“ESG and sustainability continues to be the topic of treasury conversations and its adoption and evolution will continue for some time, particularly as it percolates through all forms of corporate debt finance,” according to a study by law firm Herbert Smith Freehills and the Association of Corporate Treasurers (ACT).

Based on a survey of finance and treasury professionals at over 80 large UK listed corporates (primarily FTSE 100, FTSE 250 and equivalents) conducted between January and March 2022, the firm’s latest Corporate Debt and Treasury Report 2022 found that 71% of respondents expect to include ESG or sustainability features in their next financing.

Next financing and key drivers

Do you plan to include ESG features in your next financing and what are the key drivers for this?

Source: Corporate Debt and Treasury Report 2022 (Herbert Smith Freehills)

The survey finding highlights a steady increase in treasurer commitment to ESG and sustainability over the past two years (50% in 2020 and 65% in 2021, respectively).

According to the study, 29 percent of respondents projected that they would not include ESG features in their next financing, which may be attributed, as the report suggests, to “the tension between the required timing for raising debt and the longer-term project to create a sustainability framework.”

Having a sustainability framework is typically a prerequisite for sustainable finance. The time and cost of developing sustainability frameworks are significant, and synchronising the implementation of that and raising debt continues to be challenging for a number of corporates, as per the report.

Supporting corporate strategy (32%), appealing to customers/stakeholders (28%) and meeting investor demand (18%) were the key drivers for advancing corporate ESG and sustainability initiatives, which weren’t surprising and remained in consonance with discussions held with corporate treasury teams.

Next ESG/Sustainability-linked financing

Which of the following ESG/Sustainability-linked financing are you likely to enter into in the next 12 months?

Source: Corporate Debt and Treasury Report 2022 (Herbert Smith Freehills)

Sustainability-linked loans amount to almost half of all sustainable finance most likely to be implemented by companies surveyed, followed by sustainability-linked bonds and green bonds, each at 28%, respectively.

The report explains, “As in 2021, sustainability-linked loans remained the most likely Sustainable Financing to be implemented, reflecting both the more standardised approach to those financings (with KPIs tailored to that corporate) but also the ability of that product to be utilised across businesses without the need to focus on use of proceeds and a relatively light touch reporting process.”

“With a rise in sustainability-linked bonds being issued by a wider range of issuers, it may be that some bond issuers prefer to issue this type of instrument going forwards, given there is no need to identify specific projects to be funded by that bond,” the report further added.

The ESG/Sustainability journey

At what stage is your business in its ESG/Sustainability journey?

Source: Corporate Debt and Treasury Report 2022 (Herbert Smith Freehills)

The fact that 75 percent of respondents have sustainability-linked financing, have a sustainability network and publicised sustainability targets in place, or are in a position where they are likely to be able to do so, indicates the enormous opportunities for growth in sustainable finance.

The study findings show that the momentum behind corporate ESG and sustainability is becoming entrenched, “with the impediments to doing so weakening as ESG and sustainability in debt finance becomes better understood.”

Despite the rapidly growing trend towards implementing ESG and sustainable finance, a section of respondents queried whether it is justified given the time and cost involved. Thankfully, the numbers of respondents noting the cost and time of ESG reporting as an impediment is falling, as per the study. The report also states that corporates are no longer waiting on regulators when it comes to adopting sustainable initiatives.

Conclusion

ESG and sustainable finance continue to climb up the corporate agenda despite economic and business uncertainty. It is not only becoming better understood in the treasury and finance community, but it is increasingly becoming a part of the corporate DNA.

Banks and corporations are putting real energy into it, even as sustainability-linked loans and bonds have come into keen focus in 2021 and will continue to grow over the course of 2022 and beyond. 

Whilst treasury has played a crucial role in implementation of ESG and sustainability, and sustainable finance is evidence of a corporate holding itself accountable to its ESG and sustainability goals, the ESG and sustainability agenda “can only be progressed in tandem with that company's corporate development/ESG teams,” the report advocates.