Funding & Investing

A natural development: sustainable finance making a difference

Published: Jan 2019


Sustainable finance, sometimes seen as a gimmicky alternative to real finance, has grown up. It is now a viable means of funding that has potential benefits for us all. Here’s how all treasurers can use it to make a difference.

The old proverb, ‘those who live in glass houses shouldn’t throw stones’ has a new twist. In today’s somewhat perilous climate, where weather systems seem to have become more extreme, living as we do under a great protective atmospheric ‘greenhouse’ demands that, at the very least, we all do our best not to make things worse. The City of London Corporation’s Green Finance Initiative says that globally, US$90trn will be needed by 2030 to achieve global sustainable development and climate objectives. It seems an insurmountable figure. So why bother?

In treasury terms, there is something that can be done that arguably achieves a positive outcome for us all. That something requires bringing about a change in the way funding is sourced so that, ultimately, only the most environmentally responsible corporate activities are sustained.

What it means

Sustainable finance is, according to the European Commission, “the provision of finance to investments taking into account environmental, social and governance (ESG) considerations”. It includes a strong focus on the notion of ‘greenness’, aiming to support economic growth whilst reducing pressures on the environment from pollution, and being more efficient and considerate in the use of natural resources. It includes a wide range of financial products such as bonds, loans, securitisation and fund portfolios.

Since 2015, the Paris Climate Agreement and, in particular, the UN 2030 Agenda, have asked for commitment to align financial flows with a pathway towards low-carbon and climate-resilient development. The 17 Sustainable Development Goals (SDGs) set out in the 2030 Agenda have been likened to ‘a purchase order from 2030 for business and government action today’.

The Global Sustainable Investment Alliance shows that in 2017 there were US$22.9trn of assets being professionally managed using responsible investment strategies. This represents an increase of 25% since its 2014 review.

With the sovereign green bond market slowly expanding (Poland, France, Belgium, Indonesia and Fiji, so far) and large institutional investors such as Swiss Re announcing the movement of its entire US$130bn investment portfolio to ESG indices, steps are being taken in the right direction. However, there is a major regional imbalance in support.

The Global Sustainable Investment Review of the proportion of global socially responsible investment assets by region shows Europe at 52.6%, the US at 38.1%, and Asia (excluding Japan) at just 0.2% (Japan accounting for 2.1%).


Whilst the key driver of ESG is often the customer, there is a strengthening policy and regulatory focus in this area, says Michael Wilkins, Head of Sustainable Finance, S&P Global Ratings. Indeed, the international Financial Stability Board (FSB) has released a set of recommendations for better disclosure on climate-related risk and opportunities. These, he notes, are being adopted “in a widescale manner”.

“Green finance is very much becoming a mainstream part of capital markets,” Wilkins says. “If you look at the signatories, there are in the region of 1,800 asset and fund managers who are now part of the Principles for Responsible Investment (PRI), and that represents over US$60trn of assets under management.”

With countries signed up to the Paris Climate Agreement starting to implement so-called Nationally Determined Contributions, financing of projects to meet targets is assured. With most of the necessary financing coming from the public sector, there is a massive opportunity for private sector companies able to assist the transition to a low-carbon economy or improve the environment in broader ways.

But these projects need to be benchmarked, says Wilkins. In the capital markets, although the value of credit is well-understood by investors, understanding the “value of green” is more difficult to grasp. “If it can’t be measured it can’t be priced. If you can’t price it, you can’t discover what the value is,” he states. Because not all green bonds are equal, he believes that enabling a relative ranking of ‘greenness’ enables better price discovery. To this end, S&P’s Green Evaluation is an environmental credential applied to bond issuances and bank loans, providing investors with a clear picture of the green impact of their portfolios.

For issuers, although generally “the jury is out” as to whether green pricing benefits can be achieved, there is evidence from larger, well-recognised names making benchmark issues in the corporate bond market, suggesting it can, says Wilkins. Renewi (see case study) has beneficial margins linked to sustainability targets, as has Danone in France.

Of course, few investors would openly declare their preparedness to pay more for green bonds but Wilkins notes a two-to-three basis point advantage in the primary market, and in the secondary markets, anything up to 25 basis points. For now, it appears that green pricing is at least as good as for regular issuances. For the longer term, Wilkins says benchmarks and better information on the relative value of greenness will be necessary to facilitate market growth at scale if the projected investment required to meet the transition goals is to be met.

Case study

London’s big environmental issue

London has a growing problem with its ageing sewers. It has long-since needed an updated system to keep ahead of demand. Tideway is the regulated utility responsible for building the city’s new 25km super-sewer, known as the Thames Tideway Tunnel. This is a US$5bn project. Helping to raise the debt to keep this essential work on track is Tideway’s Treasurer, Ines Faden.

“The company was created to address a sustainability issue. We thought it was only natural that the financing should align with the mission,” says Faden. Tideway has now issued six green bonds, one public and five as private placements, both cash and deferred, and all indexed to inflation (CPI and RPI).

In 2017, a strategy was approved that would enable the creation of a green bond framework. This would be used to help guide this process and give investors better understanding of the company’s approach.

Today, almost 90% of green bonds issued are voluntarily aligned with the “relatively straightforward” green bond principles established by the International Capital Market Association (ICMA), notes Faden. “Ours are no different.” But confirming green credibility remains important and, following publication of Tideway’s framework in October 2017, S&P Global Ratings published its Green Evaluation of the company’s funding platform. It gave an overall evaluation score of 95 out of 100, making Tideway the joint highest global scorer to date.

In practice, Tideway’s framework documentation, drawn mostly from internally sourced data, acts as the definitive information for investors, detailing the company, its alignment with sustainable objectives, use of funds, reporting to stakeholders, and the governance steering its approach.

The success of its funding model saw Tideway become the largest corporate issuer of green bonds in sterling after pricing a CPI-linked issue in early November 2018. This £200m private placement complemented its first UK public green bond issued the previous week, giving a combined total of £450m.

“The main motivation for us to issue green bonds is the alignment of the finance function with the rest of the company,” says Faden. In the investor universe, there are some investors who only consider sustainable or green financing. It is a small but growing group, she says, but this helps to diversify the funding source, bringing in additional investors.

“There is also the matter of pricing. From our perspective, it is difficult to say if our bond was issued at a premium or discount as there is no curve out there for us to benchmark. There was a lot of interest in the issue right at the bottom of our pricing expectation; it has since been trading very well.”

An additional benefit derived from the experience has been the change in internal dynamics, notes Faden. “Not only are our shareholders very happy – some are now doing more in this space and are coming to us for advice – but it has also brought the finance function much closer to our sustainability team and to our delivery and operational teams.”

The general reaction from the banking community has been mixed. Although Faden says some banks were “very engaged” with the idea, some of them were, at best, “indifferent”. She recognises some institutions have some very knowledgeable people when it comes to green finance, “but they tend to sit somewhere between compliance and HR; miles from their debt capital market desks”. There is clearly an education issue here.

Royal engagement

“The skills in the financial and accounting community are not currently in a position to help us transition to a sustainable economy,” warns Helen Slinger, Director at Accounting for Sustainability (A4S), an organisation established by the Prince of Wales in 2004 to challenge the existing financial model’s appropriateness for the 21st century.

Working closely with senior financial figures through the organisation’s CFO Leadership Network (itself formed of a group of companies looking to deploy sustainable business models), she is aiming to get the message out to many more finance teams, helping them to embed sustainability into their financial decision making.

A key project, started in 2017, is aiming to drive the integration of ESG into mainstream debt finance. Working with networked CFOs and their treasurers, and a number of their debt providers, the initial mission was to achieve an understanding of the extent to which ESG considerations are currently incorporated into funding activities.

As part of the programme, a roundtable was held, bringing in asset managers, banks, credit agencies, ACT leadership, and HRH The Prince of Wales himself. This group was tasked with discussing progress and the challenges faced. “One of the most important things we can do is to get people talking to each other, to get everyone to consider how we move from the current position on sustainable finance and to help it move into the mainstream,” says Slinger.

Discussion has so far revealed that, in a green context, some banks are being much more careful about who they lend to from both a risk and reputational perspective. “Within their governance processes, they are looking much more closely when making lending decisions and even stepping away from some sectors altogether,” notes Slinger.

However, she adds that there is an indication that companies with a sustainability focus are increasingly attractive to debt investors. She also senses an expectation that committed lenders could set further sustainability criteria within their governance and terms sheets, helping to promote the concept to a far wider market.

That said, there are many challenges ahead. “This is not an easy fix,” warns Slinger. A4S is uncovering these challenges, creating a wider dialogue and on-boarding the right people to move sustainable financing in the right direction. Early adopter corporates are making great headway.


There are always cynics and the ‘greenwashing’ of finance is still a hotly debated point. Yet almost 90% of green bonds issued are now aligned with the voluntary ICMA green bond principles; these principles check, measure and report on the transparency and governance of the allocation of proceeds. They go a long way to preventing exploitation of the concept. The argument against is ebbing away slowly.

Both treasurers featured here report that sustainable financing has been very positively received internally with their respective shareholders, executive committees and boards. Clearly it also sits well with their respective investors.

With PRI investors keen to follow the story of companies that are taking the sustainability seriously, it is opening up a new and valuable source of funding that may well have to become the norm.

With the likelihood of FSB’s climate-related reporting recommendations being hardwired into accountancy standards (the City of London’s Green Finance Initiative is pushing for it), they could de facto become a compliance requirement, forcing companies to either invest in or mitigate their exposures to climate issues. This will have huge consequences for the sustainable finance market.

For Faden, within the next decade, the green bond market will cease to exist. Why? “Because all financing will have to be sustainable.” Treasurers opting in now will be helping to shape this nascent market, and making a positive difference for all our futures.

Case study

Funding the circular economy

Renewi is an international FTSE business focused on waste management and recycling. As a pollution prevention and control specialist, its green and sustainable activities fit perfectly into the eligible categories within ICMA’s Green Bond and LMA’s Green Loan principles.

In 2015 it issued its first green bond on the London Stock Exchange. In December 2018 it created a €25m Green European Private Placement (EUPP), adding an important new non-bank source of funding in addition to Renewi’s existing retail bonds and bank facilities. This was issued under Renewi’s existing Green Finance Framework, created with the help of its relationship banks to expand on the company’s commitment to sustainable finance.

The framework (which, similar to Tideway, incorporates an external evaluation), has also enabled Renewi to convert its general purpose revolving credit facility into a green loan with its banks; the Benelux institutions with which it works being most receptive to, and thus learned in the matter of sustainable finance, notes Adam Richford, Group Treasurer, Renewi.

The company has also put in place a ‘sustainability improvement’ aspect in the loan. “This links our pricing on the loan facility to ambitious targets for environmental and safety aspects of our business,” explains Richford. The margin discount, directly linking pricing to sustainability performance, is aimed at further improving Renewi’s critical ESG metrics.

Indeed, a €150m Green operating Lease Programme, issued under the framework, was also added in December 2018, reducing Renewi’s operating costs due to the efficiency of its new Euro 6 trucks. These are ‘best in class’ for reducing harmful exhaust pollutants and emissions and will significantly improve the environmental impact of the company’s collection fleet. By Spring 2019, around 90% of Renewi’s fleet will be Euro 5 or Euro 6 trucks.

Today, the sustainability framework Renewi has built is such that it could issue all future instruments – such as bonds, loans, leasing and receivables finance – under the same green guidelines, says Richford. But by strengthening the internal connection between finance and treasury, and the company’s CSR credentials, it also helps tell the broader equity story, positively positioning the business within its market place and with its stakeholders.

“For us, green finance is very much congruent with our overall corporate sustainability focus and our equity story,” he comments. “It’s now an important discussion point with our existing and potential new equity investors, many of whom are focused on socially responsible investing.”

So convinced is Richford of the value of green finance that he believes all businesses should consider using it “wherever possible, as a differentiator to investments that do not contribute environmentally or socially”. Over time, he believes that this could result in more capital being deployed for positive impact. “I don’t see any real downside,” he concludes. “Ultimately, rather than ask ‘why green?’, we should be asking ‘why not green?’”

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