bonds. There are many examples worldwide of renewable projects that are first financed by banks, then refinanced in the bond markets. For instance, since the late 1990s, Citibank supported CMI Energía (the largest renewable power generator across Central America) with bank loans in the initial stages of the company’s renewable journey. Renewable plants are relatively small, and individually their financing needs cannot justify a green bond issue. After issuing a series of loans to CMI Energía, in 2021 Citibank underwrote a US$700 million green bond deal in the capital markets. This allowed the bank to free up its balance sheet, enabling continued lending for sustainable purposes both to CMI Energía and to other businesses.

Sustainability Begins at Home

Environmentally aware banks are leading in decarbonizing both their own operations and their loan books, and in advising and financing their clients’ sustainable developments. Dutch banks have assumed a pioneering role in many respects.

For example, Netherlands lender Rabobank now has explicit criteria for providing green financing. The bank insists that buildings built before 2020 must “belong to the top 15% of national building stock based on primary energy demand” or, if built after 2020, must have an energy consumption score “at least 10% lower than the threshold set for the nearly zero-energy building (‘NZEB’) requirements in the local market.” Rabobank’s very direct and specific rules contrast with more nebulous use-of-proceeds requirements that we’re seeing in recent green bond issues from industrial companies.

Another Netherlands-based lender, ING, has comprehensive sustainable policies both for helping its clients and for its own loan book, backed by specific targets: a 50% increase in new financing commitments for renewable energy by year-end 2025 compared with 2021; 100% of its commercial real estate portfolio to have an A energy label by 2030; and the total loan book to reach net zero by 2050 or earlier.

As a further example, ABN AMRO has been a pioneer in reducing the cost of borrowing for its counterparties who borrow money for environmental purposes. The bank commits to transfer the “greenium” (that is, the cost savings from issuing green and other ESG-labeled bonds at advantageous yields) to the underlying borrowers, which reduces their overall project costs.

Much Accomplished, but Much Still to Be Done

To be sure, other financial services providers are also making major contributions to sustainable development. But global banks are central to the global economy and are systemically important stabilizers across both emerging and developed markets. And the banks have unrivalled reach: publicly owned commercial banks can support regional enterprises too small for capital markets, while multilateral development banks, operating without public equity, can provide low or no-cost loans to developing nations and/or for sustainable purposes. The recent marine conservation Galapagos Bond (“blue bond”), issued as a debt-for-nature debt restructuring swap by Ecuador and supported by a guarantee from the Inter-American Development Bank and political-risk insurance from the U.S. Development Finance Corporation, is a case in point.

While environmentally aware banks have set the pace in driving sustainable progress, much still needs to be done to spread best practices across the sector globally. Investors who seek a sustainable world must engage with banks’ management to encourage faster progress.

The views expressed herein do not constitute research, investment advice or trade recommendations, and do not necessarily represent the views of all AB portfolio-management teams and are subject to change over time.

About the Authors

Tiffanie Wong, CFA

Tiffanie Wong is a Senior Vice President and Director of Fixed Income Responsible Investing Portfolio Management. In this role, she is part of the leadership team that develops responsible investment strategy across AB's Fixed Income business, particularly related to integrating environmental, social and governance considerations throughout the team's portfolio construction processes and overseeing management of several of the team's sustainable strategies. Wong also serves as Director of Global & US Investment-Grade Credit, responsible for the management and strategy implementation of the firm's Global & US Investment-Grade Credit portfolios, including total-return and income-oriented credit strategies for institutional and retail clients. She has worked closely with AB's Quantitative Research team to leverage the firm's technology innovations within fixed-income trading and research to apply a more systematic approach to AB's credit investing. Prior to joining AB's Fixed Income portfolio-management team, Wong served as an associate portfolio manager on the Credit team, focusing on various strategies for the Global and US Credit portfolios—including total return, buy and hold, and liability matching. Before joining AB in 2012, she was a fixed-income portfolio analyst and trader at Segall Bryant & Hamill and a fixed-income portfolio associate at Wells Capital Management. Wong holds a BA in economics with a minor in business institutions from Northwestern University and is a CFA charterholder. Location: New York

Patrick O'Connell, CFA

Patrick O'Connell is a Senior Vice President and Director of Fixed Income Responsible Investing Research. In this role, he is part of the leadership team that develops responsible investment strategy across AB's Fixed Income business, particularly related to integrating environmental, social and governance considerations throughout the team's research and engagement. Previously, O'Connell served as a corporate credit research analyst, focusing on emerging-market corporates in Latin American and African countries. He joined the Emerging Markets research team in 2013 after working as a credit analyst covering US high-yield energy credits at AB. Prior to joining the firm in 2012, O'Connell was a desk analyst at UBS Investment Bank, where he helped to allocate capital on the trading desk. He holds a BS in accounting and finance (magna cum laude) from Villanova University and is a CFA charterholder. Location: New York

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Financing a Sustainable World: Global Banks Take Center Stage

Banks Are Central to Sustainable Development

Banks’ Drive to Sustainability Is a Global Phenomenon

Sustainability Begins at Home

Much Accomplished, but Much Still to Be Done

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