How Sustainable Finance Changes Corporate Cash Flows

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Environmental, social and governance (ESG) related news dominated the headlines throughout 2021. The US and UK governments have set the most ambitious carbon reduction targets ever. Anheuser-Busch InBev announced a $10.1 billion sustainability-related revolving credit facility, the largest ever for a publicly traded alcohol company. And BlackRock, the loudest investor voice calling for companies to improve on ESG, has put its own reputation on the line with a $4.4 billion loan tied to improving the diversity of its workforce.

On June 15, the U.S. Securities and Exchange Commission (SEC) ended a comment period on new climate change disclosure rules. Today, SEC staff are reassessing companies’ ESG disclosure requirements, taking into account public feedback they received. The agency’s intent is to ensure that the SEC “facilitates the disclosure of consistent, comparable, and reliable climate change information.” Separately, the SEC issued a warning to investment firms to curb the misleading marketing of ESG funds amid record inflows.

Pressure from investors, regulators and peers is forcing CEOs across America to weigh in on ESG-related issues such as climate change and voting rights. According to a survey published jointly last April by ING and the research firm Longitude, the majority of business leaders (57%) are accelerating their organization’s green and social transformation plans. American boards and C-suites increasingly feel the need to act.

If ESG transformation is not yet on the agenda of a company’s treasury and finance professionals, they may have a unique opportunity to lead in this business-critical area. Here are three ways treasury and finance leaders can help drive their company’s ESG agenda forward:

1. Harness the power of the balance sheet.

The age-old adage that whoever controls the purse strings is the ultimate decision maker has never been more relevant. As ESG moves up the corporate priority list, emerging financing solutions such as sustainability-linked loans and bonds are linking ESG objectives to access to capital. BlackRock is one example of a wave of U.S. companies that have directly tied ESG-related key performance indicator (KPI) targets, such as reducing carbon emissions, building a workforce more diversified implementation or the establishment of more sustainable supply chains, to financing at reduced interest rates over time.

The unspoken impacts of sustainable finance on a business can be profound, especially for the finance team. In addition to lowering the cost of funds, this approach to capital structure can galvanize the organization around a single set of ESG-related goals, as failure to meet these goals would result in predefined penalties. A successful end result can be meaningful: providing greater transparency and accountability around ESG goals and performance, fostering long-term positive cultural impact, and guiding managers and staff across the company towards a sustainable and socially responsible way forward.

Treasurers and finance executives currently have the opportunity to obtain funding at a lower cost of capital while simultaneously shifting internal priorities to issues that are increasingly important to internal and external stakeholders, as well as the state. future of the company. By linking sustainability goals to capital structure, corporate treasurers can influence how their organization interacts with workers, communities, societies and the planet, since all share a common responsibility for sustainability strategies.

2. Respond to all requests for disclosure.

As soon as President Biden nominated Gary Gensler as SEC Chairman, the message was clear: Disclosure of public company performance around ESG-related KPIs is going to be a priority for this administration. This means that reporting on sustainability metrics may soon be required alongside traditional financial reporting to investors, regardless of a company’s industry or sustainability track record.

European Union (EU) political leaders have set a precedent with an ambitious taxonomy, which seeks to create a uniform definition of sustainability. Additionally, the Non-Financial Information Disclosure (NFRD) Framework requires all listed companies with more than 500 employees to report on data points such as environmental protection, social responsibility and board diversity. administration, among others. Companies within the scope of the NFRD are also required to report the proportion of their revenue, capital and operating expenses that aligns with the EU taxonomy. Looking ahead, EU leaders have proposed replacing the NFRD with the Corporate Sustainability Reporting Directive (CSRD), which aims to eliminate the size limit of the NFRD for regulatory eligibility. The aim of these measures is to align companies doing business in Europe around sustainability measures, informing the public of their progress.

Investor priorities in the United States reflect the ongoing sea change in corporate values. The Longitude/ING survey last spring revealed that 72% of investors are increasing their ambitions for ESG results in their portfolios. The 2021 proxy season saw that in action, as activist investment firm Engine No. 1 replaced three ExxonMobil board seats on ESG-related issues. Companies need to prioritize these issues as shareholders increasingly view ESG KPIs as financially important metrics for judging a company’s long-term performance prospects.

For treasury and corporate finance professionals, this is another signal that now is the time to take the lead on ESG issues, through a combination of enhanced disclosures, target setting ambitious performance plans and the development of investment plans that support ESG objectives. Lenders and investors are increasingly allocating more capital to companies that are ahead of the curve in tracking, measuring and reporting on sustainability, while penalizing those that don’t.

3. Find suitable financing.

As financiers demand greater corporate action on the ESG front, a range of investment and financing options have emerged designed to have a positive impact on sustainability. These include traditional mutual funds and exchange-traded funds (ETFs) that use new metrics to identify companies with higher ESG scores, as well as debt instruments that fund green and social initiatives, or in the form of financing an eligible asset or activity. , or by financially linking the debt structure to the performance of key ESG indicators within the organization. Most of these funds have focused on environmental considerations, for example reducing carbon emissions, but new funding options allow corporate finance professionals to approach a more holistic ESG agenda using sustainable funding that supports social causes.

The Longitude/ING survey found that investor appetite has shifted towards “social bonds” rather than green bonds. According to Sustainalytics’ definition, social bonds raise funds for new and existing projects “to create positive social outcomes”, with proceeds that will be “exclusively used to fund or refinance existing qualifying social projects”. Social bond issuance hit a record $147.7 billion in 2020, largely due to the Covid-19 pandemic, according to BloombergNEF. Sustainability bonds, which mix green and social projects, are also growing in popularity.

The ability of companies to tap sustainable debt markets in this new way has unlocked the potential to match material ESG issues to the issuer, with positive impact. When treasury and finance professionals begin to assess which of their organization’s existing and upcoming projects can benefit from sustainable financing, such as new clean energy-powered generation facilities or capacity programs targeting vulnerable groups, they naturally begin to prioritize investments that lead to these positive projects. green” or “social” impacts. The more financing a company needs for eligible projects, the larger the sustainable debt instrument it can issue. Additionally, the requirement that projects funded through sustainable finance disclose their performance on sustainability metrics can lead to increased collaboration between various internal teams, as well as improved data measurement.

These trends may be particularly important for corporate finance professionals, who may be tasked with improving the “S” of ESG, even though data and benchmarks in this area are scarce. The organization may need to place more emphasis on measuring, tracking, and benchmarking diversity, employee well-being, human rights, health care, and community issues. Its goal with such an ESG framework should be to build a balance sheet that supports the adoption of ambitious social goals. If and when the business does, treasury and finance teams may be able to tap into new funding opportunities, which are about to be demanded by lenders and investors.

Additional opportunities include social and sustainability bonds, financial structures linked to sustainability goals, and green or sustainability-linked instruments that are tied to decarbonization efforts of carbon-intensive emitters.

Achieve business sustainability impacts

When a sustainability strategy is at the core of the business, a company can better manage its balance sheet to achieve a series of goals, create more compelling insights, and secure targeted funding. ESG offers opportunities to leverage traditional financial tools in new ways, to achieve greater corporate ambitions and sustainability impacts.



Ana Caroline Oliveira is the Head of Sustainable Finance covering the Americas with ING.


* Photo credit for Oliveira’s portrait: © Matt Greenslade/photo-nyc.com

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