Spanish Regions: Sustainable Funding to Become Mainstream?

The Spanish autonomous communities have continued to increase their green, social, and sustainability (GSS) bond issuances in recent years, including a rise in the number of regions issuing such bonds. In 2023, Spanish regions issued GSS bonds worth EUR 3.9 billion, confirming that sustainable funding was witnessing an increasing trend. The entities issuing these bonds share a willingness to direct investments towards sustainability projects, reflecting also their concerns about environmental, social and governance (ESG) themes. The autonomous communities also find in sustainable funding a convenient tool to amplify investor demand for their bonds. DBRS Morningstar treats GSS issuance the same as conventional bonds, however, growth of this issuance type could help the regions' funding diversification that we consider credit positive.

DBRS Morningstar is of the view that the environmental and social responsibilities of these regions offer a wide range of eligible projects that could use GSS funding. Moreover, in recent years, the European Commission has been working on developing a framework to streamline the requirements for GSS bonds, which could raise investor confidence further and grow dedicated investors for green and sustainable investments. The Spanish regions could benefit from this evolution, thanks also to their already existing set of frameworks that share some EU framework principles. DBRS Morningstar acknowledges the importance of sustainability for investors, whose increasing interest in GSS bonds underscores the fact that these bonds will likely continue to increase in volume and more regions will turn to such issuances.

Key Highlights include:

-- Sustainable funding keeps growing in volume and among the number of regions in Spain.
-- Spanish regions are growing sustainable funding, leveraging of their eligible investment opportunities.
-- Transparency on GSS definitions could increase confidence and demand from GSS investors for Spanish regions green, social and sustainability issuances.

“Spanish regions will continue to grow GSS funding and more transparency on GSS definitions may attract more GSS funds”, said Jorge Espinosa, Assistant Vice President in the Global Sovereign Ratings Group. “The multiple eligible investment opportunities under the responsibilities of the regions, and the diversification that the GSS funding could provide are strong supportive factors for this trend”.