As climate change becomes an undeniable long-term risk to be managed by politicians, corporations, pension funds and asset managers alike, the demands on treasury operations are growing. Long-term investors are on the look-out for assets resilient to the impact of climate change and that brings with it additional obligations on companies in terms of data collection and transparency.
“The effects of climate change are apparent to everyone and you can really see that companies are starting to work much more with this internally. It has become a core part of how many businesses operate, and even the treasury teams are engaged in the discussions.” said Jacob Michaelsen, head of Sustainable Bonds at Nordea, the largest bank in the Nordics and a leading Debt Capital Markets house.
The topic of sustainability may not be a recent phenomenon but the momentum behind its adoption through the economy is increasing. And now that the regulators are putting their weight behind a ‘greening’ of the financial system, that momentum will build and build. There is no choice.
Climate risk is closely correlated to financial risk and mitigating those risks, however, does not come cheap. The costs of building environmental resilience into the economy is huge. In the EU alone, there is an investment short-fall of some €180billion if the EU is to create the kind of environmentally-sustainable economy that helps it meet its Paris-agreed climate obligations by 2030.
Not only is it important for companies to secure the long-term viability of their own business operations, but it will become an increasingly important consideration in terms of raising the money to finance those operations.
“The demand for green assets from investors is growing,” said Johan Fredriksson, debt portfolio manager at Vasakronan, the leading real estate company in the Nordics. “Pension funds and asset managers need to manage the long-term risks of their investments and ESG is an important consideration.”
“Pension funds and asset managers need to manage the long-term risks of their investments and ESG is an important consideration”
“They need to deliver sustainable returns not only from an economic perspective but also in terms of the way environmental and social aspects impact on the performance of their funds. It’s also good for them from a marketing perspective.”
This swelling community of investment funds looking for ESG-compliant assets presents companies with an opportunity to expand their investor base. That opportunity comes with obligations and, as such, it is drawing the treasury function deeper into the heart of the company’s overall profile and strategy. Attracting investment will require a greater commitment in terms of transparency, collecting data and in terms of communicating the company’s ESG strategy to investors. It is also broadening the discussion with financial intermediaries.
“In Scandinavia, there has been a sea change within our clients,” said Michaelsen. “A couple of years ago, we had to open our conversations with why ESG is important. In the last six to twelve months, we’ve moved on from that discussion. It’s very encouraging.”
In a survey of issuers conducted by Nordea last year, 80% indicated that sustainability plays a major part of their business strategy. It reflects the extent to which ESG is becoming ever-more integrated into business profiles – at least in Scandinavia.
Further questioning, however, revealed that only 20% of those surveyed said ESG played a part in their funding strategy. It shows that there is still some way before financing activities catch up with the overall business concerns. Greater investor interest and regulatory changes will play their part in seeing that gap close.
“In the past, finance teams may have seen ESG as good PR and marketing for the company but played little importance in their function”
“In the past, finance teams may have seen ESG as good PR and marketing for the company but played little importance in their function,” said Michaelsen. “But now, ESG is seen as being increasingly relevant across all parts of the business and that alignment will grow across the company in response to investor demand.”
“As sustainability is a natural, integral part of Vasakronan´s organization and business we have to know everything that’s going on in the company from an ESG perspective,” said Fredriksson. “We need to know it well as we are the ones that have to communicate our profile to investors.”
Vasakronan was the first corporate issuer of a green bond in 2013 and recently updated its Green Bond Framework to reflect the development of the markets and Vasakronan as a green bond issuer.
The topic of sustainability will remain high on the agenda for finance offices in meetings with investors and bankers. Particularly following the recent edict from the EC proposing a classification system of sustainable activities and the obligations on investors to disclose information relating to sustainable investments and sustainability risks. Those obligations feed through into the rest of the economy.
“The preferred options will indirectly impact businesses as issuers of securities by incentivizing them to disclose the additional ESG information necessary for financial intermediaries and investors,” it said in the Directive.
While it is accepted that the need to disclose additional information will come with a cost, the EC reckons that ” . . . the disclosure should also enable issuers to access additional investors and potentially reduce the cost of capital”.
Those costs will depend on how deeply sustainability has been established into the company’s operations and that should also lead to further profitable outcomes.
“It makes economic sense − the less energy you consume, the less waste you make, the better the numbers”
“Sustainability plays a big part in our company and has done for the last 10 to 12 years,” said Fredriksson. “It makes economic sense − the less energy you consume, the less waste you make, the better the numbers.”
For treasurers though, the greatest impact from ESG on their day to day consideration is likely to be in relation to the cost of funds and access to those funds. It is only going to become more important, too, as governments around the world turn off the supply of cheap and plentiful credit and interest rates begin to rise. The premium from going green in a low interest rate environment may be negligible, it may become more valuable as borrowing costs start trend upward around the world.