High Yield & ESG: pushing green down the credit spectrum

March 11 2020

Dr Arthur KrebbersHead of Sustainable Finance, Corporates

View bio

Other insights

View more insights

5 minute read

Until recently, sustainability debt, in all its forms, has been the privilege of the investment grade markets. Not any longer. The past year has seen the emergence of ESG-conscious high yield funds and indices, and as a consequence, green high yield issuances.

What is driving the green agenda down the credit spectrum?

Maturing sustainable finance market benefits high yield firms

The maturing of the sustainable finance asset class has paved the way for issuances outside of the first mover sectors, such as utilities and real estate, which tend to be investment-grade rated.

In this now more established market, we’re welcoming issuances from companies in the consumer goods sector or industrials. These firms can finance the environmental and social-driven expenditure specific to their sector – not just the bricks and mortar capex on which the market was built. 

Investors pushing for impact

A growing number of sustainable investors are cognisant of their impact on the real economy. Just buying investment grade debt – from firms with arguably already strong market access – is insufficient for a number of them. Therefore, they’re directing cash into the more volatile high yield market where they can get more leverage over company behaviour. And potentially, noting the increasing evidence linking ESG results to financial outperformance, achieve excess returns.

Data revolution lowers hurdles for smaller issuers

Retrieving the required data about environmental projects and their carbon impact usually is a major obstacle for any issuer looking to define a green framework.  New standardised impact metrics and methodologies (at least in the carbon space) as well as big data and artificial intelligence-driven solutions are starting to simplify this complex task. In due course, this should also help high yield firms, which generally have smaller treasury teams and less in-house ESG data available.

High yield issuers can opt for simpler financing instruments

The more recent generation of ESG financial instruments will likely also prove more attractive to high yield firms. Key performance indicator pricing-linked instruments, for example, require less structuring effort than a traditional green bond, and transition finance should allow for relatively more polluting sectors to finance a broader mix of projects.

Challenges, however, remain to the concept of “responsible junk”: few high yield firms have authoritative ESG ratings, and it can be costly focusing on immaterial ESG factors. Litigation risks of “greenwashing” could also be more pertinent given the more default prone nature of these instruments. Yet various market initiatives are starting to address these roadblocks.

Soon there will be no “glass floor” in being sustainable!

With thanks to Dario Berruti, Nicholas Koch, Niceasia Mc Perry, Jenny Murray, Rabia Sheikh, Jaspreet Singh & Joanna Vijaykumar for their support with the background research for this article.


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, and/or 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 N.V. is incorporated with limited liability in the Netherlands, authorised and regulated by De Nederlandsche Bank and the Autoriteit Financiële 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 N.V. and NatWest Markets N.V. is, in certain jurisdictions, an authorised agent of NatWest Markets Plc.

Copyright © NatWest Markets Plc. All rights reserved