By innovating in support of sustainable finance across the funding continuum, the London Stock Exchange is working to make ESG a routine part of how capital markets work, say Elena Chimonides and Shrey Kohli
Environmental Finance: What trends have you seen in sustainable fixed income through the London Stock Exchange's Sustainable Bond Market (SBM)?
Shrey Kohli: In 2022, we saw an economy coming out of two years of Covid restrictions, undertaking a generational change in interest rates, war in Ukraine and, as a consequence, limited risk appetite. Overall, debt capital markets issuance was down 25%. Sustainable debt markets were more resilient, with issuance down about 18% so, as a proportion of issuance, it was higher than in previous years, which was a positive trend. Despite these headwinds, we currently have over 400 bonds active on the Sustainable Bond Market, raising a total of £158 billion ($190 billion) equivalent, with over £175 billion equivalent raised historically by green, social and sustainability (GSS+)-labelled bonds on our markets.
The Sustainable Bond Market has a high footprint of emerging market issuers. In a normal year on the London Stock Exchange, we see about 75% of issuance from developed markets and about 25% from emerging markets, particularly from the Middle East, Asia and Latin America. Last year, it was around the 90% to 10% range, due to limited risk appetite.
We are excited to have worked with issuers across the world on some milestone transactions from emerging markets, despite the challenging macroeconomic environment.
EF: What would you point to as some of the key transactions last year?
SK: Working with issuers to open the sovereign sustainability-linked bond (SLB) markets was a highlight. We worked with the Republic of Chile, which issued the world's first sovereign SLB with a 20-year tranche, indicating their long-term commitment to its strategy; Uruguay, which issued the first sovereign SLB with a step down in coupon payments if it exceeded its targets, as well as a step up if it missed them, substantially diversified its investor base. Seeing more issuance from regions such as the Middle East was another highlight, where we admitted first-of-a-kind issuances, such as the first bond by the Kingdom of Saudi Arabia's Public Investment Fund and the first sustainable sukuk issuances from banks such as Saudi National Bank and Riyad Bank.
EF: How has the way that the London Stock Exchange works with sustainable debt issuers changed?
SK: In fixed income markets, primary debt exchanges have traditionally acted as regulators and provided the financial market infrastructure, rather than playing a more active role in supporting the raising of capital. However, particularly on these transactions, it is our belief that we were seen as partners on the journey.
For example, with Uruguay's SLB, the government was committed to including two key performance indicators (KPIs) attached to the bond, one linked to emissions and the other to the preservation of native forest area, as well as incorporating a step-down structure for exceeding targets. That required extensive investor engagement well in advance of the transaction, followed by seamless execution during volatile times. When looking at potential exchange partners, we were able to use our relationships with communities of investors in sustainable debt markets. We were able to support the investor roadshow through our virtual roadshow platform SparkLive when the transaction was brought to market.
We've also been able to provide such issuers with data on peer transactions, and who the active investors are in other sustainable debt markets or what their conventional bonds are, as that is data we have and we can provide to our clients. For example, we offer ESG data covering over 300 data points on 10,000 companies, based in 76 countries, to all our listed issuers through our Issuer Services Platform.
The biggest difference from previous years is that our expectation has been to provide the infrastructure, review documents and provide visibility. Currently, we play a much more active part in the transaction itself and in the journey with the client.
EF: The exchange has partnered with TreasurySpring to enable issuers to tap short-term funding. What was the thinking behind the tie-up, and how does it work?
Elena Chimonides: We are looking to help our clients embed sustainable finance across the funding continuum. TreasurySpring offers short-term financing options to corporates that may not have commercial paper programmes, or only banking relationships for short-term capital. They were very keen to introduce a robust framework for sustainable investing on to their platform. The tie-up enables TreasurySpring to utilise our methodologies and issuer lists.
We will provide an accreditation to recognise sustainable issuers who can raise short-term financing through TreasurySpring. The accreditation is based on three criteria, namely that the company either: has a Refinitiv ESG score of B+ or above, which means that it is ranked in the top third of its peers; is eligible for the Green Economy Mark, which means that at least 50% of its revenues come from green sectors based on the FTSE Russell Green Revenues Classification System; or displays its bonds on the Sustainable Bond Market, in line with the International Capital Markets Association (ICMA) Green and Social Bond Principles 2021.
This provides comfort to investors that, when TreasurySpring lists short-term funding instruments on its platform, they are independently verified. It's about us looking at innovative ways to try and help our clients make sustainability investing an integral part of how they access the capital markets.
EF: You launched your Voluntary Carbon Market last year. How does the market work, and how it is being used?
EC: This is about helping to mobilise as much capital as possible to support the transition to net zero. At this point, the Voluntary Carbon Market (VCM) is focused on investment funds and operating companies. The VCM is a designation that applies to funds and operating companies that are admitted to the London Stock Exchange's Main Market or AIM (Alternative Investment Market), with the intention to invest in climate change mitigation projects that are expected to yield carbon credits. Those funds can then issue dividends as either cash or as carbon credits, which the investors can retire to meet their residual emissions requirements, hold, or sell as required.
In order to be eligible for the designation, there are additional disclosures that funds and companies are required to make over and above the listing rules for the Main Market and admission rules for AIM. These include the qualifying bodies whose standards will be applied to the projects, expected carbon credit yield and the extent to which they are contributing to the United Nations Sustainable Development Goals. As the shares in the funds and companies can be traded, investors can benefit from liquidity that is not available by investing directly into projects.
SK: This may be particularly interesting for corporates as investors who are looking for a medium- to long-term stream of carbon credits as part of their net-zero transition plans, where offsetting is relevant for them. Currently, the process of sourcing carbon credits is not transparent, with a fragmented sell-side of often quite small brokers and advisors, opaque and volatile prices and variable quality of credits. Our VCM designation offers exposure to an asset class where the corporate will directly fund those emission reduction projects, with greater visibility in where and how capital is being deployed, progress across the lifecycle of projects and the provenance of the credits that are generated.
We're in the early stages of building the market but have the ambition to establish a rich ecosystem of funds with different strategies. We have already provided the designation to the first fund – the Foresight Sustainable Forestry Fund – and we're engaging with companies, project developers and investors to develop the pipeline. There's a lot of interest in how this market will develop.
2022's transactions of note
EF: The exchange has taken a leading role in developing a green and sustainability sukuk market. How do you anticipate that market developing?
SK: Sukuk markets, which allow companies and governments from the Islamic world to fund themselves in line with their beliefs, have grown substantially over the last decade. In 2010, the market for listed sukuks was worth less than $10 billion, while it had grown to around $100 billion by 2021. Sustainable sukuk has also grown, but it's a small share of the broader sukuk market. In 2021, there was $5 billion of issuance, which is 5% of the whole market.
We think there is enormous scope to grow the market, especially as, by its nature, sukuk is asset-based or -backed – so there's a strong link between the assets that are being funded and the return that is provided to investors. This makes them very well suited to use-of-proceeds bonds.
At COP26, we created a High-Level Working Group on Green Sukuk, with the UK government, the Republic of Indonesia, the Islamic Development Bank and the Global Ethical Finance Initiative. We produced a short report ahead of COP27 at Sharm El-Sheikh, surveying market participants and discussing challenges facing the market.
During the year, it's been very promising to see more sustainability sukuk issues, including Indonesia and the Islamic Development Bank, but also from the likes of Saudi National Bank, Riyad Bank and Infracorp in Bahrain. We're working very closely with the Islamic Development Bank and the Global Ethical Finance Initiative to develop the market, and we're optimistic about there being more issuers interested in the sustainable sukuk format.
EF: What are your plans for 2023 and beyond?
SK: A priority is to provide better data to investors on sustainable finance. We are working with our colleagues throughout LSEG to provide that data via our issuer services platform as well as on our website. We also plan to further our partnership with TreasurySpring, to promote sustainable finance in the short-term funding market, and ensure consistency with the work done at ICMA committees as they refine principles for green financing for commercial paper markets.
There's massive regulatory change underway, both in the UK and the EU, not just related to sustainable finance, but capital markets as a whole. We need to engage more on policy to ensure that standards are as consistent as possible globally, to keep sustainable debt markets as accessible to the widest set of issuers as possible, with robust standards in order to deal with concerns around greenwashing.
EC: Internally, there's a big focus on ensuring ESG is integrated into the capital markets as a matter of course, and that it's not restricted to distinct product areas. As more and more companies look to partner with us in sustainable finance, and as the accreditations we offer are used more broadly in the market, it's important that ESG is something we consider across the board.
Elena Chimonides is senior product manager, fixed income, and Shrey Kohli is head of debt capital markets and product origination, at the London Stock Exchange Group.
For more information, see: Sustainable Bond Market | Sustainable Finance | LSEG