At a Glance
- ESG transformation efforts have the potential to reduce the cost of capital and enhance long-term competitiveness
- ESG transformation needs to come from the top (board and senior executives), must be embedded in companies’ existing governance structures
- For financial institutions that are developing or issuing products like sustainability-linked bonds, loans, and ESG investment funds, Renoir can help establish frameworks to align issuance with global standards
In today’s modern corporate landscape, the pursuit of sustainable finance has emerged as a paramount objective for companies around the world. The desire to secure financial resources is a compelling reason for companies to embark on a genuine Environmental, Social, and Governance (ESG) transformation. Â
In addition to reinforcing their commitment to responsible business practices, such ESG transformation efforts have the potential to reduce the cost of capital and enhance long-term competitiveness.Â
Access to sustainable finance products Â
Global sustainable investments reached US$35.3 trillion in 2020 across five major markets – the United States, Canada, Japan, Australasia and Europe – an increase of 55% in four years (2016), according to the Global Sustainable Investment Alliance (GSIA). Â
This growth is spurred by various factors, including increasing investors’ demand for sustainable investments, the growing availability of sustainable finance products, and the increasing awareness of the importance of ESG issues among businesses and consumers. Â
Companies with a strong ESG track record have an advantage in accessing sustainable finance products. Sustainable finance products such as green bonds and ESG-linked loans are designed to support companies that are committed to ESG factors – whether it is being embedded in their operations or through projects – that ultimately reduces their carbon footprint and improves their social responsibility. Â
In short, the better a company’s ESG score, the less interest it pays on the money it borrows. As lenders are increasingly looking to lend money to companies that are committed to sustainability and responsible, ethical business practices, those with strong ESG scores are considered less risky in the long run. Â
Conversely, companies that fail to meet their ESG targets are likely to pay a higher interest rate on their loans, as lenders consider them to be riskier. Â
Danone and its pool of banks, with BNP Paribas as the sustainable coordinator, achieved a significant milestone in 2018 when they successfully issued one of the largest Positive Incentive Loans (PILs) in the market, worth up to €2 billion. The PIL facility has a mechanism that includes discounts and premiums applied to the funding margin depending on the issuer’s ESG score.Â
Is CSR still relevant in a world dominated by ESG?
Part II. TNFD for Financial Institutions
Part II. TNFD for Financial Institutions
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Reduces cost of capital
Investors and lenders recognise the possible correlation between ESG performance and reduced risk and enhanced long-term business performance. As such, investors and lenders perceive sustainable businesses as more likely to succeed in the long run, and therefore, reward them with a lower cost of capital.
There are studies indicating that the average cost of debt for companies with a high ESG score was lower than that of companies with a low ESG score. However, it should be noted that this observation varies depending on the legal ecosystems and environments in different countries.
Financial institution, such as BlackRock, has integrated ESG considerations into their investment decision. They structure their approach to ESG integration around three primary pillars, which are investment processes, material insights and transparency. With more institutions adopting ESG-focused investment approaches, like Blackrock, the cost of capital advantage for sustainable businesses may strengthen further.
ESG integration: a key imperative
It is becoming crucial for all corporations to embed ESG in their business models and operations, according to Imad Alfadel, Managing Partner, Global ESG Practice Lead at Renoir Consulting.
Imad shared that presently, many companies still perceive ESG as a pure compliance matter or a report that they need to publish once a year. ESG transformation needs to come from the top (board and senior executives), must be embedded in companies’ existing governance structures, and companies must be genuine about the transformation which entails embedding their material ESG factors into their operations.
“Companies that won’t consider effectively managing their ESG risks and opportunities will risk shrinking their access to capital. As banks continue to align themselves with the Principles for Responsible Banking and the Paris Agreement, their business and lending portfolios will shift to those clients that are on a similar pathway. That’s the only way for banks to achieve their own ESG and Climate specific goals!” he said.
How to get started with framework for green- and sustainability-linked loans
For financial institutions that are developing and issuing innovative products such as green- and sustainability-linked bonds, loans, and ESG investment funds, Renoir can create the necessary framework and policies to ensure these products are issued in line with recognized global standards and relevant taxonomies.
For companies, ESG encompasses a transformation to long-term sustainable value creation. Companies choosing to report on their ESG performance and initiatives can analyse and address associated risks based on the international sustainability standards and frameworks. In this capacity, ESG plays a crucial role in facilitating more informed investment decisions and effective risk management.
We can help companies to understand which ESG topics are material to your investor and engage constructively with stakeholders to support your sustainability transformation.
Imad is the Global ESG Practice Lead at Renoir Consulting. With over two decades in the financial and consulting sectors, Imad has been supporting companies in enhancing their ESG performance. Through a hands-on approach at Renoir, he supports clients in realizing their ESG ambitions and transforming them into tangible results.
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