Sustainability-linked finance has fallen down the treasury agenda from its peak in 2021/2022, according to the latest Corporate Debt and Treasury Report from law firm Herbert Smith Freehills. Although ESG and sustainability remain a core part of strategy, treasury teams are wary of reporting and verification requirements, and concerned about public perception if they miss targets.
In contrast, the report finds preserving cash as a buffer for the unexpected or to deploy when investment conditions improve remains a key focus of the treasury community. In the current climate, treasurers are focused on responding to unpredictable macro-economic and political events, taking pre-emptive steps to raise debt and capitalise on optimal conditions, but also to support their businesses across all treasury activities and markets.
“Corporate treasury teams continue to develop new ways of dealing with emerging headwinds. Disruption appears here to stay, and corporates are focussed on liquidity. A return to treasury fundamentals means that, for many, discretionary activities such as sustainable finance are now far down their agendas,” said Kristen Roberts, Head of the UK Corporate Debt Practice at Herbert Smith Freehills.
The report finds optimism is growing among corporates with a majority of respondents with many acclimatising to the initial challenge of high interest rates. In comparison to 2023, many more respondents said macro-economic and geo-political events would have no, or a minor, effect on their 2024 debt strategy. Nonetheless, many corporates are still mindful of upcoming macro-events, including the number of elections taking place globally in 2024.
The significance of cash and conserving it on a balance sheet for secure business activities was a recurring theme. “Cash is king. Before, quantum and tenor [of debt] were key. Now, it is interest rates and management of working capital that are important,” said one respondent.
The ability to access multiple sources of liquidity was also seen as important for overcoming impediments and managing changing investor policies towards raising debt in the year ahead.
The popularity of sustainability-linked finance continues to dwindle, a trend raised in last year’s report. “In 2021 it [sustainable finance] was really in vogue…how could you not do it? A few years on far fewer are doing so,” said one respondent.
Although ESG and sustainability remain a core part of corporates’ strategies, many businesses are reluctant to agree separate sustainability performance targets in their debt financings: 47% of respondents did not foresee ESG having any impact on their financing strategy in the next 12 months.
Treasury teams voiced concerns over reporting and verification requirements (59%) This was followed by greenwashing concerns (45%), and concerns of public perception if the facility was declassified/targets were missed (19%).
“Sustainability-linked finance has, for many, lost its appeal, particularly for those who have not yet embedded that within their financings. In the bank market at least, SLLs have proved to be time consuming to implement and, for some, cumbersome to deal with on an ongoing basis as well as creating wider risks and concerns to manage than the benefits provide. As sustainability increasingly forms part of the credit process, its role in driving performance through margin adjustments looks set to diminish,” concluded Roberts.
