Green finance is seeing a 'fundamental shift': SEB Bank

There has been a fundamental shift in green finance, argues Nick Blake, head of transaction services UK, at SEB Bank.

Green financing has traditionally been positioned in the capital markets space, “but today we are starting to hear about corporate loans having green features and sustainable supply chain financing being explored,” says Blake.

These are also cropping up in supply chain finance and some receivables transactions (often the shorter trade transactions), Blake tells The Global Treasurer in an exclusive interview.

Mark Luscombe, SEB Bank’s UK country head, says: “We see more banks issuing green bonds and they are using the proceeds to provide green loans to their customers – that’s clearly grown quite significantly.”

Utilities vs. true corporates

The spike in interest in green finance has mainly come from “utility and municipality-type companies, quasi-sovereigns and more recently from the banking sector”, says Luscombe.

“The area where we’re still lacking the same level of traction is in what I call the ‘true corporate’ space – corporates that aren’t utilities.

“It is a heavier process for these companies. The task a treasurer has is to get funding in that can be used for general corporate purposes. So, limiting the use of proceeds from a bond issue, for example, to green projects means the treasurer has to be able to identify a sufficient volume of green projects.

“These treasurers really want to issue a bond that’s going to be big enough to be liquid and for many companies that means €500m or more,” Luscombe explains.

Many companies are not likely to have that volume of green projects they can easily identify. Or, if they have, the projects might be staggered over time.

“There’s more work involved, but a good step in that direction are green loans from the banking sector,” Luscombe tells The Global Treasurer.

“European companies can have an EMTN program where the treasurer just presses a button and can issue a traditional bond within hours, but issuing a green bond requires you to put a framework in place – it requires a bit more effort,” he continues.

In February, French food company Danone announced it had introduced environmental, social and governance (ESG) criteria to its syndicated €2bn credit facility led by BNP Paribas.

The margin on the facility is linked to them fulfilling certain ESG-related criteria.

“There’s no doubt we’ll see more of this,” says Luscombe.

He argued it’s likely that in the future the majority of all finance will be sustainable finance, with only a very small fraction being non-sustainable.

“The way we’re approaching our clients (and I hear several other banks too) will be increasingly incorporating environmental, social and governance (ESG)-related factors in their credit assessments,” argues Luscombe.

Companies will be asked what they are doing to address sustainability issues and whether this is potentially going to be a future issue, he says. For example, companies may have assets that could be classified as stranded assets in the future.

If there is no more demand for certain assets, such as fossil fuels, that will be incorporated into the company’s credit assessment.

How is your green rating?

“There’s no doubt that there’s an increasing number of banks that are looking at incorporating that into their assessment,” says Luscombe.

Today banks look at companies’ credit ratings. However, rating agency Standard & Poor’s (S&P) has a team of about 20 people working on developing a framework around sustainability.

“In the future, we need to be able to rate companies on the basis of greenness and use that as criteria for evaluating the riskiness of a company’s investments,” said Luscombe.

How much impact do treasurers have on ESG?

While treasurers may have control of how much green finance is in their investment portfolio, most treasurers don’t have control of their full supply chain.

“That’s a fact,” says Luscombe.

“If a company really sets their focus on wanting to have a sustainable supply chain it will likely start higher up in the organization. It’ll probably be a board decision or CEO or CFO decision, but so far we don’t really see it starting in treasury,” he adds.

Blake says: “Where the treasury function potentially gets engaged is helping define how a supply chain can be validated as sustainable. For example, if your suppliers can be identified as green or sustainable, this can help reduce risk to your reputation but now potentially also create opportunities for more creative financing solutions.

“There are independent third parties who can help you validate this,” he adds, “and having an independent counterparty involved can provide a company with more protection from a reputational perspective, as intention can be proven.

Blake says whilst the opportunity for third-party validation is growing, “there’s a lot of work that needs to be done before people can be confident that sustainable supply chain financing is a standardised model”.

“Everything is a work-in-progress at the moment as this is a relatively new but exciting part of the trade and financing market,” he adds.

Pressure from all angles

While banks are expected to increasingly put more ESG demands on their clients, clients will also be putting more demand on their banks.

However, Luscombe says: “There’s no doubt a big part of this starts at the government level.

The Paris climate agreement between 195 governments worldwide sends a clear signal through the global economy.

“There’s also recognition, certainly in our bank, that the banking sector has a critical role in driving the development that this world is going to take because we decide which projects get financed,” Luscombe explains.

“We also think green finance is good business. We can see from some of the leading companies who put demands on us that there is absolutely a growing trend here that works both ways.

“SEB is a family-controlled bank – this naturally means thinking about the future generations, what we inherited and what we leave for them in the future,” Luscombe points out.

“It’s about thinking about the type of companies that will survive in the future, whether those are companies that will relate to these issues and take them seriously.

“We think that if you, as a bank, don’t pay attention to this and care about it, it’s going to have consequences for you in terms of your ability to be chosen as a banking partner,” he concludes.