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.