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Taking stock of the ‘E’ in ESG

Sustainable finance looks to be gathering momentum on the corporate agenda. Yesterday, CTMfile reported how Tesco has launched a bond that is linked to the company’s commitment to reduce greenhouse gas emissions. Tesco says it was the first business globally to set a zero-carbon goal in 2009 and later the first FTSE 100 Company to set science-based carbon reduction targets on a 1.5-degree trajectory. The launch of its first sustainability-linked bond further demonstrates a continued commitment to reduce its impact on the environment and become a net zero carbon business in the UK by 2035.

The €750m bond with a 0.375% coupon offers an 8.5-year maturity and is the first bond of its kind to be issued by a retailer. The retailer says it is an important step in setting tangible incentives for its environmental and social performance and follows the company's announcement in October 2020 that established a £2.5bn revolving credit facility, with interest linked to the achievement of three ambitious environmental targets. The bond is aligned to an agreed Sustainability Performance Target (SPT) of reducing Scope 1 and 2 Group Greenhouse Gas (GHG) Emissions by 60% by 2025 against Tesco’s 2015 Baseline.

The bond will be aligned to Tesco’s newly introduced Sustainability-Bond Framework, which follows the ICMA Sustainability-Linked Bond principles, and has been independently assessed by Sustainalytics.

“I’m delighted that we have issued our first sustainability-linked bond," commented Alan Stewart, CFO at Tesco. "Linking our financial strategy to our long-term commitment to tackle sustainability is an important step in ensuring that this commitment is embedded across all our business operations and ensures we are driving continuous improvement. We are proud to be making good progress on our journey to be a net zero carbon business in the UK by 2035 and for the entire Group by 2050.” 

Europe accounted for US$87.49bn in green bond issuance in the year to 30 September 2020, eclipsing that of the second-largest market, North America, which issued US$36.81bn, and the third-largest, Asia-Pacific, which issued US$26.67bn, according to data compiled by S&P Global Market Intelligence.

ESG credentials are also important in corporate bank relations. As noted in the Greenwich Associates 2020 Large Corporate Banking Study, 21% of the large US companies say they have started considering banks’ performance on ESG factors and provision of sustainable finance options like green bonds when allocating their banking wallet. 

Practical steps to green the business

That said, when it comes to understanding how to practically 'green' an organisation, business leaders’ understanding of the implications on net zero on their organisations is poor, according to the first Net Zero Barometer Report published by BSI. In a survey of 1,000 senior decision makers and sustainability professionals in the UK, 64% were not confident they fully understood what impact it could have for their firm, while the vast majority (82%) stated that they require more guidance if they are to achieve the target.    

In spite of this, there is a genuine desire amongst the business community to come together to hit the government’s 2050 net zero target, with 7 out of 10 stating that their business has made or is considering making a solid commitment to achieving the goal. However, this commitment dwindles for the UK’s small business community, with just one in five having committed to a net zero target, in contrast to 50 per cent of their larger cousins. With smaller businesses accounting for 99.9 per cent of all UK firms and half of business-related emissions, this lack of commitment could severely undermine the overall net zero progress in the UK.

The past 12 months have hampered businesses efforts, with nearly 7 out of 10 reporting that their plans to achieve the carbon neutrality target have been pushed back by the pandemic, as other corporate priorities have taken centre stage. A difficult year is also reflected in what businesses see as the largest barrier to achieving net zero - cost. 44 per cent of those surveyed identified it as their greatest hurdle to overcome, followed by clarity on what the target really means.

“Despite the pressures posed by the pandemic, it is incredibly positive that there is growing, wide-spread commitment from business leaders to achieve net zero by 2050," commented Scott Steedman, director-general Standards at BSI. 

Survey respondents from IT and manufacturing firms were the most likely to report that their organisation has committed to net zero, also showing the most awareness. Whereas, healthcare and education exhibit a comparative lack of awareness regarding target setting, with just 26% and 22% of respondents respectively aware of whether their organisation had committed to net zero in some form. It should be noted that the COVID-19 pandemic will have impacted both sectors significantly which could explain this relative lack of target setting in 2020.

For all sectors, standards are an effective way of embedding best practice into British business, ensuring that organisations are equipped with the tools that they need to achieve their goals in the most efficient, safe and effective way possible. Numerous international standards provide guidance to enable organisations to measure, verify, manage and communicate their journey toward carbon neutrality.

Driving sustainability through the supply chain 

An article by Rodolphe Vergeaud, head of CIB EMEA Trade and Working Capital Solutions - Global Banking at BNP Paribas, published on LinkedIn on 22nd January made the case that, for trade buyers, sustainable supply chain finance is a powerful tool to drive the ESG agenda throughout their supply network.

"Not only can it help you achieve your sustainable sourcing goals, which reflects well on your business, but it also increases security of supply," says Vergeaud. "Suppliers with access to better finance, that are managing their sustainability risks effectively, are more likely to be around for the long-term."

Companies with efficient supply chains have a competitive advantage and finance solutions are one of the most effective routes to achieve that.

"I’d go one step further and say I am convinced that embedding sustainable supply chain finance solutions represents the key innovation that will define the future of global trade finance, allowing buyers to draw suppliers down a sustainability path, incentivising ethical and responsible practice," argues Vergeaud.

In practice, the buyer can embed sustainability criteria in the terms they provide to suppliers, so those suppliers have a tangible incentive to go green. In doing so, suppliers can get better access to working capital at lower rates.

"It is becoming easier to do this," Vergeaud notes. "Supplier sustainability performance data is still not perfect, but it is becoming more widely available. Initiatives such as the European Union’s Sustainable Finance Disclosure Regulation (SFDR) – due to come into effect in March 2021 - are improving information flows."

The role of carbon pricing

Elsewhere, in a report released by Deutsche Bank this week, 'Carbon Pricing and the green transition', James Brand, Utilities EU Analyst at Deutsche Bank Research takes a look at what the 2020s have in store in terms of industrial decarbonisation, emissions trading and renewable energy. In the report, Brand notes that we are approaching a crunch point for carbon pricing. 

"A flurry of key policy reviews are due in the first half of the year and we expect decisions on the framework for industrial decarbonisation," Brand says. "Indeed, while decarbonisation of the power sector continues apace, the EU and UK’s tough emission reduction targets will require broader cuts. For utilities, this means carbon pricing could be key." 

In terms of EU and UK policy on greener power, the report notes that with more ambitious 2030 targets, national objectives may have changed from insulating industry to also driving industrial decarbonisation.

"Designing an incentive regime which funds this while maintaining the international competitiveness of European industry is likely to prove a key political focus of 2021," Brand says. "Strengthened emission trading programmes with higher carbon prices should aid this process. As such, the review of the EU Emissions Trading Scheme (ETS) and the launch of a UK ETS could be the most important single cross-sector events of the year."

Sustainability is a complex and multifaceted area for corporates to grasp, but progress on this issue has never been more important.

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