The Power to Change

Drax is driving its sustainability response to the next level with an innovative multi-asset derivative model

Sustainability is central to the business of power generator Drax Group. With the ambition to become a carbon-negative company by 2030, the treasury team at Drax is never one to shy away from innovative thinking. Having successfully executed a number of pioneering projects, TMI is delighted to celebrate the team as winner of the Treasury4Good 2021 Best ESG FX Solution for its innovative ESG-linked FX derivatives project.

Best ESG FX Solution

Power generators are under intense investor scrutiny over their sustainability credentials. But the sector has a decidedly green contingent, with Drax, one of the UK’s leading renewable energy generators, known for its proactive and innovative approach.

The focus on sustainability for Drax treasury started in 2019 with its first ESG term loan, a £125m ESG CO2 emission-linked loan facility, a global first for a power generator. Since then, it has implemented an ESG Deferred Letter of Credit programme, established a £300m ESG RCF, and added a Canadian-dollar ESG term-loan. Most recently Drax has extended its ESG metrics to derivatives, with a multi-asset approach, starting with FX.

In practice, Drax’s ESG-linked agreements are subject to an annually-reducing target, designed to become more challenging if the company constantly overdelivers. Metrics are independently validated yearly. The real aim is to ensure ESG remains core to Drax’s thinking and actions, but Lisa Dukes, Director, Corporate Finance & Derivatives, Drax, notes the financial aspect is sufficiently meaningful to care about. “Even small incentives can encourage big changes in behaviour – that’s the mindset we’re really trying to promote”.

Indeed, it’s hoped that sustainability agreements will be extended beyond FX derivatives to other areas, including interest and inflation, and that this demonstrates to all stakeholders that sustainability is embedded within Drax’s guiding philosophy. “This gives treasury the opportunity to promote these internal behaviours and goals, and to promote similar values with our wider stakeholder group,” says Dukes.

ESG vision

The winning solution applies long-term ESG KPIs to short-term FX trades with two of the company’s main banks, NatWest and Barclays. The ESG-linked FX derivatives agreements cover forwards, swaps and options.

As well as being conscious not to create more work for everybody, in order to drive the right behaviours at a broad level Drax treasury decided early on to connect the group’s sustainability metrics with day-to-day derivative activity, rather than single-trade solutions.

Now, executing financial agreements with sustainability at their core helps promote similar values among key Drax stakeholders, including firms in its supply chain. Importantly, two-thirds of Drax’s large banking group, and several banks beyond it, have already called to explore how they can deliver similar derivative structures.

Close allies

Working with partners NatWest and Barclays, Drax’s innovative approach was executed using carbon-intensity metrics that it had already established and incorporated into its RCF. For Mimi Rushton, Co-Head, Global FX Sales, Barclays Investment Bank, collaboration meant challenging each other to do things differently. “That’s what we’re seeing in the execution of this project.”

Tom Moody, FX Corporate Sales, NatWest Markets, recalls that the main challenge was that most previous attempts to link FX with ESG relied on a use-of-proceeds approach. “But most companies run a centralised treasury for their FX operations, and so do not have the ability to apply use-of-proceeds. We took the decision to link a firm-wide FX hedging programme to firm-wide ESG goals.”

Just the beginning

With investor interest gaining momentum, Rushton is “very optimistic about the potential” of such programmes. Success requires open-mindedness, she warns. “Don’t be constrained by a notion that something isn’t achievable, especially if it hasn’t been done before. In this space it’s incumbent upon all of us to be as innovative as we possibly can be, and test each other. Be bold and have those conversations.”

Chris King, Group Treasurer, Drax, offers a pragmatic view. “The key to a successful FX policy and hedging strategy is in being underpinned by well-structured governance and risk management process,” he states. “Our aim is to continue demonstrating that sustainability is at our core, that we have these principles embedded within our trading philosophy going forward, and will continue to work with our stakeholders on a long-term basis.” It is, he adds, “our hope that these types of sustainability or ESG agreements will eventually become business-as-usual, rather than the exception”. For now, Drax continues to blaze a trail and is the worthy winner of the Treasury4Good 2021 Best ESG FX Solution.