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We embrace ESG, say FTSE treasury chiefs

Corporate treasurers are pushing for ESG and sustainability financing, not because of any margin benefit, but because it shows a public commitment to sustainability, argues a new report from Herbert Smith Freehills.

By Adrian Murdoch

treasury ESG
Kristen Roberts of Herbert Smith Freehills says a lot more treasurers will bring forward and implement ESG in their financing. (Photo courtesy of Herbert Smith Freehills)
  • More than two-thirds of UK corporate treasurers plan to use ESG features when facing investors in their next round of financing, according to fresh research.
  • As ESG financing structures go mainstream, 25% of treasurers have even considered or used ESG derivatives.
  • Although only 20% of treasurers surveyed have already completed sustainability-linked or green financing, that figure is expected to jump dramatically as companies refinance.

Signs that ESG financing, rather than accessing cheaper funds, is becoming part of a broader step-change in company financing and an increasingly common tool for treasurers can be seen clearly in April’s ‘Corporate Debt and Treasury Report’ by legal firm Herbert Smith Freehills.

The research is a survey of finance and treasury professionals at over 80 large British corporates – primarily FTSE 100 and FTSE 250 companies – conducted between January and March this year.

The annual report’s findings indicate the corporate treasury function is not leading the ESG drive; rather, it is responding to internal and external factors that are shifting corporate attitudes towards it.

Almost a third (32%) of respondents said the key driver for their ESG/sustainability initiatives in 2021 was that it supported corporate strategy and 28% said that it appealed to stakeholders and customers – up five percentage points and eight percentage points, respectively, on 2020. Only 10% said that it was because ESG and sustainability funding was typically cheaper than conventional funding (see chart below). That is down four percentage points compared to the year before.

No margin gain

“The cost of implementing sustainability-linked finance is greater than the margin adjustments in many cases,” says Kristen Roberts, Herbert Smith Freehills’ head of corporate debt in London, explaining the shift.

The principal driver now, he continues, is that companies are not doing it for the economics of the financing itself; they are doing it because it’s a way of saying that the company is committed to sustainability targets.

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Certainly, the overwhelming majority of respondents plan to include ESG features in their next financing round. From 50% of respondents in 2020, up to 65% last year and 71% this year, said they were planning to do so.

It is only a matter of time before the remaining 29% that have not yet planned any sustainability financing do so, says Roberts, who believes this is likely to come over the next 18 months as companies are encouraged to do so, either as regulatory frameworks evolve or due to a “general push from their stakeholders”.

Green and sustainable capital

The report suggests that the type of sustainability financing that treasurers will be looking at over the next 12 months will be dominated by the familiar trio of sustainability-linked loans and bonds as well as green bonds.

Sustainability-linked loans were the most popular at 47%, followed by sustainability-linked bonds and green bonds at 28% each.

Of the remaining types of financing, the largest jump in interest came for social or sustainability-linked social bonds. Interest in this product increased from 4% in 2021 to 17% this year.

“This upward trend is likely to continue,” said the report, partly because more issuers are incorporating social and sustainability categories in their frameworks, but it is also helped by regulatory developments such as the EU Social Taxonomy, which have “strengthened confidence” in the market.

Weapons of mass sustainability?

A further sign of the evolution of the market is the interest in ESG/sustainability-linked derivatives.

Although three-quarters of respondents said that they were neither interested in nor had entered into ESG derivatives, a significant 25% said that they either were interested or had done so.

Roberts explains that this is typically interest rate hedges rather than more complex structures like inflation hedges. “What [corporate treasurers have] largely done is to piggyback off the sustainability-linked features in a revolving credit facility or a term loan,” he says.

What comes through in the report is the gradual professionalisation and removal of impediments to ESG and sustainability-linked financing.

All of the metrics in the Herbert Smith Freehills report show how much more familiar treasurers have become over the past couple of years with sustainability (see chart below).

For example, the percentage of respondents who didn’t know how an ESG approach would work in the context of their business has slumped from 21% in 2020 to 14% last year and to 5% this year.

Growing in confidence

There was also a significant drop in the figure of those who were not sure what ESG/sustainability metrics to use – from 15% in 2020 to 12% last year and to 5% this year.

And even concerns that the increased reporting that ESG requires has tapered off. These have fallen from 17% to 13% to 10% over the same three-year period.

What could be seen as a fly in the ointment is the speed of the transition, but as the report makes clear, this is process-related rather than coming from any intrinsic suspicion of ESG.

Although only 20% of respondents said that they had already completed sustainability-linked or green financing, a further 55% had either publicised their sustainability targets or had a sustainability framework in place, and another 22% had started the process of developing their sustainability reports.

Only 3% had taken no steps at all towards any kind of sustainability financing.

But there is still a gap between the desire to issue and completion. Roberts puts this down to some banks pushing back on incorporating sustainability-linked margin adjustments in loans unless the key performance indicators (KPIs) are agreed at the time.

“Banks are nervous about finger-pointing and greenwashing,” says Roberts, explaining that banks will no longer allow companies to put all of the mechanics into financing and switch it on later once they have settled on their KPIs.

What we have at the moment is what he calls “a lag”. For example, if a company has signed financing with a tenor of four or five years, and only has a sustainability framework in place ten months later, then it could be another two or three years before new debt is raised or new refinancing is due.

“We’ll see a lot more corporates both bringing forward and implementing ESG in their financing, so I do expect a significant uptick,” he concludes, estimating that at least two-thirds of new financing will be signed on a sustainability basis.

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