Encouraging sustainable financing with Lloyd's Bank

Transcript:

Rosie (00:00)
Hello and welcome to the latest episode of the Sustainable Finance Guernsey podcast, rated one of the top 10 most useful sustainable finance podcasts by Green Finance Guide. Guernsey is one of the jurisdictions leading the way in green and sustainable finance and as part of this podcast series, we'll be speaking to and learning from some of the leading figures in the field. My name is Rosie Allsopp. I'm Communications Director at Guernsey Finance.

We're the island's promotional agency for the financial services sector. And today I am thrilled to be talking to Hannah Simons. She's Head of Sustainability at Lloyds Bank Corporate Markets. With a background in supporting institutional investors achieve long-term objectives, Hannah supports Lloyds Bank Corporate Markets clients to build sustainable financing solutions. She also works closely with colleagues across the wider Lloyds Banking Group to support the delivery of their own sustainability objectives.

Hannah joined from Schroders where she was Head of Sustainability Strategy. In her role, she supported clients in embedding sustainability into their investment strategy and developed a cohesive range of sustainable investment products to meet client needs. Earlier in her career, Hannah worked at BlackRock, Pimco and Schroders. So today we'll be discussing sustainability reporting and transition plans. Welcome Hannah. It's great to have you with us on the podcast today. Could you start

a little bit by introducing yourself maybe a little bit more and talk about your current priorities within Lloyds Bank.

Hannah Simons (01:30)
Rosie, thank you so much for those introductory comments and it's such a pleasure to be with you today sharing some of my insights. So you mentioned about my career path. I've been with Lloyds for just coming up on two years now and in my role what I'm really here to do is support all of Lloyds Banking Group's customers as they look to embed sustainability

into their corporate strategy or obviously for individuals into their own personal agenda. Now as a bank, the foundation of really everything that we're doing is sustainable financing. So helping our customers access funds that will enable them and support them as they seek to build a more sustainable proposition for their own business.

Now, I'm also really lucky because not only do I support our customers, but actually I also get to look inwards and I get to be part of the team that's helping Lloyd's Banking Group actually drive sustainability into its own corporate agenda as well.

Rosie (02:36)
That sounds absolutely fascinating. Now, there's been a lot of developments in the sustainability space in the last six months. I think we can say there's been some positives and some negatives. How do you see these externalities impacting the transition to net zero? And how do they impact the development of sustainable practices in the short and maybe the longer term as well?

Hannah Simons (02:59)
Rosie, it's just a great question. And with everything in life, think timing is just so important. And clearly the last six months have been very noisy, if I can put it that way. And as we look forward, we're probably into a more challenged environment around sustainability than we have been for the past few years. But look, sustainability has been through those ups and downs throughout a number of years. In fact, when I first transitioned,

into a sustainability role at my previous organisation, Schroders it was really hard work to get people to prioritise sustainability. So clearly in a world where we're facing more challenges, partly because sustainability is so embedded in everything that we do. But as we really look forward, Rosie, what needs to change? And I think one of the things that we're all here to do is actually move the conversation on from, we're here to do the right thing,

to why sustainability makes financial sense. For example, why will sustainability drive future returns? How can it help companies become far more resilient as they face into new and changing and evolving risks? And of course, one of the key elements around the challenge that we face is anti-greenwashing. And therefore, how do we support and manage those reputational risks?

And the other thing I would add is really on that transition story and where we are today. If we think about the transition that we're well on our way to around renewable energy, today it's much cheaper than it was in the past. And in fact, actually compared to continuing to sort of mine fossil fuels, it also very critically helps improve energy security, a key consideration that we're facing following the war in Ukraine.

So certainly in the short term, there's a lot of noise, but I do believe the longer term trends around financial returns, the resilience that companies can build up and therefore how they manage their risks will continue to prevail. And it's that focus on financial returns that I think will drive sustainability into corporate agendas.

Rosie (05:20)
I

couldn't agree more. Now we've seen increasing focus on transition pathways and transition finance. Could you outline what the current understanding of transition is and maybe tell us a bit about the transition finance initiatives that you're working on at Lloyds?

Hannah Simons (05:38)
Of course, and look, it's hard enough for people across the globe to agree on what's green. And I think that when we get into the transition story, it gets even more difficult because not only do you have to define transition, you also have to define what a credible transition really looks like. In the UK, there was some excellent work undertaken last year. It was led by the Transition Finance  Market Review

that Vanessa Havard-Williams oversaw. And hopefully the outcome of this is, you know, paving the way for improved transparency and that consistency around a sort of credible and clarified definition of what transition finance really looks like. what we've seen, so based on the responses from the call for action, many felt that actually it is that lack of clarity

on definitions of transition finance that really come from things like reputational risk and those greenwashing risks that I highlighted that makes it a little bit more difficult for transition finance to move at pace. And there are certainly also a number of challenges around where we are in the technological sort of development life cycle. So I talked about earlier things like renewable energy and how far we are now into that becoming

a sort of well-known investment that many companies have already been supporting. I think what happens with some of newer technologies is that actually because they're unproven to some extent, there's a lot of uncertainty around the future return streams. So again, predictability to finance organisations is really, important. And therefore it's that lack of certainty around those future revenue streams that can be really hard.

Rosie (07:31)
Yeah.

Hannah Simons (07:32)
But

that said, we are seeing progress. I mentioned that, you know, we've sort of been supporting renewable energies and that's something that we've done at Lloyd's for a number of years. But just before Christmas, we completed our first carbon capture and hydrogen deals. And these are really critical for the delivery of the Paris Agreement. And so clearly it's moving at pace. But we also need to think about not just the corporate world,

but also how we're supporting our individual customers. And a great example of this is obviously we're seeing more more electric vehicles on the road. And in the UK, Lloyd's currently actually finances around one in every eight electric vehicle that's on the road.

Rosie (08:18)
Wow, that's a great number. What other initiatives is the banking industry looking at and developing?

Hannah Simons (08:26)
there's a whole suite. And I started out by saying, the foundation of everything we do at Lloyds around customers is really that provision of sustainable financing. So we offer discounted lending for those that have assets. We actually also offer sustainable deposits where the underlying assets are then invested in those sustainable projects.

Closer to home in the Crown Dependencies and in particular in Guernsey, I'm really excited about two products that we launched last year as well. Both of them are really aimed at helping homeowners on the island to improve the energy efficiency of their homes. So the two elements are the home booster loan and the eco mortgage. So the home booster loan is there to really support customers that are looking to

invest in energy efficiency measures, say for example loft insulation, double glazing, solar panels. And once you've improved the energy efficiency, then you can actually move on to the eco mortgage solution. left out for those most efficient homes. Both of them obviously are supporting all of our customers on the island as they seek to improve the energy efficiency of their homes.

Rosie (09:46)
They sound like really interesting initiatives. So the climate policy initiative estimates that the amount of global financing needed to meet net zero targets is as high as 6.2 trillion US dollars annually by 2030, five years away, and 7.3 trillion by 2050. Hannah, do you think we're doing enough? And if we're not doing enough, how can financial institutions such as banks be encouraged?

provide more sustainable financing.

Hannah Simons (10:18)
Rosie, I think it's fair to say that when you look at those numbers around what we actually need to finance, we're a long way short today. So I think the easy answer to say is that we do need to do more. So how will we actually encourage that investment? Interestingly, one of the biggest regulatory changes in the last few years, which has transformed the investment into green technologies and green energy,

was actually the Inflation Reduction Act that was introduced in the US. We saw a tremendous amount of investment flowing into solar projects and other renewable projects. So look we are scaling up, but we need to do more. And a top-down policy framework is therefore critical to this. So again, the Inflation Reduction Act, transformational. So that can be incredibly helpful because it really supports and enables

all of the finance industry in understanding what is considered green, and it also helps with that sort of flow of money to speed up the sort of technological advancements that we really need. So when we think about the sort of finance industry, the GFANZ umbrella that was launched following the COP in Glasgow a number of years ago, again, has certainly helped convene

all of the different players in the finance industry to come together and collaborate on what good looks like. So the Net Zero Banking Alliance, and Lloyd's is a member of that, is currently actually under discussions around actually how can they change their focus to really look at how we mobilise capital, again, that critical action that's needed to deliver Net Zero.

So we look forward to continuing to support NZBA as it looks at those new plans. The other part though is that sort of top-down framework that we need from government policy. We need collaboration, obviously, across the industry under those convening groups like NZBA. But we also need collaboration and resharing through blended finance. And Great British Energy is really exciting and the role that it might play again in sort

early stage investments that aren't quite yet bankable by the sort of finance industry. And the final piece is credit risk insurance. Again, one of the challenges with some of the new technologies is simply that actually we don't really understand both the risk and reward profile and therefore insurance, so insurance in the form of credit risk can be incredibly helpful.

The challenge there today is that some of those policies can be incredibly expensive. So it's about all of these initiatives moving forward because certainly I don't really see that there's one silver bullet. It really needs to be collaboration, top-down risk, sort of policy-led framework, and also that sort of bottom-up mobilising capital by individual and finance organisations.

Rosie (13:24)
Now, within the investment fund and private capital space where you've previously worked, one long standing misconception within sustainable finance that we hear a lot from investors is that there needs to be a trade off between sustainable investment and profit. Why do you think this notion prevails? And maybe you could talk us a little bit through the commercial positives of sustainable investing that you touched on earlier.

Hannah Simons (13:50)
So Rosie, what's really interesting is, and I totally agree with you, the most commonly asked question once you talk about sustainable investment funds is do they outperform or underperform sort of standard market benchmarks? And look, again, the answer in my view is it depends. And it depends for a whole host of reasons. One critical thing is the time horizon over which you're looking. So over very short periods of time, you're going to see

outperformance and underperformance. Over longer periods of time, I think that's when you can really start to understand, is there a sort of return premium or an alpha that's generated by investing sustainably? And let's look at some of the sort of evidence there. So Morgan Stanley has long done some analysis on sustainable investment funds.

And again, they can certainly point to periods of outperformance and periods of underperformance. A great example is that post the Ukraine war, what we found was that many sustainable funds lagged behind those traditional benchmarks. That was in part because those focusing on the energy transition. So they had the sort of clean and green energies in them,

and typically often had exclusions to fossil fuels, which really performed extremely well. So you can look at that and think, well, actually, that was a result of the exclusions that the fund was actually introducing rather than it being any other factor. So again, when you build your sustainable investment portfolio, it really matters how you change the universe of companies. And again, as we exclude more and more of the universe,

that inevitably is going to lead to different sector biases, different, maybe if it's a global fund, different geographical biases, which may then introduce what I call a greater tracking error. That's simply the difference between the fund and the benchmark. So, of course, as you reduce your universe, you may open yourself up to periods of underperformance. The flip side is, though,

that if you are really looking for those companies that are forward looking, thinking about their future, the needs of their customers, therefore how about products and services need to adapt to meet that sort of changing customer demand, and of course any new regulations that come along. It's those what I call sort of best in class or industry leaders that perhaps will demonstrate that long term outperformance, but you will need a period of time

for that to come through. Shorter periods, of course, you might see that volatility and I've given you some examples of when we've seen that through history.

Rosie (16:42)
So yeah, no easy answer really, So moving on to regulation, the European Commission's recently unveiled Omnibus proposals for sustainability regulation. Do you think this is a helpful simplification in regulatory burden or adding uncertainty and commitments for sustainable finance?

Hannah Simons (17:04)
I feel like I could answer this question again with that it depends. And obviously we couldn't have this conversation without touching on the sort of EU's proposed simplification. So thank you for asking the question. Look, one thing I'm really pleased about for the and again, I should highlight it's only proposed at this moment, but obviously the likelihood is that the Omnibus will be adopted. Is the principle of double materiality?

So under CSRD, companies are required not only to understand the sustainability factors that might be financially material and the impact that they may have on their business, but also, of course, the impact that companies are having on the environment and broader society. So, I'm personally really, really pleased that that part of the requirements has survived. The scaling back.

And we'll come to why I'm a little bit concerned in just a moment. But I do think the scaling back is very positive for smaller companies. The burden of meeting things like CSRD, so that's the reporting disclosure requirements, and CSDDD  the sort of due diligence within your supply chain, is enormous. And obviously for smaller companies, that impact is so much greater.

So again, some of the scaling back, recognising that smaller companies are a little bit more challenged, I think makes an awful lot of sense. However, that said, Rosie, I would have much preferred that we found a sort of common ground, a core set of key metrics that we ask many more companies to provide. So rather than scaling so far back to a much smaller

set of companies that are in scope. I would like to find that sort of common ground of those core reporting metrics. The reason I say that is that that data layer is so critical, not only for the investment community and obviously, sustainable finance being the heart of really our discussion today. Without that transparent and credible data that you can rely on, it's very hard whether it's the asset management community making investment decisions in their portfolios

or obviously the banking community making decisions around does this constitute sustainable finance? That lack of data makes that incredibly difficult. So for that reason, I think we sort of will miss out, if you like, as a result of not having the data that would have been provided under the various and different requirements. The other thing, though, and this goes right back to the heart of why sustainability should be front and centre.

Is that data layer also critical for effective decision making at companies? So really understanding, where are our risks? Where are the opportunities? Where should our products and solutions evolve going forward? And so this, you know, in my view, the data would empower management teams to make those really effective long-term decisions to secure their future sustainability and also future profitability.

Rosie (20:20)
Guernsey's issued a discussion paper inviting views from the financial services industry on the future of sustainability reporting on island including looking at the work of the ISSB. How do you think international finance centres like Guernsey

best make use of standards like the ISSB?

Hannah Simons (20:39)
Look, Rosie, another excellent question. You've really hit on all of the sort of critical topics today. And obviously in our previous question, we were talking about the EU Omnibus and their disclosure requirements, which are part of CSRD. The ISSB, so the International Sustainability Standards Board, has proposed a set of disclosure requirements for companies globally. And many countries, obviously including Guernsey right now,

are looking at how they would actually adopt the ISSB framework into their individual country. So the first thing I would say is transparency, the technical word I always use, interoperability. So understanding the global set of requirements and how ISSB differs is really critical. So firstly, my plea, I guess,

to Guernsey and the decision makers is follow as closely as possible ISSB. Because what we don't want is every single country adopting their own version. And that's in part because again, many companies will have international operations. So if you're asking for a slightly different disclosure in Guernsey versus the other countries in which the company operates, it makes life a lot more complicated.

And complication really actually means time and money, so much more expensive for companies. So what I would highlight, recognising again that Guernsey does have a high proportion of international finance companies, please look to adopt as closely as possible. And I'd also suggest that we do a little bit of phasing. So start with your listed companies.

Again, recognising that the burden for smaller companies is so much greater. So perhaps phase them in once you've got some fantastic examples from larger companies, because again, smaller companies will be able to learn from that. But also, obviously, there'll be an opportunity to really understand how you start gathering data. And again, the longer lead time for those smaller companies, I'm sure, will be most welcome.

Rosie (22:52)
That's great. Thank you. Now we are very, proud of the position we've taken in Guernsey for sustainable finance, where we've been developing sustainable finance products, code and expertise on island since setting sustainable finance as a strategic priority for the island back in 2018. You've recently been working with other IFCs who are building their own sustainable finance strategies. Hannah, in your opinion, what can Guernsey do next

to maintain its position?

Hannah Simons (23:23)
Well, maintaining that leadership position is always tricky, isn't it, Rosie? And I certainly say you have made excellent progress, certainly been one of the leading lights, if I may say. And some of the work that other jurisdictions are undertaking right now is recognising in part that they are perhaps a little bit behind some of the other countries. So what I would really encourage you to do, and I'm certain that you are already doing all of these things,

Rosie (23:27)
Yeah.

Hannah Simons (23:51)
is really stay focused and ensure that in this sort of noisy environment that we find ourselves in, the sustainability agenda is not derailed. I'd encourage you though to keep the pace that you've been going at for the last few years. I know there's probably a little bit of fatigue, but please, please, please keep it up and particularly around those disclosures because as I've highlighted, they really, really support transparency,

which makes those investment decisions so much easier. But also the real critical part around disclosures is that it empowers management teams to drive their business forward in a sustainable way. So please keep that pace up.

Rosie (24:36)
Keep up the good work. That's good advice. So that's all we have time for today, I'm afraid. It's been absolutely marvelous chatting with you today, Hannah. Thank you for joining us. And thanks to you two for listening. If you'd like to find out more about what Guernsey has to offer, visit our website, guernseyfinance.com. And if you'd like to know more about Guernsey's success in other sectors, you can tune into our sister podcast, the Guernsey Finance podcast.

We also have quite a back catalog of interviews and panel discussions, and you can check those out by searching for Sustainable Finance Guernsey wherever you get your podcasts. If you enjoyed today's episode, please subscribe so you'll never miss an episode. And if you have thoughts about today's show, leave us a review. We always love to hear what you have to say. And we'll be back soon with another episode of the sustainable finance Guernsey podcast.