With ever more sustainable finance streams available, corporations have a vital tool to leverage. But what is the ideal approach in accessing sustainable finance?
Every indication is that sustainable finance will soon be the most lucrative and valuable global financial lending stream. And it should be, because activating sustainability across the world’s businesses and transitioning those already operational towards greener futures is a hastening challenge.
Finance itself remains an intriguing tool. Historically used simply as a driver towards profitability and little else, today’s financial world is itself evolving.
Various characteristics, environmental and social governance (ESG) and corporate social responsibility (CSR) chief amongst them are forcing unprecedented change on investors and financial markets. The key driver for these money men is no longer sheer profitability.
So, as with any change or evolution, there are big opportunities for corporates to gain and leverage green money. Equally, there are complexities to navigate and pitfalls to overcome.
Sustainable finance in a nutshell
The European Commission says sustainable finance refers to taking ESG considerations into account when making investment decisions in the financial sector.
Such considerations might include climate change mitigation and adaptation, as well as the environment more broadly, for instance the preservation of biodiversity, pollution prevention and the circular economy. Social considerations could refer to issues of inequality, inclusiveness, labour relations, investment in human capital and communities, as well as human rights issues.
And in a policy context, sustainable finance is understood as finance to support economic growth while reducing pressures on the environment and taking into account social and governance aspects.
Whilst precise contexts will vary globally, corporates can assume the above to broadly match what sustainable finance means. The next question, how to access it?
1. Tell the truth
One lesson beyond any other is vital, corporates must be truthful when it comes to sustainable finance. To explain, accessing sustainable finance will demand detailed representations from corporates describing where the money is going, to what ends and how they are going to prove it is doing the right thing.
Without this due process, banks and other lending institutions will be reluctant or unable to lend on a sustainability basis, as their investors in turn would be outraged over stranded assets or reputational risks from corporate investments proven to include exploitative supply chains for example.
But the other very real lesson is that if a businesses’ new offering, product, service or operation doesn’t fit a lender’s sustainability criteria, that’s a good indication the business oughtn’t to be heading in that direction anyway.
Ultimately, sustainability means profit. If a business offering is sustainable, it will have forecast how to use cheaper renewable energy, saving costs and future carbon taxes. Equally, if a business offering is fit for a sustainable lend, it will have considered how it reports on carbon and how it measures its performance on emissions.
And guess what, corporates can’t manage what they can’t measure. If inadequate carbon measurement means a green finance loan gets denied, that’s saying more than just you can’t have the money.
The refusal is also pointing out that this business stream is insufficiently monitored to truly understand its impacts, sustainability and otherwise.
The point being this; whilst it might not immediately seem apparent, agreement (or refusal) on a green finance lend is something of a consultation on whether the given business proposition likely has legs.
So corporates must embrace green finance criteria early. Deeply interrogate your proposals and whether they will pass the green finance lending test. Because if they don’t, the chances are you don’t want to be putting your own financial resource up to support them either.
2. Get in the right expertise
So, how to achieve a proposal that accesses the right green finance and develops a business stream or expansion you can be proud of?
First off, employ the right people. Sustainability nowadays is anything but an add-on. You need and should seek to employ the finest people to overhaul your internal sustainability performance and scope out whether your expansion, product or service offering is going to get a tick from the lender.
It makes sense to invest in this expertise internally. Consultancies in this space are myriad and highly expensive. They can offer results, but the chances are that nowadays you are going to require their services more than once in any case.
Therefore, developing an internal sustainability team that covers internal process, measurement, carbon reporting and oversees proposals on expansion and green lend is going to do you big favours in the longer term.
Unconvinced? Take a look at ING Wholesale Banking’s comments on the process. Leonie Schreve, global head of sustainable finance at ING, says that one of the principal drivers for borrowers looking to access funds from the sustainable finance market is the growing belief that “sustainable business is better business”.
She reckons sustainability is increasingly proving to offer a competitive advantage: analysis by the Boston Consulting Group, for instance, finds that sustainable business model innovation helps companies to create “environmental and societal surpluses” that drive “business advantage and value creation”.
Further, ING says the explosive growth in the sustainable finance market has had clear business benefits. ING’s research found 73% of companies which say they have issued sustainable finance instruments have improved their ability to implement robust metrics for performance.
Corporates need to realise that this accountability is not just a box-ticking exercise, but something that can support them financially: profit can come from purpose.
3. Be forward-looking
The global sustainability market is incredibly fast-moving. It generally isn’t enough to understand what sustainability means today in order to win finance, businesses need to be attentive to where the trends for ten or 15 years down the line are heading.
This is because lenders are constantly updating their loan criteria, month on month. So, if you don’t have the necessary future-proofed approach to sustainability and finance, you may well find your proposals rejected because you haven’t spotted a new sustainability trend the financial institutions are all over.
Making the effort to understand the future on sustainability is worthwhile anyway, outside the loans market, because the intelligence will drip down across every aspect of existing operations in any case. And this reinforces the argument made above for employing the right internal teams and investing in expertise in-house you can rely on.
ING confirms this, saying the world is changing so quickly, sometimes it’s hard to keep up. ‘Our purpose is to empower people to stay a step ahead in life and in business, and we believe this also means helping clients and society stay a step ahead of the challenges they’re facing.’
4. Government has a role to play
Don’t forget centralised cash. Most governments in developed countries are now operating loan schemes on sustainable finance and if corporates can find the right scheme, they might even find more attractive rates or additional benefits that the profit-based lenders out there won’t encourage.
Furthermore, government-backed lends may offer additional networking opportunities or encourage businesses to partner up on loans to add robustness and value. All of these elements are potentially appealing.
Climate Bonds writes that there is huge potential for the state sector to contribute to the growth of this market. The Biden administration’s emphasis on addressing social inequalities is expected to result in further development.
Sean Kidney, CEO, Climate Bonds Initiative, explains: “The USA has led national green bond rankings for several years, however, significant upside potential and unmet demand remains, in both the municipal and corporate markets.
“This demand will only grow as large investors continue to seek sustainable investment opportunities, align towards emissions reduction goals and reduce long term carbon exposure in their portfolios.”
The lesson? – do check whether centralised lending options are available in addition to the profit-making banks.
In conclusion
The fundamentals of accessing sustainable finance remain relatively simple. Be transparent, use the right expertise and always have an eye on the future.
Additionally, government policy globally is constantly changing. COP27 might bring significant changes to ease the rollout of further sustainable monies and lends globally as the community seeks to hasten steps to mitigate climate damage, which some reckon didn’t go far enough at COP26.
Certainly, one thing is clear. The prevalence of green finance is going nowhere. It’s here to stay and it is here to help corporates steer in a truly sustainable direction. The faster the uptake and the faster the money hits the ground, the more momentum will engulf the sustainable global business sector with associated benefits for all.