As we start 2020, we are entering a critical decade.
It is a period where we will be remembered for one of two things: for taking decisive action towards a sustainable global economy; or for creating a bleak future by not doing enough.
In the words of environmentalist and broadcaster Sir David Attenborough, “What we do now, and in the next few years, will profoundly affect the next few thousand years.”
The only environmental conditions that humans have known – on which we base our cultures, our livelihoods and, more recently, our consumerism – are changing fast.
On our current trajectory, we are facing devastating biodiversity loss, ecosystem collapse and failure to mitigate and adapt to catastrophic climate change.
What is clear, however, is that these are not just environmental issues – they are fundamental societal and economic issues.
Corporate treasury teams are rising to the challenge and finding innovative ways to use financing to drive more sustainable business activities
Our economic prosperity is dependent on a thriving society and a healthy planet. Consequences of acute or prolonged exposure to these problems can lead to water and food crises, as well as contributing to conflict for resources and large-scale involuntary migration.
According to the World Economic Forum’s Global Risks Report 2020, environmental threats are already the biggest risk to the stability of the global economy.
To many, this may seem melodramatic. But take the current example of the Australian bush fires – unprecedented in scale and intensity.
This year’s bush fires have been fuelled by a combination of extreme heat, prolonged drought and strong winds – all of which are likely to be more prevalent with a warming climate. Australia has already warmed by more than 1°C since 1910.
At the time of writing, the devastation, on top of the huge destruction to the environment, wildlife and communities, has caused insurable losses approaching AU$1bn, according to a statement from the Insurance Council of Australia.
The total economic impact is estimated to be over AU$8bn, but could reach AU$20bn if the fires continue on a similar basis until the end of summer.
Many affected communities are facing a 25-50% reduction to their economy and may struggle to ever recover.
Over the next 10 years, a rapid transformation of the global economy is needed if we are to address the current climate and nature emergencies, and create a sustainable future.
In 2015, governments around the world committed to the Sustainable Development Goals (SDGs) and the Paris Agreement.
These global objectives provide a focus for collaboration to develop solutions and direct investment for areas such as decent work and economic growth, responsible production and consumption, clean water and sanitation, good health and wellbeing, and climate action.
For both objectives, the decade to 2030 is critical. Two thousand and thirty is the target date for achievement of the SDGs, and it will serve as a crucial milestone against which to measure progress in the reduction of greenhouse gas emissions.
In 2018, the UN highlighted that, to limit global temperature rise to 1.5°C, global emissions need to be reduced by 45% by 2030 and reach net zero by 2050. This means a 7.6% reduction in global emissions is needed every year between 2020 and 2030.
It is a tight time frame.
Five years on from these commitments being made, leadership is growing across business, finance and government, but the trajectory remains an unsustainable one.
The recognition that environmental and social risks have a direct bearing on the sustainability of financial returns is gaining ground, but at too slow a pace. Significant investment is needed to drive change in the right direction and at the required pace.
Let’s be clear: we need to allocate capital away from activities that generate negative impacts, and towards those that will have positive impacts – and we need to do so urgently.
In his latest, annual letter to investee companies’ CEOs, Larry Fink, chairman and CEO of BlackRock, issued a stark warning. He said: “We are on the edge of a fundamental reshaping of finance… In the near future – and sooner than most anticipate – there will be a significant reallocation of capital.”
The good news is that this does not mean taking a financial hit for the greater good. Rather, this represents an investment opportunity.
The Business and Sustainable Development Commission estimates that achieving the SDGs could open up $12 trillion of market opportunities by 2030.
All actors in the investment chain have a role to play, and treasurers are no exception.
Many debt providers have a growing interest in increasing the sustainability ‘utility’ of their assets, alongside financial returns, and are starting to recognise that ESG factors can cause credit impairment and reputational concerns.
Credit rating agencies are increasingly incorporating ESG into their ratings. Though still a small part of the whole market, the green, social and sustainable bonds market is growing rapidly.
For a real shift to occur in the debt markets, the majority of debt would need to take ESG factors into consideration and be managed accordingly, regardless of whether the bonds were labelled specifically as sustainable finance products.
This mainstreaming across all forms of debt finance is an important part of achieving a sustainable economy.
There is a clear need for treasury teams to understand the trends towards sustainable markets. Treasurers have a vital role to play in enabling your organisation to reap the benefits and mitigate the risks that would otherwise be faced.
Treasurers have the opportunity to become active participants, and to play a leadership role in accelerating the transition.
The Prince’s Accounting for Sustainability Project (A4S) has developed guidance to help treasurers with this: the A4S Essential Guide to Debt Finance.
A4S’s guide was created through extensive interviews with lenders and debt investors. We looked at how ESG is currently considered in debt finance decisions, and how the market is expected to shift in the future. It was developed by treasurers for treasurers.
The guide also includes a variety of examples of debt instruments linked to sustainable outcomes:
Both debt providers and corporate treasury teams are rising to the challenge and finding innovative ways to use financing to drive more sustainable business activities.
Banks are now supplying either green or sustainability performance-linked products. Investors are increasingly seeking green or sustainability bonds, to the extent that demand currently outweighs supply.
In order to adapt to the changing market, treasurers should be building knowledge and capacity within the treasury function. They need to understand the sustainability factors affecting their organisation and keep up to date with the adaptation and innovation of financial markets, products, debt providers and investors.
They need sufficient knowledge to be able to promote their organisation’s sustainability credentials and attract and negotiate with the right debt providers.
Despite common misconceptions, sustainable financing can, and often does, lead to lower costs of capital.
Treasurers should therefore aim to work with debt providers who share the organisation’s principles on sustainability and have a demonstrable track record on such issues.
A good approach would be to develop a sustainable finance framework that covers all new and renegotiated debt. This will make it easier to initiate discussions with market participants and enable more informed financing decisions in the long run.
A final message to treasurers would be to be proactive and lead the dialogue; ensure sustainability is demonstrated clearly through all communications with debt providers; work towards incorporating sustainability into all your finance-raising activities; and, where necessary, bring others in the market along with you.
Doing so can give access to a wider pool of financing, save money and help accelerate a shift towards a more sustainable economy for all.
With all these reasons to act, can you and your organisation afford not to?
“There was a time when we could say that there was either a complete lack of knowledge, or at least room for doubt, about the consequences for our planet of our actions. That time has gone. We now know all too clearly what we are actually doing and that we need to do something about it urgently.”
HRH The Prince of Wales, at the launch of his Accounting for Sustainability Project, St James’s Palace, London, 2006
Helen Slinger is executive director at Accounting for Sustainability
This article was taken from the February/March 2020 issue of The Treasurer magazine. For more great insights, log in to view the full issue or sign up for eAffiliate membership