Riding the CSR Wave: Green Bond Issuance at Thames Tideway
By Eleanor Hill, Editor
Thames Tideway is the largest issuer of green bonds in sterling and holds the joint-highest Green Evaluation score awarded to date by S&P globally. In this case study, Darren White, Head of Environmental Sustainability at the company, and Ines Faden, Treasurer, share best practices for green bond issuance and outline practical ways to embed corporate social responsibility (CSR) into treasury processes.
Tideway was specifically established to protect the tidal River Thames from pollution, so sustainability lies at the heart of everything the company does. “We are tasked with building the Thames Tideway Tunnel beneath London, which is a major new sewer designed to substantially improve the quality of the water, which will assist with improvements to ecology of the river and public health,” explains White.
In addition to the legacy of cleaning up the river, the company also has the legacy of the construction process to consider, so has very ambitious sustainability targets. “We have developed a Legacy Plan which has 54 sustainability targets. Our objectives are grouped under five themes: Environment; Health, Safety and Wellbeing; Economy; People; and Place. They are also aligned to several of the UN Sustainable Development Goals,” he explains.
“To give a few concrete examples, we support an inclusive workforce, employing ex-offenders, supporting apprentices, and recruiting people locally. We also have an ambitious target of achieving a 50/50 gender split in our construction work – which is a traditionally male-dominated area. Elsewhere, we are committed to planting two trees for every one tree removed during construction.”
These targets have the potential to have important impacts, but they also require significant amounts of financing, says White. “However, an independent assessment of the social value of our legacy commitments has shown that the anticipated return on investment for every Tideway pound spent was approximately £3.39.”
Since Tideway reports on these 54 targets to its board, investors, and the UK government, it seemed like a completely natural step to link the company’s financing to these sustainability credentials, through initiatives such as green bond issues. And for treasury, there were wider benefits on offer, too.
Busting green bond myths
There is a perception in the market that green bonds can be a headache issue. But Faden disagrees. “Issuing a green bond was relatively easy for us because we are a ‘pure play’ – everything we do is green, i.e., building the tunnel to clean the tidal River Thames. Companies that aren’t pure plays but want to issue green bonds need to be able to clearly identify the green assets in their business and segregate these. This takes a little bit of time, but generally all of the information already exists within the company; it’s a question of extracting and compiling it to prepare the Green Bond Framework (GBF),” says Faden.
“It is possible to use consultants for this process, but we did it all internally. Once you get started, it isn’t terribly complicated. The changes required to the prospectus are also pretty simple, so this should not put treasurers off from issuing green bonds. Likewise, the ongoing reporting is not a burden. Most companies actually collect and report this data in one way or another already anyway,” she notes.
And for those treasurers worried about the additional cost, Faden says that, “in the big scheme of things, the difference in cost between issuing a green bond and a traditional bond was not significant. For smaller companies, this might be more of a concern, but for medium and large companies, it should not be a roadblock.”
Reasons to go green
As Faden explains: “We had two objectives in mind when deciding to issue green bonds: the first was to integrate CSR even more deeply into the daily processes of the company, and to connect the treasury team more closely with the rest of the organisation. In any company, the finance function often works in isolation. But CSR initiatives, such as green bond issues, can bring departments closer together, through collaborative projects – and this is precisely what we were aiming to achieve.”
The second objective, she notes, was to appeal to a new investor base, namely those who are specifically looking for Environmental, Social and Governance (ESG) investments. “While this may still be a relatively small market, the number of investors that have a mandate to invest in sustainable financing is definitely growing,” says Faden.
With this in mind, every piece of debt that Tideway has issued in the last six months has been a green bond. “We have now issued six green bonds, totalling £775m, and we are the world’s largest corporate issuer of green bonds in sterling. The issues have taken various forms: public bonds; private placements; nominal rate; CPI-linked bonds; RPI-linked bonds; cash bonds and deferred bonds,” she explains.
Key to these highly successful issues was having a robust Green Bond Framework (GBF) in place. “Our GBF is aligned with the four core components of the International Capital Markets Association (ICMA) Green Bond Principles (GBPs), a set of voluntary process guidelines that recommend transparency, disclosure and reporting. One of the recommendations of the GBPs is that companies obtain a second opinion on their GBF before committing to it,” she notes.
Nevertheless, the market for these second opinions is still relatively fragmented. After careful consideration, Tideway opted to use Standard & Poor’s (S&P’s) Green Evaluation service as it not only evaluates the GBF but also provides a relative green impact score of the financing in terms of the environmental benefits. “We were delighted that our financing received the joint-highest Green Evaluation score awarded to date by S&P globally: 95/100,” says Faden.
Another reason why Tideway chose S&P was that the service on offer “evaluated our bond platform, not just a single bond, which we found very helpful, especially being a ‘pure play’ issuer.” Moreover, the report produced by S&P is investor-friendly and allows stakeholders to easily understand how the score was reached.