In the aftermath of pandemic lockdowns, the collective effort to transition away from carbon and to improve social and governance credentials seemed to have a much clearer focus than today. As investors and as issuers, organisations were – and many still are – firmly on board when it came to responding to the environmental, social and governance challenge.
This year, sentiment appears a little different. In September, British Prime Minister Rishi Sunak confirmed he was postponing the ban on new diesel and petrol vehicles from 2030 to 2035. On America’s political stage and elsewhere, there is outspoken opposition of the very premise of climate change.
For the real economy, political showboating is rarely helpful, but there is little doubt that concerns around the costs of achieving net zero are coming sharply into focus. “We are seeing a pushback,” says Naresh Aggarwal, policy and technical director at the Association of Corporate Treasurers (ACT).
A combination of the economic climate and the pure uncertainty of the path towards decarbonisation is heaping uncertainty onto uncertainty. “We have been hearing louder voices around whether climate change is real and whether sustainable finance is affordable within the context of a cost-of-living crisis. But I also think that the cost of delivering carbon neutrality is both hard and uncertain. When you have a confluence of all those factors, it is not surprising that we’re seeing a slowdown.”
For me, sustainability is the key strategic priority and sets apart business leaders and laggards
All that being said, sustainability-linked bonds do continue to attract investment even if they have an as yet small share of the overall market – 14-16% according to S&P Global Research. The ratings agency has projected that GSSSB (green, social, sustainable and sustainability-linked bonds) should reach $900bn to $1tn in 2023, a return to growth compared with a slowdown in 2022, when uncertainty pulled down bond issuance globally.
ESG is undoubtedly hard to grapple with when it comes to establishing a viable and strategic framework. Policy and financial products are still very much works in progress. But climate change as a risk to the world and to businesses is still very much on people’s minds.
“Pressure on businesses has never been more intense,” says Joanna Bonnett, who until recently was a sustainability specialist at Page Group, after a stint of six years as head of both sustainability and treasury. “Each sector has its own unique challenges, but a common one across all businesses is how to combat the impacts of climate change. For some businesses, this is going to the very fundamentals of their business proposition, whereas, for others, it is about reinventing product lines.
“As companies grapple with these topics, equity or debt holders are asking similar questions about their investment portfolios. Do they want to be exposed to a particular industry and product going forward? For me, sustainability is the key strategic priority and sets apart business leaders and laggards.”
From an investment perspective, assessing the soundness and likely performance of funds is just one of many hurdles for treasurers, who will be aware that ESG claims made by less credible providers can make for interesting reading. Asserting that your fund manager avoids investing in North Korea on ethical grounds is an eye-catching move. But, as Aggarwal points out, North Korea is subject to the UK’s and EU’s financial sanctions regime, so it is something of a meaningless promise.
The challenge for investors is understanding what is being presented to them – cutting through the weeds of the ESG language. Treasurers are well versed in assessing the financial sense and soundness of financing. An overlay of ESG criteria will require similar analysis: does the provider have a sound track record; is the product regulated; does the information presented make sense?
As Chris Dibben, VP of corporate finance at GSK, points out, the green and sustainability financing market is served by a plethora of rating specialists. That situation has yet to be resolved and, in the meantime, brings complexity around comparability of funds, as well consistency on communicating a corporate’s ESG story to debt investors. Corporates such as GSK will have their own net-zero goals and ESG standards and parameters as an investor. It is not necessarily the case that those goals are easily matched to MMF funds in the current environment.
“Sustainable finance – in my mind, it’s more about the company’s direction in terms of its strategy around ESG,” Dibben says. “So, setting KPIs on top of those you’ve already set as an organisation is slightly counterintuitive. When we have a clear view of our company’s objective, if it’s not the same or better on the bond, why would we do the bond?
“On the ratings side, there are lots of different ratings companies. If we were to look as a treasury at investing in a green or sustainable finance MMF, for example, it is difficult to assess how a rating compares with others. We know what our various ESG ratings mean for us, but there are lots of other ratings where we’d have to really look at what that rating means and what areas does its methodology target.
“What does the rating tell us about what a company or a fund is delivering? We have some insight into what debt investors are looking for and, through our banks, we know that having relevant ratings will [eventually] make a more consistent playing field for investors to assess companies. But there is so much variability in what’s available and what companies put out, you can understand if investors struggle to take a company’s view versus a labelled bond.”
...people with genuine sustainability-motivated strategies actually fear disclosing that, because they are very much aware of the fear around greenwashing
In the EU and in the UK, greenwashing is a huge concern and one that regulators have made their priority. “What needs to be distinguished when looking at greenwashing is there is still a huge range in various products in the market, from products with very low sustainability ambitions or basically no sustainability ambitions up to very sophisticated products,” says Heike Schmitz, partner at Herbert Smith Freehills. “There have been instances where you claim to consider certain criteria, but you only do it for a very small part of your portfolio.”
Even after a tightened disclosure regime from the EU, and the loss of Article 9 status for a significant number of ‘dark green’ funds in 2022 (some of which have been upgraded again), funds remain hard to compare. Last year, the European Commission brought in a requirement, under its Sustainable Financial Disclosure Regime (SFDR), for Article 9 funds to invest solely in entities that positively and measurably contribute to an environmental or social objective.
Article 8, meanwhile, applies to funds promoting ESG objectives, but without a requirement for 100% of the portfolio to be so invested. The distinction can cause its own issues, Schmitz points out, with some fund managers underplaying their ESG credentials in the interests of attracting less scrutiny, a practice referred to as ‘greenhushing’ or ‘greenbleaching’.
“[SFDR-renewed focus] has a benefit and a disadvantage. The benefit is the closer scrutiny by the regulator. Some of these less serious or more marketing-focused offerings will decrease. But we also see a tipping over, where people with genuine sustainability-motivated strategies actually fear disclosing that, because they are very much aware of the fear around greenwashing.
“To some extent, it’s part of the regulation. Fund managers have applied ESG criteria in investment selection, but have deliberately chosen not to disclose so that they can claim to be Article 8 or 6 and have fewer disclosure regulations to adhere to. This way of handling disclosure is something that the regulators don’t like at all. People also refrain from making clear statements about certain impacts created by their investments because they’re very scared of being in the public eye.”
For the corporate treasurer, the basic starting point is that sustainability and ESG principles should be part and parcel of investment policies, says Schmitz. “Not for morally or politically motivated reasons, but simply because people have learned that this should be considered to make sure the investment keeps it value. It would be difficult for a bigger company to say there is no risk from climate change. I would call it basic hygiene.”
Five years ago, a few investors might ask us about climate or ESG matters. Now we don’t wait to be asked. ESG is written into our fundraising material
When it comes to bond issuance, the framework has matured considerably over the past five years, says Alexandra Lewis, group treasurer at National Grid. “Five years ago, a few investors might ask us about climate or ESG matters. Now we don’t wait to be asked. ESG is written into our fundraising materials. Investors need to know where we are from an ESG perspective. Green and sustainable finance has developed into something more formalised, with best practice emerging.”
From National Grid’s perspective, the capital projects intended to support the transition towards more diversified and renewables-based energy sources are still very much the order of the day, with use-of-proceeds bonds being what best suits the energy infrastructure company.
Measuring and reporting on ESG KPIs is now part of the fundraising mix. This may not be as straightforward as the financial KPIs treasurers are used to delivering on and means breaking new ground at times. And some measures, such as ‘emissions avoided’, are clearer cut than others. Overall, however, planning ahead, being clear with investors and auditors on the methodology used, and discussing in advance any areas that are harder to define or more reliant on estimations will all help bring about a smoother process, from bond issuance to reporting and assurance. “Enabling a really simple story to be told is important,” Lewis says. Green and sustainable finance is not without cost, but agreeing terms and parameters helps the process and aids transparency.
“You have to spend time and resource preparing, setting targets and monitoring progress, but more and more companies are being required to disclose on sustainability,” Lewis says. “Choosing ESG measures that align with the broader ESG disclosures reduces time and resource, and ensures alignment of green financing with overall strategy.”
Green financing for National Grid has become part of the landscape. “The key driver is not to save a few basis points on a bond. It is more about diversifying our investor base and potentially drawing in investors who are ‘dark green’ and enabling them invest. It also supports our strategy and equity story. We are enabling the energy transition.”
In the meantime, there is much still to crack around KPIs and other measures before supporting the board’s ESG strategy as an investor becomes an easy task. Treasurers will continue to survey the landscape and scan the horizon for achievable goals that have sufficient ambition to help in the move towards net zero.
Liz Loxton is a freelance journalist and former editor of The Treasurer
This article was taken from Issue 4, 2023 of The Treasurer magazine. For more great insights, members can log in to view the full issue.