- Ben Poole
- Editorial Team, Treasury Management International (TMI)
The Covid-19 pandemic has brought environmental concerns into sharp focus. Today’s business leaders must factor sustainability into their recovery strategies, and treasurers have an essential role to play in reshaping the future of the global economy.
Despite the shadow cast on the global economy by the pandemic, a silver lining is starting to emerge. Following 2017, when consumption of natural resources exceeded 100 billion tonnes for the first time [1], 2020 saw a sharp decline in consumption rate. It dropped by 9.3% compared with the same period last year, according to the international non-profit organisation Global Footprint Network [2].
However, scientists have made it clear that this is an opportunity to change, rather than the beginning of a solution. The declining consumption rate is likely the result of short-term pandemic-related restrictions rather than a long-term change in attitude. Corporates have a chance to seize this opportunity for change, however, as actions that they take today can positively affect sustainability in both the short- and long-term.
Dr Roland Mees, Director of Sustainable Finance, ING, describes a necessary expansion of outlook as a consideration of the “phenomenological horizon” – a field of view that addresses short-term and long-term demands through present-day action. “Sustainability is still something remote – outside our phenomenological horizon,” he explains. “These sustainability policies we talk about have to be so complete and tangible that they enter into this horizon.”
ING research [3] released in April this year reveals that making progress towards tomorrow’s goals is a challenge for some corporates, which see their targets as being distant. More than a third (35%) of the businesses surveyed said their sustainability targets are set too far in the future to ensure any meaningful accountability today. At a global level, this number is still too high, given the urgency of the climate crisis. The challenge facing decision-makers now is how to define a pathway that mobilises future ambitions to drive short-term action, accelerating the development of the green economy. Treasurers can play an essential role in this journey given the increasing number of green options across the spectrum of financial instruments.
A step change in transparency
At a corporate level, clearer guidelines from regulatory frameworks can help. The EU Taxonomy, which came into force last year to support the implementation of the European Green Deal's overarching aim to make the EU carbon neutral by 2050, is a good example of this. Clearer definitions mean that companies can begin to set themselves coherent, achievable goals. Sustainable finance, and therefore corporate treasurers, have a significant role to play in facilitating the transition.
In the ING survey, more than half (53%) of respondents said the economic turbulence they had experienced in recent months had led to reduced capital expenditure (capex) budgets. At the same time, 57% said their green transformation plans are being accelerated. Fortunately for businesses, lenders have looked to improve access to finance through a range of fixed-income products and loans.
Recent figures from M&G and Bloomberg [4] suggest that more corporate debt (bonds) with environmental, social, and governance (ESG) matters embedded were issued in the first half of 2021 than in the whole of 2020. Moreover, Bank of America’s full-year forecast for green- and social-bond issuance in 2021 has risen by US$150bn to US$900bn.
Sean Kidney, CEO, Climate Bonds Initiative, takes confidence from the market’s uptake of instruments such as green bonds in a period of such upheaval (See Research Highlights Green Bond Benefits for Treasurers box below). The fundamental reason for this, he says, is that transparency and reporting principles enshrined in both voluntary guidelines such as the Green Bond Principles and the Climate Bonds Standard and Certification Scheme, now in regulation in many regions, ensure that issuers report on the use of proceeds from such instruments. This brings a “step change in transparency” in the tracking of funds linked to environmental projects. Both during periods of calm and crisis, this kind of transparency offers welcome clarity to concerned investors.
Kidney says: “In the past year, green bonds performed better than conventional bonds in secondary markets, in terms of trading volumes I've had investors tell me that, in March [2020], when they couldn’t trade conventional bonds, they could continue to trade green bonds – they remained liquid when the rest of the market froze.”
Green loans offer other opportunities for companies to examine. With them the use of proceeds is tied directly to green projects or green product development. Typically, these loans are provided at lower interest rates, with borrowers obliged to communicate environmental objectives to lenders.
Research Highlights Green Bond Benefits for Treasurers
In the Climate Bonds Initiative's Green Bond Treasury Survey 2020, almost all the 86 treasurers polled (98%) said their green bonds attracted new investors. The most frequently stated resulting benefits were an increasingly diverse pool of investors, greater flexibility to reopen or issue new bonds, a ‘stickier’ investor base, and greater visibility.
Of those surveyed, 91% of treasurers said a green bond facilitated more engagement with investors than a vanilla option. Investors interrogated issuers on topics such as the use of proceeds, the framework, and post-issuance reporting. This dialogue resulted in investors having a more intimate knowledge of the organisation.
The vast majority of treasurers (88%) that had issued green bonds said they planned to issue more in the future, while a further 15% said they would reopen their current bonds. This underscores the positive experience of issuing green bonds. An established investor base and greater visibility in the market were the most frequently cited advantages of repeated green bond issuance.
The survey also found that green bonds generate greater demand than regular bonds. Some 70% of treasurers said the demand for their green bond was higher than for vanilla equivalents, while 25% noticed no difference.
More than two out of every five treasurers (42%) that have issued green bonds said that the cost of funding green bonds was lower than that of funding vanilla bonds. This was particularly the case for larger issuers and those with more years of experience in the green bond market.
Green finance at work
There is evident pressure on automotive firms to act. According to the International Energy Agency, road vehicles account for almost three-quarters of the transportation sector’s carbon emissions, which in turn contributes to 24% of carbon emissions from fuel combustion globally.
Despite this, the same ING survey found that 43% of automotive companies – a significantly higher percentage than that seen in companies overall – feel that sustainability targets are too far in the future for them to have a meaningful effect on current production methods.
Green bonds have been important for automotive firms looking to finance their transition from fossil fuels to electrification. Automotive giant Volkswagen, aiming to reach full carbon neutrality by 2050, made its green bond debut in September 2020 with the issuance of two bonds totalling a volume of €2bn. The proceeds are being used to fund its development of new electric vehicle models and the technology underpinning them.
Telecoms is another sector that has demonstrated an ability to accelerate its transition to a more sustainable future through green finance. In 2020, Turkcell, a mobile network operator in Turkey with 34.4 million mobile subscribers, took out a green loan for the first time to refinance a share of its debt repayments and finance its capex requirements.
By taking out a €50m, five-year bilateral green loan, the company supported its sustainability endeavours, including investments in renewable energy and energy-efficiency projects. Turkcell has committed to sharing an annual allocation report detailing exactly how the loan is being used to ensure accountability. The opening of Turkey’s first solar-powered data centre last year is just one example of Turkcell’s work.
Despite the size of the task ahead, there is plenty of optimism, according to the survey: 41% of companies say their planning in the next one to two years will be shaped by an ambition to align sustainability goals with long-term business strategy and purpose.
Governments evidently need to step in with a firmer and more time-sensitive regulatory hand, making businesses aware of the need to prepare for future events today, rather than expecting companies to respond to vague targets. Through the uptake of instruments such as green bonds, businesses can begin to take meaningful steps towards achieving their future emissions goals.
The greater the variety of financial instruments available, the more likely it is that companies will play their part in ushering in the green economy.
For treasurers, sustainable finance tools such as green bonds and green loans offer a way for the function to take the lead within their organisations to embrace the green economy. Crucially, these instruments offer financial rewards for corporates meeting the associated environmental targets, through cheaper debt, lower interest rates, for example.
By understanding the green tools available and working with banking partners to see where these can be implemented across the spectrum of treasury activities, corporate treasurers will be perfectly placed to drive their company's shift towards greater sustainability.
