Impact of adopting sustainable finance beyond capital markets
By Darryl Yu
FROM the development of green bonds several years ago to the rapid emergence of sustainability-linked loans, ESG (environmental, social and governance) principles/sustainable finance has slowly become a must discuss topic within the financial services community. According to Moody’s Investors Service, green bond issuance globally is on pace to break original estimates of US$200 billion to potentially US$250 billion. Moreover, BloombergNEF calculated that in 2019 YTD there has been around US$319.8 billion in sustainable debt compared to US$56.7 billion in 2015.
While these milestones are positive signs for the overall drive for sustainable finance, this only addresses a particular part of the financial services industry with the overall market needing to look beyond just the capital market transactions to make a significant impact.
Enter the idea of sustainable supply chain finance which has yet to gain traction as a viable option for businesses to change the habits of their suppliers. Unlike the concept of sustainable supply chain which focuses on businesses generally replenishing the resources a company uses, sustainable supply chain finance creates a financial incentive encouraging a company’s supplier to embrace ESG friendly policies by fulling certain goals.
This was the scenario earlier in the year for multinational retailer Walmart which alongside HSBC crafted a sustainable supply chain finance programme that pegs a supplier’s financing rate to its sustainability performance. In 2018 French fashion label Pimkie and BNP Paribas embarked on a similar sustainable journey when it decided it would rank suppliers on a four-tier scale linked to cheaper financing for its supply chain finance programme.
The examples above however, represent just a handful of companies that have successfully been able to positively influence the habits of their counterparties which is key in spreading the idea of ESG beyond just capital markets. While the benefits are evident there are still a number of challenges companies should consider before deploying their own sustainable supply chain finance programme.
Firstly, companies should self-reflect and carefully consider the rational and basis for ESG standards they plan to enforce over their suppliers. This might be the most pressing task initially as there are various standards and interpretations over ESG which sometimes don’t correlate. Secondly, companies must be diligent in requesting creditable ESG data from suppliers such as estimated greenhouse emissions. Finally, companies should also be able to find a banking partner willing to offer financial incentives based on the pre-determined goals suppliers should meet.
Ultimately, the sustainability actions taken by companies today, whether it be from the capital markets to supply chain financing, will contribute to helping a company satisfy the requirements of stakeholders who are themselves becoming more ESG aware.
According to a recent report by the CFA Institute, there has been a notable increase in demand for issuers to provide high quality, comparable and relevant ESG information. For companies to take the next step they should embrace all facets of sustainable finance not only capital market focused deals.
“If you want ESG disclosures, and more importantly high-quality ESG disclosures, you need both the regulation and market to want this. If you can convince an issuer, and demonstrate to an issuer that it is good for shareholders and good for your community and will help you satisfy the regulators, that would be a win-win-win proposition,” says Mary Leung, head, advocacy, Asia Pacific at CFA Institute.