How Sustainable Financing Is Driving Corporate Treasuries to Evolve

Environmental, social, and governance (ESG)–related news was splashed across headlines throughout 2021. The U.S. and U.K. governments have set the most ambitious carbon-reduction goals on record. Anheuser-Busch InBev announced a $10.1 billion sustainability-linked revolving credit facility, the largest ever for a publicly listed alcohol company. And BlackRock—the loudest investor voice calling for companies to improve in terms of ESG—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. Now, SEC staff are re-evaluating requirements around corporate ESG disclosures , with an eye toward the public input they’ve received. The agency’s intention is to ensure the SEC is “facilitating the disclosure of consistent, comparable, and reliable information on climate change.” Separately, the SEC issued a warning to investment firms to rein in misleading marketing of ESG funds amid a backdrop of record inflows.

Pressure from investors, regulators, and peers is compelling CEOs across America to weigh in on ESG-related issues such as climate change and voting rights. According to a survey jointly released last April by ING and research firm Longitude, the majority of corporate executives (57 percent) are accelerating their organization’s green and social-transformation plans. American boards and C-suites are increasingly feeling 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 in which treasury and finance leaders can help push their company’s ESG agenda:

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 list of corporate priorities, emerging financing solutions like sustainability-linked loans and bonds are tying ESG objectives to access to capital. BlackRock is one example in a wave of U.S. companies that have directly tied ESG-related key performance indicator (KPI) targets—such as lowering carbon emissions, creating a more diverse workforce, or enabling more sustainable supply chains—to reduced-interest financing over time.

The unspoken impacts to a business of sustainable financing can be profound, especially for the finance team. In addition to reducing the cost of funds, this approach to the capital structure can galvanize the organization around a single set of ESG-related goals, because failing to meet those goals would result in pre-specified penalties. A successful end result can be meaningful—offering more transparency and accountability related to ESG targets and performance, fostering a positive long-term cultural impact, and focusing managers and staff throughout the business on a sustainable and socially responsible path forward.

Treasurers and finance executives currently have an opportunity to obtain lower-cost-of-capital financing while simultaneously shifting internal priorities toward issues that are increasingly important for internal and external stakeholders, as well as the future state of the business. By tying sustainability goals to the 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. Meet all disclosure demands.

As soon as President Biden appointed Gary Gensler as SEC chairman, the message was clear: Public-company disclosures of performance around ESG-related KPIs are going to be a priority for this administration. That means reporting on sustainability metrics might soon be required alongside traditional financial reporting to investors, regardless of a company’s industry or track record on sustainability.

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

Investor priorities within the United States mirror the ongoing sea change in corporate values. Last spring’s Longitude/ING survey found that 72 percent of investors are increasing their ambitions when it comes to ESG outcomes in their portfolios. The 2021 proxy season saw this in action, as activist investor firm Engine No. 1 replaced three ExxonMobil board seats over ESG-related issues. Companies need to prioritize these issues, because shareholders are increasingly viewing ESG KPIs as financially material metrics for judging a company’s long-term performance prospects.

For corporate treasury and finance professionals, this is another signal that now is the time to lead on ESG issues, through a combination of reinforced disclosures, setting of ambitious performance targets, and development of investment plans that support ESG goals. Lenders and investors are increasingly allocating capital to companies that have a head start in sustainability tracking, measurement, and reporting—while penalizing those that do not.

3. Find fit-for-purpose financing.

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

The Longitude/ING survey found that investor appetite has shifted toward “social bonds” over green bonds. As defined by Sustainalytics, social bonds raise funds for new and existing projects “to create positive social outcomes,” with proceeds that will be “exclusively applied to finance or refinance existing eligible social projects.” Social-bond issuance hit a record $147.7 billion in 2020, driven in large part by the Covid-19 pandemic, according to BloombergNEF. Sustainability bonds, which mix green and social projects, are also increasing in popularity.

Companies’ ability to tap the 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 start to assess which of their organization’s existing and upcoming projects may qualify for sustainable financing—such as new production facilities powered by clean energy or capacity programs targeting vulnerable groups—they naturally begin to prioritize investments that lead to those positive “green” or “social” impacts. The more eligible projects a company requires funding for, the larger sustainable debt instrument it can issue. Furthermore, the requirement that projects funded by sustainable financing must disclose their performance on sustainability metrics can lead to further collaboration between various internal teams, as well as a push for improved data measurement.

These trends can be particularly important for corporate finance professionals, who may find themselves tasked with improving the “S” in ESG, even though data and benchmarks in that area are scarce. The organization may need to place more emphasis on measuring, tracking, and comparing diversity, employee well-being, human rights, healthcare, and community issues. Its goal with such an ESG framework should be to build a track record that supports the embracing of ambitious social targets. If and when the company does that, treasury and finance teams may be able to tap new financing opportunities, which are poised to be in demand from 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 the decarbonization efforts of carbon-intensive issuers.

Achieving Corporate Sustainability Impacts

When a sustainability strategy is at the core of the business, a company can better manage its balance sheet to meet a range of objectives, create more compelling disclosures, and secure purpose-driven financing. ESG is providing opportunities to leverage traditional financial tools in new ways, to achieve greater corporate ambitions and sustainability impacts.

Ana Carolina Oliveira is the head of sustainable finance covering the Americas with ING.

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