Lloyds completed the allocations of the proceeds of its debut environmental, social and governance (ESG) bond this week, a successful step forward for the bank’s SRI platform — but one which unfortunately leaves investors and the public without much meaningful information.
The bond was structured with four pillars, with the loans it funded allocated to one of the following: to a healthcare provider, to small scale renewable energy projects, to borrowers awarded grants through the UK government’s Regional Growth Fund, or to customers in the poorest 30% of areas in the UK.
But any investors that thought the ‘E’ in ESG — it does come first, after all — would be given priority will be disappointed.
The bank announced earlier this week that it had completed the allocation of the proceeds of the bond and had used the £250m of proceeds to fund an equal value in loans. Lloyds offered a fair deal of clarity in how it was using the proceeds, including allocating a grand total of £0.8m worth of loans funded by the bond to projects focusing on renewable energy.
That’s 0.32% of loans to one of the four sets of eligible projects. On the doughnut chart the bank sent out to illustrate its lending, this represents an almost-invisible sliver.
Meanwhile, 87.32% of the loans have gone to projects that fill only the criteria of being in deprived areas. That’s great — but how does it compare to Lloyds’ normal lending practices?
Lloyds’ loan book could be broadly similar in composition. It could be even more environmentally sound. It could also be less socially responsible — the bank has, after all, encountered criticisms of its lending in the past.
We just don’t know enough to make a meaningful comparison. But if investors are actually concerned with the impact their investment has, shouldn’t that information be available to them? After all, they presumably want to demonstrate that through funding this investment, more lending has gone to responsible projects than would have otherwise been the case.
Lloyds declined to share information on its loan book on the basis that it is commercially sensitive information. A spokesperson added that it would be challenging to compare Lloyds’ overall loan book with the use of proceeds of a £250m bond offering.
Lloyds might protest that there are also governance criteria to meet — the borrowers must conform to Lloyds’ “Code of Business Responsibility”. A document that — among promises such as ensuring workers can achieve “a positive balance between their work and their lives outside of work” and aspiring to “treat others as we would like to be treated” — commits Lloyds to such noble goals as adhering to human rights laws of the countries it operates in and not tolerating “abusive or discriminatory behaviour”.
These are platitudes, and the latter amounts to nothing more than an open commitment to obey the law.
One SRI industry veteran pointed to the bond as an example of why “opinion bonds”, where issuers themselves define the criteria of social goodness are a problem, and why socially responsible investors and third party watchdogs need to demand rigorous standards of issuers of SRI bonds.
He’s right. The industry vet highlighted that there is no means for investors in Lloyds’ ESG bond to ensure that the companies to which it has lent are even fairly treating their workers. While the use of proceeds has external monitoring from Sustainalytics and PwC, they presumably won’t be checking on the welfare of workers once a week.
If we are truly trying to move the idea of socially responsible investment forward and making it something banks are incentivized to do at the expense of other, less socially responsible activities, then SRI issuers will have to give meaningful metrics on their lending activities. Otherwise, it can be considered little more than just good PR.