As seen in today's Industry News on CTMfile, where HSBC has rolled out its Green Deposits solution to the UAE, the appetite for the delivery of ESG-related financial products is carrying on at a rapid pace. 

From the corporate treasury perspective, perhaps nothing sums this up more than the recently announced partnership between Tesco and Santander to offer sustainability-linked supply chain finance in a programme directly linked to the grocery giant's sustainability commitments.

Every little helps

Tesco says that the initiative will see it become the first UK retailer to offer its supply base sustainability-linked supply chain finance. The retailer hopes this move will encourage more suppliers to sign up to science-based emissions reduction targets.

The voluntary programme, which has been in development for 18 months and is due to launch in September, will see annual greenhouse gas emissions data provided by suppliers independently verified and assessed by sustainability experts, Anthesis. KPMG are engaged to carry out assurance of the programme.

"In this critical year for climate action, we’re delighted to be able to offer thousands of suppliers access to market-leading supply chain finance linked to sustainability," commented Ashwin Prasad, chief product officer at Tesco. "This programme not only provides suppliers with a real incentive to set science-based emissions reduction targets, it will help embed sustainability goals throughout our supply chain and support the UK in realising its climate change targets."

Tesco suppliers will be offered preferential financing rates via Santander’s supply chain finance platform which incentivises suppliers to make positive changes to their business while tracking performance and creating a culture of continuous improvement. The rates will be based on each suppliers’ carbon data disclosure, emissions reduction targets and progress against sustainability goals.

"Action on climate change is crucial and from individuals to corporates, we all have a part to play," said Darren Jones, head of Santander Corporate and Investment Bank UK. "Supply chain finance can be an effective tool for influencing positive change by linking sustainability achievements with competitive financing."

Tesco says it will regularly update the scope of the sustainability data requirements in line with market best practice and its own sustainability commitments. The retailer expects the programme to be of particular interest to small and medium-sized businesses. Tesco will provide online tools and support to help these suppliers enrol in the scheme.

"As a business, we recognise the importance of doing what we can to protect our planet and the Tesco supply chain sustainability programme is strongly aligned with our company values and our aim to become BCorp certified in the next year," explained Dave Knibbs, director at The Tofoo Company. "The supply chain finance programme offers a great incentive for us and similar suppliers to make a noticeable difference when it comes to sustainability."

In 2017, Tesco became the first company globally to set science-based climate targets for its own operations on the more ambitious 1.5-degree trajectory of the Paris Climate Agreement. And last year, the retailer committed to reach its net zero climate target in the UK by 2035, fifteen years earlier than originally planned. In the same year, the retailer also set science-based targets for its supply chain, set on a 2-degree trajectory. Last year its 70 biggest suppliers reported a 12% reduction in manufacturing emissions, exceeding its science-based target of a 7% reduction. The retailer is also working in partnership with WWF to halve the environmental impact of food production, including supporting Tesco’s suppliers in setting sustainability targets. 

"Global temperatures are rising and the natural world, our life support system, is already feeling the heat," commented Sarah Wakefield, head of Food Transformation at the WWF. "We’re working with Tesco to address one of the biggest environmental challenges facing our planet: how we produce and consume food.  We welcome this latest leadership by Tesco, to be a part of the solution by incentivising their suppliers to report on their emissions and take action to align with 1.5°C climate targets. This takes us closer to achieving our shared goal of halving the environmental impact of the average shopping basket."

Getting the guidelines right

For ESG-related finance to truly make a difference, the principles and guidelines underpinning what does and what does not qualify for ESG status have to be rigorous and clear. Just last month, the Loan Market Association (LMA), Asia Pacific Loan Market Association (APLMA) and Loan Syndications and Trading Association (LSTA) announced the publication of the Social Loan Principles (SLP), which aim to create a high-level framework of market standards and guidelines, providing a consistent methodology for use across the social loan market, while allowing the loan product to retain its flexibility and preserving the integrity of the social loan market while it develops.

The SLP build on and refer to the Social Bond Principles (SBP) administered by the International Capital Markets Association (ICMA), with a view to promoting consistency across financial markets. They have been developed by a working party consisting of representatives from financial institutions and law firms active in the global loan markets, with a view to promoting the development and integrity of the innovative social loan product.

The SLP comprise voluntary recommended guidelines, to be applied by market participants on a deal-by-deal basis depending on the underlying characteristics of the transaction, based around the following four core components:

1. Use of proceeds.
2. Process for project evaluation and selection.
3. Management of proceeds.
4. Reporting.

Following the launch of the Green Loan Principles in 2018 and the Sustainability Linked Loan Principles in 2019, the SLP represents another milestone in the development of the global market for sustainable lending products. The LMA, APLMA and LSTA intend to produce a separate guidance document on the SLP in due course.

"The speed with which environmental, social and governance (ESG) issues have moved into mainstream finance is truly remarkable," noted Hannah Vanstone, legal associate of the LMA. "At the LMA, we have already seen the power of green loans and sustainability linked loans to drive positive ESG outcomes. Since the commencement of the COVID-19 pandemic, we have seen a huge increase in the issuance of social loans, which seek to channel capital directly towards positive social outcomes. The LMA is delighted to have worked alongside the APLMA and LSTA to produce the Social Loan Principles which are intended to serve as a global framework for use across the social loan market. We hope these Principles will help further increase the flow of capital into vitally important social projects worldwide."

Meeting the requirements

Having the right technology solution in place can help corporates track the data flowing throughout their organisation to ensure that ESG requirements are being met or even exceeded. On that note, Alveo, a financial data management solutions provider, has just announced new ESG data management functionality. This includes an extension of Alveo’s standard industry data model and user interface functionality that helps clients understand data quality, data lineage and divergence between third-party ratings.

Driven by regulations such as the EU’s Sustainable Finance Disclosure Regulation (SFDR), the data model now incorporates the data fields required to address the SFDR’s indicators applicable to investments in investee companies, sovereigns and supranationals, and real estate assets. 

Alveo’s business rules allow for completing missing data points based on peer group analysis, converting reporting bases and units of measurement and proxying information based on historical records.

The provider has also extended its standard library of off-the-shelf connectors with financial data feeds. Alveo’s Ops360 user experience includes dashboards showing the sourcing, processing and completion status of data requirements and insight into data quality metrics and complete lineage to show the provenance of reported data fields. Clients can also use Alveo to integrate multiple sources of ESG data and derive analytics, for example showing the divergence between third-party ratings or the creation of clients’ proprietary ratings.

"ESG is the biggest data management requirement to hit the buy-side for some time," said Mark Hepsworth, CEO at Alveo. "We see clients requiring access to multiple ESG data sources and increasing volumes of data. At the same time, clients want to manipulate this data and make their own decisions about it and how they present it to their clients."

When ESG met risk management

Finally, this week Standard Chartered has announced that it has priced its first commodity hedge linked to ESG benchmarks with Trafigura, a commodity trading client. The transaction involved combining conventional derivatives risk management with sustainability-linked key performance indicators (KPIs) that are linked to reducing greenhouse emissions - from owned or controlled sources - and to sustainable sourcing in the base metals business.

The transaction is structured to offer a premium or discount to Trafigura on their hedging rate based on fulfilling the pre-agreed ESG KPIs, which are independently monitored and reported on regular basis by a third-party provider, ERM Certification and Verification Services.

"We are committed to embed sustainability in our day-to-day operations in a consistent and coherent way," commented Chin Hwee Tan, CEO of Trafigura, Asia-Pacific. "A key pillar of our responsible business practices involves minimising adverse impacts on the natural environment. This sustainability goals-linked derivative transaction with Standard Chartered is an important step forward on our journey."

"We are committed to getting capital to where it is needed to help our clients achieve their sustainability goals, and ESG-linked derivatives are among a number of solutions that we offer them," concluded Sharad Desai, global head of Financial Markets Sales at Standard Chartered. "We’re proud to structure this first ESG-linked derivative transaction for Trafigura to help them execute both on risk management and sustainability targets."