This issue’s question

“Should sustainable finance be a treasury priority?”

Sustainable finance should definitely be a treasury priority and not just financing but all aspects of treasury should be assessed and challenged for their sustainability. This includes, in addition to financing, cash management and investments, choice of counterparties for treasury products, systems and suppliers in general.

We seek to demonstrate to our equity and debt investors our vision to not just clean up the Thames but to promote a change in the relationship between London (and Londoners) and their river and how the financing of such a large project can support that vision. Raising financing is at the core of the business and it made sense to align treasury activities to the business of the company. Tideway has issued six green bonds in the past two years for a total of £775m.

There is an increasing pool of investors with a sustainability mandate and environmental, social and governance (ESG) filters and all investors have an increased focus on integrating ESG factors into the investment process, which was facilitated by funding a green project like Tideway. Investors and other stakeholders also have greater transparency into a bond’s use of proceeds and get more information and reporting.

The bonds received significant internal and external recognition. The internal story is very positive as it made an example of successful cross-company collaboration. This turned on its head the additional work required to issue sustainable finance by harnessing collaboration with other areas – both sides develop a better understanding of the business, which provides risk mitigation too. It brought more integrated reporting to investors and, in the process, provided greater awareness of finance and investors’ requirements to colleagues in other areas. Finally, this collaborative process expanded the skill set of the treasury team and provided development opportunities.

Some of our shareholders have shown interest in using green bonds in their other projects. Externally, the bonds were covered by the specialised press and won a couple of awards. The government was delighted given its green financing strategy, added comments by two ministers to our press release and mentioned Tideway’s green bonds in its January 2018 25-year Plan to Improve the Environment.

Sustainable financing is at the centre of delivering the Sustainable Development Goals and the Paris Climate Agreement, but other areas of treasury are also important and increasingly coming up for scrutiny. Cash management and investments is one example: we have been discussing with our banks and money market funds how they apply ESG factors to their business as well as investigating sustainable product offering, an emergent topic. Equally, our analysis of counterparties takes into consideration their ESG strategies and performance.

Finally, the way we work matters too. Tideway’s finance department has been developing sustainable and healthy initiatives for a few years now: paperless meetings, monthly reports on printing, month-long plastic challenge to encourage people to reduce the amount of single-use plastic used, volunteering litter-picking events to clean the river foreshore. As a team we have created a culture where the lack of recycling, use of plastic and unnecessary printing is frowned upon and we have recently won a Clean and Green Treasury4Good award for these efforts.

Sustainability should be a personal and corporate imperative for all. It will take the collective actions of each of us, individually and corporately, to address the sustainability issues our societies face. This is for our own direct benefit now, and for future generations. It is simply the right thing to do.

Sustainability incorporates climate change, the Paris Accord 2oC target, CO2 emission levels, but is also more holistic in terms of UN Sustainable Development Goals, and it encompasses actions such as the preservation of natural resources, reduction in pollutants, and social responsibility.

From a direct treasury perspective, there are lenders who want to put money to work for positive impact. This can also provide some flexibility in terms of relative return expectations from banks and institutional investors. There are governments, regulators and institutions who are looking to encourage society and the corporate world to invest sustainably. Directing capital for positive impact via debt financing is a potential route to encourage this.

LMA and ICMA-compliant green loans and green bonds have benefits to borrowers in terms of the pricing and volume available relatively. They are relatively approachable as the mechanisms by which the activities can be characterised as green are highly customised to the circumstances of the individual organisation. The green aspects are expertly reviewed and externally accredited. In addition, the banks have also started extending sustainability linked loans, incentivising further improvements in ESG impact, via ESG scores or KPIs, to support lower loan margins.

Beyond these potential immediate economic benefits to treasury budgets, there is also the opportunity to mitigate business risk and, therefore, credit risk/credit rating risk. This is achieved by having a strategy that minimises the idiosyncratic risks associated with a breach in ESG standards. Better still, some companies can gain competitive advantage by positioning themselves to benefit from the opportunities that come from the transition to a sustainable economy.

More broadly, equity investors are also seeking positive impact and investments with mitigated risks against sustainability, for example, via the UN Principles for Responsible Investing that many fund managers sign up to. Treasury can support this by drawing attention to the positive purpose of the company. So the benefits of a sustainability focused strategy extend beyond the treasury area to the board and corporate strategy.

There are also risks in the pursuit of a sustainability-focused treasury strategy, in terms of the complexity around its implementation and management. Implementation can be complicated, time consuming and has some additional costs. It will also probably necessitate support and input beyond finance, from the teams responsible for Corporate Social Responsibility and ESG. Once you do implement a sustainability focused treasury strategy, there are also further risks and issues to manage. These might include the reputation risk if commitments are not met, the additional reporting obligations, additional ratings and more complexity.

Sustainable finance has taken a firm hold worldwide. As climate risk intensifies, and sustainability concerns rise to the fore, issuers and investors are increasingly integrating ESG factors into business and investment strategies.

Less clear, to date, is the extent to which treasurers should be prioritising sustainable finance in their corporate strategies. The value to treasurers becomes more apparent, however, when we consider the many elements inherent to sustainable finance – such as its forward-looking perspective, enhanced disclosure practices, and consideration of a possible reduction in the cost of capital.

Moreover, awareness around the material impacts that ESG risks (and opportunities) can have on an entity’s finances is only rising. All this means that sustainability matters could well fall within the treasurer’s remit in the near future.

By nature, to ensure that the intended sustainability objectives are being met, sustainable finance requires disclosure of investment factors that transcend direct capital returns. This more holistic level of disclosure is of obvious benefit for treasurers – allowing for greater oversight over finances. Indeed, it is already-established practice in green financings to ringfence funds to ensure that proceeds are only directed to projects that offer an environmental benefit.

Looking at risks through a sustainable lens also provides a more forward-looking perspective when compared to a traditional view, incorporating emerging and strategic risks that could materialise in the longer term. This affords treasurers enhanced visibility in their financial planning activities.

What’s more, when we talk about risk in sustainable finance – and particularly in an ESG context – we look at the broad swathe of parties affected by success (or failure) of an entity’s operations. This extends far beyond shareholders and lenders to incorporate an entity’s suppliers and consumers, too – allowing treasurers a view of the ESG risks that are visible and material along the supply chain.

Finally, for those contemplating issuing green or sustainable bonds or loans, there is growing evidence that such instruments can provide a cost of debt advantage given the current imbalance between supply and demand for green financial instruments. Some recently-issued green-labelled bonds with external reviews have achieved up to three basis points advantage over non-green equivalents.

Although research is still in its early stages, some published data does link a strong ESG record with improved corporate financial performance and returns on investment. It suggests that those entities focusing on ESG issues have achieved reduced costs, improved worker productivity, mitigated risk potential and even revenue-generating opportunities.

Greater cognizance of such considerations is shifting sustainable finance into the mainstream. In fact, the Global Sustainable Investment Alliance estimates that US$30trn worth of assets were invested in line with ESG-related strategies in 2018.

And we are already witnessing instances of banks realigning their investment strategies to achieve sustainability objectives. Some are even changing their mandates to restrict lending to entities with perceived weak sustainable credentials.

Clearly, lending institutions and corporates are embedding sustainability deeper into their long-term financial strategies. In turn, treasury departments will have an increasingly crucial role to play – to both aid this transition and help tap into the estimated (by the Business & Sustainable Development Commission) US$12trn of new market opportunities for sustainable businesses.