Financing the Transition to a Sustainable and Profitable Future

Transitioning to a more sustainable future requires financing solutions that support both the climate and society-linked goals. For investors, tools that enable them to assess companies on their sustainability credentials are crucial to their decision-making. Meanwhile, for treasurers, having access to the right sustainable finance solutions helps them support environmental, social, and governance targets across the organisation.

The Covid-19 pandemic has exposed broader sustainability issues beyond the urgent climate crisis, leaving governments and companies scrambling to find solutions for issues ranging from water-usage optimisation and reduction of carbon emissions to supply chain management and worker rights.

Dr Roland Mees, Director of Sustainable Finance, ING, notes that the health crisis has been a catalyst for companies to accept that more action must be taken to protect the planet. “The positive aspect of the pandemic has been the moment of reflection,” he says. “We have been forced to reflect on our situation.”

During the height of the pandemic, the public and private sectors worked together to produce and roll out vaccines in record times. This example shows that, when a challenge is prioritised, it can be addressed quickly, particularly co-ordinated efforts to find solutions.

That approach can be applied to the wider climate and sustainability issues. Linking corporate finance to projects that can positively impact the environment and society offers a way to accelerate the transition to a sustainable future. There is an important role for treasurers to play here.

Sustainable business is better business

At a business level, there is a clear and urgent imperative to pursue sustainability targets. Research published by ING in April,^[1] based on a survey of 100 institutional investors and 450 companies, found that 72% of investors are setting themselves increasingly ambitious targets on environmental, social, and governance (ESG) outcomes in their portfolios. They want to show that they are responsive to their stakeholders’ concerns.

For investors, ESG success means having access to a more transparent set of tools for assessing whether the sustainability ambitions of companies they seek to lend to are realistic. While, for companies, success means accessing sustainable finance solutions that are relevant to their goals. Being transparent about their performance as they pursue those goals is equally critical.

Leonie Schreve, Global Head of Sustainable Finance, ING, says that one of the principal drivers for borrowers looking to access funds from the sustainable finance market is a growing belief that “sustainable business is better business”. Sustainability is increasingly proving to offer a competitive advantage. Analysis by the Boston Consulting Group published in October 2020 found that sustainable business model innovation helps companies create “environmental and societal surpluses” that drive “business advantage and value creation”.^[2]

There is also strong demand from stakeholders for companies to address ESG issues. Adopting a sustainable business model now can help corporates to future-proof themselves. This is one reason why, despite pandemic disruptions, 2020 saw a 13% rise in green bond issuance to $305.3bn from the previous year and a surge in the sustainable debt market more broadly. Issuance climbed to $732.1bn for the year, up 29% from 2019, according to a Bloomberg report in February 2021.^[3]

“We’ve  already seen an uptake of sustainable finance in the past couple of years, but I think last year started a rethink about the answers to the question, ‘How should we do things differently?’,” says Schreve. “There is really an immense drive now towards sustainability.”

Exploring sustainable finance solutions

Lenders and corporate treasurers need a clear blueprint to work from. Among the solutions that have gained traction in recent years are sustainability improvement loans, also known as sustainability-linked loans.

Mees, the architect and initiator of ING’s sustainability-linked loan, which first launched in 2017, says that with these arrangements, businesses are offered a meaningful incentive to meet their targets. “This typically works as a 'nudge' for them,” he says. “These loans provide companies with lower interest rates if they meet ambitious targets. If they fail to meet those targets, the interest rates will increase.”

Variable-rate loans can be used for greenwashing by companies wanting to appear to be doing the right thing – unless the lender sets clear criteria. One way for lenders to avoid this is to assess the company’s sustainability rating based on a score given by an external agency.

These agencies typically assess businesses on their impact on a range of areas, such as biodiversity, energy efficiency, water management, and social supplier standards. Investors also have other ways to assess companies, such as the work of the Sustainability Accounting Standards Board, which applies industry-specific measures of success to individual companies while accounting for both financial and non-financial data. ^[4]

With the widening sustainability issues facing companies, other specific financial instruments have seen a boom in popularity. In 2020, social bonds proved to be a highlight in the sustainable debt market because companies used them to tackle the pandemic’s human problems: $147.7bn of social bonds were issued in the 12 months, according to the February report from Bloomberg – an astonishing 720% increase on the previous year. In the first half of 2020, for example, regular issuers in the green bond market such as the Korea Development Bank and the African Development Bank focused their attention on social bond financing to mitigate the effects of the pandemic.

“We see a lot of interest in solutions where we can really accelerate specific social investments,” says Schreve. “During the first months of the pandemic, we issued the first social Covid-19 bond to support investments in healthcare, social housing and employment.” Here, banks can play a proactive role in developing new solutions to support sustainable transformation. Financing the transition will be accelerated when lenders actively develop financial solutions that help corporates with sector-specific needs.

Profit and purpose

The explosive growth in the sustainable finance market has had clear benefits. ING’s April research found that 73% of companies that have issued sustainable finance instruments have improved their ability to implement robust metrics for performance. Accountability is now less an abstract ideal and more a measurable part of strategy for treasurers.

But to maintain momentum, corporates must accept that this accountability is not just a box-ticking exercise but something that can support them financially: profit can come from purpose. For Marieke Blom, Chief Economist, ING Netherlands, in the next five to 10 years companies have to “really understand their relationship with society and the planet. It will force everyone making strategic decisions within a company to ask, ‘How exactly do I relate to something?’,” she says. “Traditionally, companies have mostly thought about how to make a profit, but this requires a different way of thinking.”

The widening of the sustainable finance market will support executives in achieving their purpose while making a profit. Two-thirds of the companies surveyed by ING say that the greater variety of products now available alongside green bonds has made the sustainable finance market more relevant to them and their goals.

The onus is now on corporate treasurers to assess the various financial instruments currently in use across the entire scope of the treasury function – from bank accounts to investment instruments, from funding tools to supply chain management and beyond – to see where sustainable options exist. Treasurers should contact their banking partners to view their sustainability portfolio, talk through their organisation’s ESG goals and activities, and suggest areas that are viable for sustainability-linked instruments. Treasurers are in the driving seat to help finance the sustainable transition and generate greater returns for their business as a result.

Further Reading