Standard Chartered’s Simon Derrick and Robert Newell discuss the key types of sustainable finance that treasurers should be aware of, the workload and risks to consider when embarking on sustainable finance initiatives, and the extent to which developments vary between different markets.

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It’s clear that sustainable and ESG investing need to become mainstream if the world’s climate and sustainability goals are to be met. But what does sustainable finance mean for treasury activities, and what sort of workload and risks do treasurers need to be aware of?

“Sustainable finance needs to be differentiated from sustainability,” explains Simon Derrick, Head of Financing Solutions, Europe at Standard Chartered. He adds that while the benefits of more sustainable behaviour are well established across a variety of stakeholders, “sustainable finance refers to the process of taking environmental, social and governance considerations into account when making investment decisions in the financial sector.” This, in turn, leads to more long-term investments in sustainable economic activities and projects.

Where funding is concerned, Derrick notes there are two distinct types of sustainable finance:

• Use of proceeds, including green, social and sustainable loans and bonds. Sustainable finance structures give investors comfort that funds will be used appropriately, and can potentially result in cheaper financing.
• Sustainability-linked products that incentivise improvement in ESG performance.

With increasing amounts of capital allocated towards sustainable finance, it is likely this will result in pricing benefits for compliant usages – and, conversely, a premium for continuing what is considered to be polluting or non-compliant behaviour, explains Robert Newell, Managing Director, Global Corporates, Europe. “This hopefully ensures that businesses and governments – and their stakeholders, such as banks and investors – act in a more beneficial manner.”

Impact on treasury activities

So what does sustainable finance mean for treasury activities? Newell comments that since sustainability is now at the forefront of most strategies, “it is hard to think of areas of treasury that would not be influenced.”

While bond issuance and funding via green or ESG-linked loans are well known, there are other areas in which sustainable financing is being applied more widely across the treasury space. “For example, ESG-linked derivatives and supply chain financing largely follow similar principles of working on a framework of sustainability-linked targets where there are real benefits for positive action, and costs for failing to act,” says Newell. Other examples include green deposits and sustainable repos that ensure excess liquidity is deployed in a sustainable way.

“At Standard Chartered, we continue to develop products that help with the evolution of treasury in ESG,” says Newell. “We have executed sustainable repo trades, and were one of the first banks with sustainable deposit accounts. These are used to fund SDG-compliant businesses, reviewed by our partner Sustainalytics.”

Beyond the activities that are likely to be relevant to all treasuries, some industries and sub-sectors may also be affected by the establishment of carbon markets and carbon trading, which Newell says “will be key to hitting net-zero targets.” Heavy energy users, meanwhile, are investing in their own sustainable energy production.

Risks and workload

How much of an additional workload should treasurers expect when embracing sustainable finance? Derrick says this depends both on the product being considered, and on the nature of the business – “again, there is a difference between use of proceeds and sustainability-linked.”

On the funding side, for example, use of proceeds deals require strict monitoring that proceeds are being applied for the intended purpose. Where bonds are concerned, additional work is needed to obtain a Second Party Opinion and a Borrower Sustainability Framework, although Derrick notes that Standard Chartered works closely with clients on these requirements. Sustainability-linked deals, meanwhile, require a more holistic borrower involvement, with targets required across a range of sustainability KPIs.

“For both use of proceeds monitoring and sustainability-linked, once a framework has been established it should be easier to repeat the process – though there is a whole separate point on continuing additional reporting,” comments Newell.

Risks, meanwhile, include the risk of greenwashing – in other words, criticism from NGOs, investors or customers that a particular project should not be eligible, or that the structure of a deal means some funding can be used for non-green purposes.

Variation across markets

Where the global picture is concerned, it’s clear that different markets are developing at different speeds. While growth in the sustainable loan market driven by sustainability-linked loans (SLL) was initially a European phenomenon, this growth spread to the US market in 2021. In other regions, however, SLL activity is more limited.

Emerging markets, meanwhile, are characterised by a higher proportion of use of proceeds financing, particularly for specific infrastructure or green buildings. “Financing sustainable assets in the emerging markets can have far more impact than in developed markets,” comments Derrick. “For example, a solar project in India will help avoid more than seven times the CO2 from a similar-sized project in France, given the current sources of power on those countries’ grids.”

Newell comments that as a European bank with the majority of its business in the emerging markets, Standard Chartered “can play a major role in taking ideas and funding between East and West.” And while less than 60% of the funding needed to achieve the SDGs in low and middle-income countries is currently being met, he says Standard Chartered is focused on redressing this: “Of our US$9bn of verified sustainable financing, 70% is in emerging and developing countries.”

Thanks to Robert Newell and Simon Derrick for sharing their views. You can listen to the accompanying podcast to learn more.

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