Many of the very early corporate sustainable use of proceeds transactions were launched by issuers from a relatively narrow range of sectors, representing those with capex-intensive businesses, and/or significant asset portfolios. The likes of utilities (to fund their regulatory assets) and housing associations (to fund improvements to housing stocks) made up a large proportion of supply, including green, social, and latterly sustainability ‘labels’.

One of the earliest green bonds can be traced back to November 2013, in a €1.4bn issuance from French utility giant EDF – setting the scene for issuance across the subsequent years. Indeed, between 2013 and 2016, the Euro sustainability market grew by an average of 103% YoY, enabling €18.6bn of supply, dominated by utility names (74%) and real estate sectors (21%). Though it wasn’t until 2018 that issuance truly took-off, with corporates growing comfortable with funding in sustainable finance formats. 

Figure 1: Corporate green, social and sustainability use of proceeds supply (EUR)

Utility and real estate issuers were therefore also some of the earliest to publish financing frameworks, including Iberdrola in April 2014, Gecina in January 2015, EDF in September 2016, and Engie in March 2017. These Frameworks set out how this new mode of financing could support their sustainability strategies as well broader business plans. 

For many of these organisations this was no mean feat – bringing together, for the first time, teams across treasury, sustainability and reporting functions – and requiring their firms to invest time and resource with the hope of execution benefits down the line, of which many availed. Indeed, our analysis suggests issuers achieved a 7bps ‘greenium’ on average in the Euro market between 2022-2023.

Figure 2: Euro market: GSS execution dynamics

Figure 3: Sterling market: GSS execution dynamics

With macro conditions shifting in recent years, many sectors placed funding plans on hold, leaving their frameworks dormant. As economic circumstances continue to evolve, and as funding opportunities return to the fore, it is therefore key for issuers contemplating sustainability issuance to be prepared. But does this mean a need for new frameworks, and a new accompanying Second Party Opinion (SPO)?

Sustainable finance has matured significantly, but many of the underlying principles are broadly unchanged. Indeed, the International Capital Markets Association (ICMA) has updated its authoritative Green Bond Principles (GBP) only twice since their release in 2014: first in 2018 and then revised in 2021. However, ICMA has since offered clearer and more prescriptive guidance on best practice. See here for a summary of key changes.

With this, investors tend to take a pragmatic view of how an issuer’s framework aligns and are generally not fixated on a particular cut-off date, with alignment to the latest principles naturally being of preference rather than requirement: “We don’t require alignment to the latest standards. Older frameworks are often weaker, but that’s where the market was at the time”, we’ve heard from a French investor. And an Italian investor remarked: “Alignment with latest standards is important, but not a deal-breaker.” 

Considering this gradual evolution rather than any fundamental shift, it remains key to consider the details of a framework, including the overall context. When embarking on an assessment of whether an updated framework makes sense, we’d start by being sure that the framework is still a fair representation of the business as a whole.

Indeed, investors do consider the ‘Section 1’ of the framework (typically where an issuer’s sustainability strategy is set out, linking towards a justification for GSS funding) as an important part of their holistic assessment. Here, they expect to see relevance and materiality, as well as information to help them understand why the sustainable finance transactions are important and coherent with this wider strategy. This section can demonstrate how the eligible projects will contribute to that broader sustainability strategy. A UK investor said: “We consider Section 1 a fair amount – it gives us a feel for the issuer’s aims and reasons for issuance.” And coming from a Spanish investor: "It is important as a way to summarise the issuer’s strategy, but we don’t spend too much time on it.”

The Use of Proceeds section of a framework is cited by many investors as a priority. It’s therefore key to check that the projects, criteria and, ultimately, impact metrics remain appropriate, and are achievable as part of the reporting infrastructure.

Criteria-setting can include thresholds for energy efficiency, for example, or stipulating any exclusion limits that could contribute to a ‘do no harm’ assessment. In many cases, projects will still be relevant – other than where a business has significantly evolved – but an update could be an opportune moment to broaden the suite of projects, or indeed tailor them where particular capex programmes have concluded. Some issuers have also used a framework update to add alignment to the EU Taxonomy, uplifting eligibility criteria to reflect the more stringent requirements, and also demonstrating their ongoing focus on the sustainable finance market. A UK investor commented: “We focus on all of the framework but pay a bit more attention to Use of Proceeds and allocation.” Another UK investor confirmed: “The most time is spent assessing the Use of Proceeds section.” 

Investors also look closely at the implementation of frameworks, including reporting of both allocation and impacts. There is a focus on compliance with commitments set out in frameworks, though few would immediately divest if reporting fell short. Investors are keen to work with issuers to understand challenges and work collaboratively with issuers. In the spirit of sustainability stewardship, exiting a position would, in most cases, be the last resort. “If an issuer doesn’t allocate or report in good time, we’ll engage to understand the issues,” a UK investor said.

The stamp of assurance from the Second Party Opinion (SPO) provider remains a ‘must-have’, delivering an external review of any sustainable finance proposition. Most often these are valid for the life of the framework they’re opining on, though few carry a specific expiry date. A Framework update would usually also trigger the need for a refreshed SPO.

This workstream can be time-consuming, especially when new eligible projects are being considered, so it’s worth engaging early. Most investors don’t have a firm preference for SPOs. Other investors look for some analysis, rather than ‘box-ticking’. Nonetheless, it is sensible to engage with a provider that has some sectoral experience, which will usually take some friction from the process. “We prefer SPOs that give an actual opinion,” and: “No preference on provider. Like to see a review against ICMA, but good if more explanation is provided,” we heard from two UK investors.

With a degree of housekeeping, sustainable finance frameworks can be considered durable against the test of time. Relevance to the business is key, and implementation watched carefully by investors. Updating frameworks can be a good way to recalibrate one’s sustainability strategy, add new investment categories, improve criteria, or align to taxonomies, but the need to update can be assessed through a pragmatic lens. Waking up the “sleeping” framework can put you in good stead for your next round of funding. 

[1] We define ‘vintage’ frameworks as those that are more than two years old, with some of the content out of date.