Sustainability: What to watch in 2024

Read time: 5 mins Added date: 04/01/2024

Hannah Simons, Head of Sustainability, Markets, Lloyds Bank Corporate and Institutional, outlines three key ESG and sustainability considerations for corporates and institutions in 2024.

Sustainability image: forest and line graph

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 farsighted 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.

1. Refine your sustainability taxonomy

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 which have not previously done this should consider drafting now).

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 debate reflects the growing maturity of sustainable finance, and opportunities for farsighted companies.”

2. Data, data, data

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.

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 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. Similarly, companies operating in the European Union will be able to reuse information they collect and report for the Corporate Sustainability Reporting Directive.

“It is important to monitor developments that could deliver both attractive financing and stronger ESG credentials.”

3. Keep an eye on market developments

Many sustainable financing tools, such as ‘use of proceeds’ bonds and loans and sustainable-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 2023, 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 which promote healthy seas and the blue economy. The guidance that includes blue economy typology, eligibility criteria and KPIs. While 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.

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.

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