Green bonds are red hot. At the beginning of 2014, the green bond market was expected to more than double by end of the year (from $10.9 billion in 2013), however, these expectations have already been surpassed by mid-year. The market will most likely quadruple before year end. In the past, public sector issuers have dominated activity, but a lot of new growth this year is in the corporate sector. Corporate green bonds to date make up less than one percent of corporate issues. You can almost still count them on your hands and toes. But that may soon change. With no sacrifice in yield, the investor demand for this impact-focused asset class remains high, especially among responsible investors, with oversubscription a common occurrence. And companies are increasingly seeing green bonds as a means to diversify their investor base while also achieving a positive impact. Corporate green bond issuances are set to explode. In early 2014, Lloyds Bank recognized the important role they could play in developing the green bond market by creating an ESG bond. Lloyds Bank ESG bond not only focused on environmental impact, such as funding micro-renewables, but also social impact, by including a range of eligible social assets – including financing SMEs and healthcare providers in disadvantaged UK regions.
At their core, green bonds must deliver positive ESG impact alongside traditional returns. If green bonds are going to create positive change, we need to ensure that these impact characteristics are credible and transparent to the investment community. In order to accomplish this, issuers need to find a way to “certify” that their approach measures up to the expectations of the investment community in terms of impact.When developing its ESG bond Lloyds Bank committed to providing ongoing clarity for investors by creating a robust reporting structure to ensure the proper use of proceeds. The use of the funds raised through the bond will be independently measured and monitored through quarterly reporting and a “final allocation report,” and will be independently audited. The framework and reporting structure for the bond was developed through thorough consultation between Lloyds Bank and Sustainalytics, where Sustainalytics defined the bond’s themes and impact objectives in light of the bank’s sustainability goals and established credible criteria to determine which projects are eligible for the use of proceeds. While many RI investors are focused on the green attributes of the bond itself, others are concerned about the link between the issuer’s sustainability performance and the objectives of the bond. In this case, the ESG bond builds on the Lloyds Bank Helping Britain Prosper Plan (HBPP) as it is designed to specifically support the pillars of the company’s sustainability strategy. In addition, Sustainalytics conducted an assessment to ensure that the bank’s HBP Plan’s commitments were aligned strongly with the overall objectives of the bond. As the corporate green bond market evolves and best practices emerge, continued investor confidence remains central to the success of this market. By creating an ESG bond that is aligned with corporate sustainability goals, with dedicated management oversight and transparent and regular reporting, Lloyds Bank and Sustainalytics, intended to further investor confidence in this rapidly growing market.
Vikram Puppala and Marion Oliver are both Associate Analysts at Sustainalytics.