From supporting the issuance of sustainable bonds, sukuk and green equity, to improving corporate disclosure, the London Stock Exchange touches many points in the sustainable finance ecosystem. Claire Dorrian and Shrey Kohli review a busy 2023 and look ahead to 2024.
Environmental Finance: Volumes in the sustainable debt market bounced back in 2023. What were the patterns of activity you saw in the London Stock Exchange's (LSE) Sustainable Bond Market (SBM) in 2023? What would you point to in terms of issuance highlights?
Shrey Kohli: We had a record year on the SBM, with the highest number of issuances ever, at 119, raising over $79 billion. Although we had the strongest year with regards to the number of issuances and it was positive to see the large number of transactions, the total amount raised was less than what we saw in 2021, which was the largest year for sustainable debt markets globally, aided by the monetary easing during the pandemic.
In terms of trends, there was substantial issuance from sovereigns around the world, particularly in Latin America, but also in the Asia Pacific region. We saw a greater number of banks participate in the sustainable debt market, particularly from the Middle East in the lead up to COP28, as well as corporates returning to issue capital. In summary, there was a good mix of issuers, particularly from emerging markets, after a very volatile year in 2022 due to rising interest rates.
In terms of highlights, we saw Heathrow Funding issue a €650 million ($700 million) sustainability-linked bond, which was the first to include a target to reduce Scope 3 'in the air' emissions from aircraft. Masdar, the United Arab Emirates' clean energy pioneer, issued $750 million worth of green bonds, primarily to support greenfield renewable energy projects around the world. And we saw significant growth in green sukuk issuance. For instance, Abu Dhabi Islamic Bank issued a $500 million green sukuk in November 2023 and, in January 2024, we saw the first sustainability sukuk from Qatar, issued by Qatar International Islamic Bank.
EF: What are your expectations for 2024? Where are you expecting to see most issuance?
SK: We've had a very strong start to 2024: we have seen significant activity in January on the SBM, with nearly $10 billion raised. A large component of the issuance this year has been from supranationals, sovereigns and agencies (SSAs), such as the European Bank for Reconstruction and Development, Mexico, Chile and the Ivory Coast, and almost all inflows have been through green, social and sustainability bonds. It shows that there is significant investor appetite to provide funding in use-of-proceeds formats.
From a macroeconomic perspective, we're seeing the market get used to 'the new normal', where interest rates continue to remain elevated and issuers need to lock in their funding. And we're also reaching a tipping point in terms of countries and companies enacting their net zero strategies, which is why we feel supply will be strong. We're expecting very healthy issuance in 2024 – similar to 2023, if not higher.
EF: Have you introduced any changes to how the SBM operates in 2023? Do you have any changes in the pipeline for 2024?
SK: The SBM, now in its fifth year, has evolved and responded to market needs since we launched it in 2019. In fact, we will soon be celebrating a decade since we set up our green bond segments, being the first exchange globally to do so. We do a lot of work behind the scenes on maintaining the market's integrity and application of standards, ensuring that we have the appropriate governance in place and that our processes can deal with reviewing applications and analysing any associated risks efficiently.
Feedback that we received from investors when we set up the SBM is that it is important to ensure that issuers commit to and then publish their post-issuance reports. So what we've also done is make sure that issuers meet the transparency requirements of the SBM, and that investors can see their allocation and impact reports. We reach out to issuers on an annual basis to ensure that that reporting is done, prompting issuers to do so when required. We feel that operating in this manner improves the governance and standards of the whole market; that rigour in our approach will continue in 2024.
EF: It's now almost two years since you teamed up with TreasurySpring to bring short-term debt financing to the SBM. How has that part of the market developed?
SK: Our partnership with TreasurySpring brought together two distinct capabilities. On the one hand, TreasurySpring allows investment-grade SSAs and companies to raise short-term funding without needing access to commercial paper markets, which are typically only open to the largest borrowers with sophisticated treasury management teams and the largest investors. On the other hand, London Stock Exchange Group (LSEG) offers its expertise in sustainable finance, which we can use to identify sustainability leaders among issuers active in the short-term debt markets.
In 2023, we saw the first direct issuance through the TreasurySpring platform, by Mitsubishi HC Capital UK, which has raised over €60 million of funding through the platform.
In a development we perhaps weren't expecting when we launched the partnership, we have also seen SSAs make their short-term funding needs available on the TreasurySpring platform as well, to access a new set of investors. For us, this is exciting as this demonstrates that there's appetite among investors within short-term markets to incorporate an assessment of sustainability strategies in their decisions.
EF: The London Stock Exchange was the venue last year for the launch of the sustainability disclosure standards by the International Sustainability Standards Board (ISSB). What will they mean for issuers and investors?
Claire Dorrian: Historically, sustainability reporting has been confusing for companies and investors who have been required to navigate a plethora of different reporting standards, initiatives and data requests. Over 40% of large and mid-caps globally still do not disclose Scope 1 and 2 emissions. The level of disclosure of Scope 3 emissions, those emissions associated with suppliers and products, is much lower. If implemented on a global basis, the ISSB standards can provide the key to unlock this information.
The ISSB helps to bring some consolidation into the market and sets a global baseline to enhance disclosure to meet geographical, sectoral and regulatory requirements. Reporting standards play a critical role in how markets operate, in the integrity of markets, and in the flow of financing. To act on sustainability priorities, financial industry participants need reliable and globally consistent data.
Disclosure can also assist organisations with their decision-making processes, longer-term strategies, and their policy and business plans, as well as helping them manage and reduce their direct risks and those across their supply chains.
Ultimately, more transparency and disclosure will help foster engagement and capital flows between the real economy and the financial industry to enable the transition to a low-carbon economy. That's why we've been very public in our support for the ISSB standards becoming mandatory, and being applicable on an economy-wide basis, so that they cover not just public companies but also private companies.
EF: What regulatory developments are you watching in 2024?
CD: Moving the ISSB into the implementation and adoption phase is really important, as is helping London-listed companies understand what that means on a practical level.
We're also keeping a close eye on international developments. For example, in the EU we're following policy including the implementation of the Corporate Sustainability Reporting Directive and the review of the Sustainable Finance Disclosure Regulation (SFDR). There's a lot happening more broadly around the world as well, for example in the Asia-Pacific region, where we're seeing progress in areas including ISSB implementation and environmental, social and governance codes of conduct.
Transition plans are also an important area of focus, in terms of helping companies and investors understand them.
By enhancing the availability of information on how companies across the economy intend to decarbonise, transition plans can facilitate a more efficient and effective allocation of capital in line with net zero.
The London Stock Exchange welcomes the UN's International Fund for Agricultural Development on the launch of its inaugural impact report
The London Stock Exchange welcomes the listing of Masdar's $750 million green bond
EF: What other bodies are you working with to develop the market?
CD: We are working with a wide variety of market participants. For example, we work with the International Capital Market Association (ICMA) and similar organisations where we need to align on developments in frameworks for capital raising and reporting. We work with industry bodies, multilateral development banks and other bodies to build the pipeline of businesses that use our markets to access green and transition finance.
We are working with the UN Sustainable Stock Exchanges (SSE) Initiative and the ISSB to launch some training later in 2024 for listed issuers on our markets guiding participants on applying the ISSB Standards. We're also going to be publishing some guidance around the production of disclosure against the ISSB standards, and what that means for companies.
In addition, we support policymakers in developing the market for sustainable finance, such as the UK Financial Conduct Authority, as well as international bodies like the International Organization of Securities Commissions. We have an important convening role as an exchange, where we can help to bring together companies, investors, policymakers and regulators on this agenda.
EF: LSEG was also prominent at COP28, unveiling initiatives around the sustainable sukuk market and making climate data more accessible. What did you announce there?
SK: At COP, we announced with the Islamic Development Bank and ICMA an industry collaboration to create guidance on how sukuk financing can be aligned with ICMA's Green Bond Principles and Sustainability Bond Guidelines. There's around $180 billion to $200 million sukuk issued annually, but green sukuk is only about 10% of that. In a similar way that ICMA has worked with other stakeholders on blue bonds and gender-themed bonds, the guidance will cast a light on the global market and give issuers and market participants clear advice on how sukuk can be labelled as green or sustainable. We expect the guidance to be in place later in 2024, after consulting with key stakeholders globally in sustainable and Islamic finance.
We also unveiled the second edition of our "Green and sustainability sukuk" report as part of the High-Level Working Group on Green Sukuk, which we launched at COP26 in Glasgow. That Working Group aimed to grow the market to $30 billion of annual issuance, and we're nearly there. Our second report explored how the market has developed and brings together recommendations from different industry stakeholders in terms of how to grow it further.
CD: On the climate data side, we were closely involved with the launch of the Net Zero Data Public Utility. It's the world's first global, centralised open-access repository for private sector climate data. Our CEO David Schwimmer was very much at the forefront of that, alongside Michael Bloomberg and President Emmanuel Macron. It was a great example of the importance of the collaboration we will need to tackle climate change, and of the importance of the common standards, data and information that capital markets need to properly embrace sustainable finance.
Claire Dorrian is head of sustainable finance, capital markets and post trade at the London Stock Exchange Group. Shrey Kohli is head of debt capital markets, at the London Stock Exchange.
For more information, see: www.londonstockexchange.com/raise-finance/sustainable-finance
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