ESG: The New Differentiator

  • By AFP Staff
  • Published: 11/15/2021

Sustainable financing needs to be adopted by organizations all over the world. Even though numerous companies are working towards sustainable financing, there is still a long way to go. A recent AFP webinar, “ESG: The New Differentiator,” aimed to give attendees insights into the many innovations present to help them move towards sustainable financing.

The speakers for this webinar included Susan Gray, Global Head of Sustainable Finance and Innovation at S&P Global, and Scott Paredes, Vice President and Treasurer at the Southwire company. They were followed by John Egerman, Head of Capital Markets and Corporate Finance at Walmart, and finally, Greg Cass, America’s Head of Sustainable Capital Markets at Barclays.

The presentation started with Susan Gray focusing on the growing need for sustainable financing globally. She mentioned that according to S&P Global statistics, there had been significant growth in sustainable financing. Even though this meant sustainable financing topped a trillion dollars globally, it was still inadequate to carry out the required transition.

A small poll conducted during the webinar showed that 60% of the attendees had no plan of pursuing sustainable finance issuance over the next 12 months. That was a bit alarming considering the effect that environmental, social, and governance (ESG) factors have had on the well-being of our planet. ESG analysis has become a crucial part of the investing process so that investors know which company to invest in that has a positive impact on the planet.

John Egerman provided valuable input to the discussion due to his experience at Walmart. As per John, Walmart has been a leader in sustainable financing for quite some time now. Due to large-scale organizations following such initiatives, others are following their lead. This has led to higher ESG issuances so that companies may find incentives and resources to move towards sustainable financing.

As the world advances in technology, innovative solutions to a greener future are springing up everywhere. Scott Paredes focused on this during the webinar. He spoke of the sustainability-linked loan recently launched by Southwire, a leading wire, and cable manufacturing company. Southwire hopes to eliminate or offset 100% of their scope 1 and scope 2 greenhouse gas emissions through this. It consequently gives smaller companies a chance to adopt sustainability-driven practices and promote their strong ESG profiles. This way, investors can deduce more easily which companies are worth spending for.

Greg Cass felt that it was an exciting prospect to see the product base evolve with time. Every company has different ESG standards that they hope to meet. The idea of going green encompasses a much larger area of interest, and there is a huge sector in which sustainable financing methods are being applied.

Companies must track key performance indicators (KPIs) linked to their finance sectors so that they can judge whether their sustainability goals are being met or not. KPIs are an excellent way of determining where the company is falling short of meeting its goals. Teams can then work on strategies to mitigate risks and improve their processes to ensure that the international markets association principles are being followed.

Susan Gray spoke of the use of proceeds financing and the impact they have on the environment. A green use of proceeds bonds means that whatever is accumulated due to these bonds goes into related or unrelated green projects. The proceeds end up in a sub-portfolio and are tracked by the issuer. They can then be invested in projects that promote sustainability for our planet. At S&P Global, companies can engage with sustainable finance and specialist credit analysts to receive an overview of their performance and how to improve it. This gives the company a chance to articulate its strategies and provide an easier transition towards sustainability in the future.

Now, to put all these incentives into action requires skilled execution. Egerman revisited his experience at Walmart and told us that what helped meet sustainability terms was that they had dedicated resources to aid the treasury team. Creating a framework to track proceeds properly required a good amount of teamwork internally throughout the organization. The whole organization has to be involved with the process of moving towards sustainable financing, not just the finance teams. It is crucial to have a clear strategic direction when a company aims to meet such goals. That is what allowed Walmart to come to the forefront of the race.

Southwire took a completely different approach as a relatively smaller company in comparison to Walmart. They applied existing cashflow revolving credit facilities and turned them into innovative asset-based loans. This went in line with the fact that their lender circle was quite limited. They were able to provide full transparency to their lenders and familiarize them with their sustainability goals for the future. This became possible due to S&P assessments which contributed to Southwire’s differentiation amongst its suppliers and shareholders.

Whatever approach a company adopts towards sustainable financing, it’s better to start early and with adequate team coordination. In many places, a vast amount of ESG data is already present to make the process easier. However, it is still a work in progress. Working with second-party opinion providers gives you an external overview of whether your company is meeting ICMA principles or not. Whatever metrics you decide to track, make sure that you keep a record of them. Provide sustainability reports regularly and be transparent with the people working alongside you. This includes companies that do not want to issue green or social or sustainability bonds. It will make communication with your stakeholders easier and enable them to judge how you’re working towards sustainability.

ESG investors are growing at an accelerated rate in the market. Therefore, at one point or another, companies will have to comply with sustainability standards to meet the requirements of investors and maintain their place in the market.

Never heard of ESG? Read about it here.

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