Rabobank's new sustainable financing framework raises the game for financial institutions issuing ESG debt by clearly identifying the investments that it will finance upfront in response to investors’ calls for greater transparency.
The move puts sustainability at the heart of the Dutch bank’s funding programme and will allow its treasury to give investors more detail when issuing a range of sustainable debt and prepare its balance sheet for looming EU regulation.
Rabobank has created four new "sub-frameworks" that detail the eligible proceeds for each sustainable fundraising from the outset, rather than issuing generic ESG-labelled deals with a mixed use of proceeds that offer investors’ little visibility beyond an annual report.
Each issue will fund only one of the sub-frameworks: renewable energy, green commercial real estate, healthcare and care facilities and Covid-19 crisis support to SMEs. This separation allows investors to assess materiality and impact, which are different for each sector.
"As an investor, you only know what your money has been used for when you get the green bond report a year after [the bond] has been issued. We want to give that upfront and say very specifically this is what your money is going to be used for," said Maarten Biermans, head of sustainable capital markets at Rabobank.
Investors have been pushing for more transparency to understand whether financial institutions’ portfolios and carbon footprints fit allocation strategies, and the availability of this information is seen as critical to investment decisions.
"We need to have that information ... it's absolutely something that we push for and something that is part of our engagement process and a very high priority for us," an investor said.
Rabobank issued a US$1bn six-year non-call five year senior non-preferred green bond on Thursday, using the renewable energy sub-framework to fund a portfolio of projects. The deal, which is also Rabo's biggest ESG bond ever, was priced at 73bp over Treasuries in a momentous week for sustainable finance.
The framework will allow Rabobank to issue more sustainable debt, including green and social versions of bonds, loans, commercial paper, certificates of deposit and derivatives and has been structured to align with the latest EU standards.
It includes the "do no significant harm" principle and social safeguards of the EU’s Taxonomy, and renewable energy projects have also been categorised to align. The mapping exercise will also help Rabobank to "green" its balance sheet over time.
"This is a logical step of getting more insight into the balance sheet of a bank because there's more pressure on financial institutions and banks in particular to do more on sustainability. Ultimately it will help to further green Rabobank's balance sheet," Biermans said.
Rabobank completed €49bn of sustainable financing in the first half of 2020. In 2019 it raised €5.3bn of ESG-linked debt for its own balance sheet.
Rabobank will keep a buffer of assets over liabilities of at least 130% to ensure compliance and will report twice a year.
Second-party opinion provider ISS highlighted each sub-framework’s contributions to the UN’s Sustainable Development Goals, and described the overall framework as "an innovating process in the market ensuring transparency".
More issuers are expected to expand frameworks to match the expanded definitions and detail demanded by the EU Taxonomy to issue more sustainable debt, but investors warn that standards need to be maintained.
“It’s extremely important to us to see that if you’re broadening your framework it is as robust as what was there before,” the investor said.