For CFOs and treasurers, the pace of change in the world of sustainability – across regulation, financing and standards – can seem bewildering. Combined with policy uncertainty and a backdrop of high inflation and interest rates, this complexity could prompt some companies to adopt a ‘wait and see’ approach.
However, the vigorous debate around standards and regulations is positive. It reflects the growing maturity of sustainable finance, and ever-growing opportunities for far-sighted companies. Businesses seeking to prosper in a riskier world recognise that it has never been more important to cut through the noise and get to grips with the impact of environmental, social and governance (ESG) issues on operations and financing. As companies head into 2024, below are some key items to consider:
The sustainability debate has advanced significantly in recent years. Language around ‘use of proceeds’, eligibility criteria, monitoring and reporting – and even what constitutes environmental and social objectives – has evolved accordingly. Companies should revisit their taxonomy to ensure they have clearly articulated activities, both environmental and social, that are sustainable. Companies that have not previously done this should consider drafting now.
Investors’ greater emphasis on clarity and credibility when it comes to targets is being reflected in the use of financing tools
A clear taxonomy enables potential investors to more easily assess the sustainability goals and key performance indicators (KPIs) of companies using sustainable finance. Investors’ greater emphasis on clarity and credibility when it comes to targets is being reflected in the use of financing tools. During H1 2023, use-of-proceeds issuance soared while instruments linked to broader sustainability targets, such as carbon emissions, slowed.
Meanwhile, the Financial Conduct Authority (FCA) has drawn attention to the need for “more meaningful, science-based targets” for sustainability-linked loans (SLLs) to build market trust and integrity. Corporates may also want to rethink their attitudes to missed SLL performance targets. Most sustainable finance is multi-year, so there is usually an opportunity to get back on track and regain the cost benefits associated with hitting their KPIs. And as KPIs become more credible, investors will come to recognise that they may, on occasion, be missed.
The depth and frequency of requests for sustainability information continue to challenge many corporates. To manage incoming enquiries from stakeholders – including customers, suppliers and regulators – companies need to ensure their sustainability data is in good order.
While the FCA has yet to announce a timetable for mandatory compliance with the Taskforce on Nature-related Financial Disclosures (TNFD) and International Sustainability Standards Board (ISSB) S1 (broader sustainability metrics) and S2 (on climate) regimes, it is expected that both regulations will be introduced in the coming years.
Companies need to ensure their sustainability data is in good order
Corporates might benefit from starting the process of gathering information about governance, identifying key risks both within the business and across the supply chain, and considering how relevant data will be managed. One benefit of early planning is that many of the standards build on each other. TNFD will require similar structures to those already in place for the Task Force on Climate-related Financial Disclosures (TCFD) and much of the work that companies do to prepare for TCFD will be useful for ISSB standards.
Similarly, companies operating in the European Union will be able to reuse information they collect and report for the Corporate Sustainability Reporting Directive.
Many sustainable financing tools, such as ‘use-of-proceeds’ bonds and loans and sustainability-linked instruments, have been around for years or even decades. But the sustainable finance market continues to evolve. It is important to monitor developments that could deliver both attractive financing and stronger ESG credentials.
For instance, in September, the International Capital Market Association issued new guidance on so-called blue bonds, which are an innovative financing instrument with funds earmarked exclusively for projects that promote healthy seas and the blue economy. The guidance includes blue economy typology, eligibility criteria and KPIs. Blue bonds might seem niche, but for companies with real estate or facilities near the coast, making use of this tool – to invest in coastal protection, for instance – could be advantageous.
Social bonds have recently seen strong issuance
While green bonds continue to dominate sustainable bond market issuance, social bonds, have recently seen strong issuance. Motability Operations, which provides cars and scooters to people with disabilities, published a social bond framework in 2020 and has since issued several bonds, including 12-year and 25-year bonds sold in September with Lloyds Bank as joint bookrunner. The success of the transactions highlights the role that social bonds can play in reflecting business strategy while also raising cost-effective finance.
Lloyds Bank has also helped to further the development of the sustainability-linked derivatives (SLDs) market, with a sustainability-linked foreign exchange transaction that supports UK leisure travel company Jet2’s decarbonisation ambitions.
For Jet2, the SLDs enable it to mitigate FX risk from operations – just like a standard derivative – while gaining pricing benefits as long as it delivers on its ESG goal of reducing CO2 emissions per passenger-kilometre travelled.
The world of sustainability is becoming more complex. But rigour is also increasing. Despite uncertainty in the macroeconomic and political environment, the direction of travel is clear. Sustainability is not only a force for good, but – during a time of uncertainty – can deliver both operational and financing benefits for companies that are prepared to focus on the long term.
Hannah Simons is head of sustainability at Lloyds Bank Corporate Markets
Disclaimer: while all reasonable care has been taken to ensure that the information in this article/guide is accurate, no liability is accepted by Lloyds Bank plc for any loss or damage caused to any person relying on any statement or omission in this article. This article is produced for information only and should not be relied on as offering advice for any set of circumstances and specific advice should always be sought in each situation.
Lloyds Bank Corporate & Institutional supports clients with UK links from the UK, Europe and North America as well as other countries around the globe. Its Capital and Financial markets business (the non-ring-fenced division of the Group known as Lloyds Bank Corporate Markets) provides banking, financing and risk management solutions, connecting the UK to the rest of the world. It aims to help its clients grow their business, as well as drive sustainable and inclusive growth that benefits people and businesses across Britain.
