Treasurers’ commitment to ESG continues to strengthen
Survey data shows ESG is becoming entrenched across corporates, with treasurers playing a leading role in actioning initiatives
Survey data shows ESG is becoming entrenched across corporates, with treasurers playing a leading role in actioning initiatives
The momentum behind ESG and sustainability is continuing to build across corporate treasury teams as they gain better understanding of associated corporate debt capital structures and become more adept at incorporating them in financing, according to a study by law firm Herbert Smith Freehills and the Association of Corporate Treasurers (ACT).
Based on a survey of finance and treasury professionals at over 80 large UK corporates (FTSE 100 and FTSE 250), the firm’s latest annual Corporate Debt and Treasury Report found that more than two-thirds (71%) of respondents expect to include ESG or sustainability features in their next financing.
Kristen Roberts, partner at Herbert Smith Freehills and co-author of the report, says the latest finding follows a steady increase in treasurer commitment to ESG and sustainability over the past two years (50% in 2020 and 65% in 2021, respectively). At 47%, sustainability-linked loans are the most likely to be implemented by firms surveyed, followed by sustainability-linked bonds and green bonds, each at 28%, respectively.
The annual survey conducted in Q1 2022, aims to capture trends around corporate debt and tracks the growth of ESG and sustainability within corporate debt finance. Treasurers were asked whether they consider that ESG and sustainability has become the norm in their principal debt financings, with respondents almost equally split, with 53% saying no and 47% stating yes.
“ESG and sustainability remain the major topics of treasury conversations,” says Roberts. “The general trend towards ever greater proportions of debt containing ESG or sustainability-linked features is continuing as the barriers to engaging in ESG and sustainability-linked financing subside.”
The study findings show that momentum behind ESG and sustainability is becoming entrenched, says Roberts, and over the coming years he expects to see the number of corporates not engaging with ESG continue to decline.
“There is no longer a debate within organisations as to whether they should or should not undertake ESG and sustainability initiatives,” says Roberts. “Rather, the question being asked now is how they can engage with it for the benefit of their own business. And they are under pressure, in any case, from investors, banks and consumers to pursue sustainable initiatives.”
According to the report, the corporate world is no longer waiting on regulators when it comes to implementing sustainable initiatives. In fact, there is a trend towards ESG becoming “normalised”, with greater momentum towards the standardisation of ESG financing – s particularly for sustainability linked loans – s and standardisation of workstreams relating to those financings, such as reporting, targets, and alignment with regulatory regimes.
Source: Corporate Debt and Treasury Report 2022 (Herbert Smith Freehills)Despite being generally optimistic about the outlook for corporate ESG and sustainability initiatives, Roberts fears greenwashing will be a significant drag on the application of sustainability linked loans.
Some debt investors are growing “extremely nervous” about the threat greenwashing poses, he says, due to the potential liabilities it exposes them to. As a result investors are taking much more time and care in carrying out due diligence. That, however, has led to an increase in the timescale for getting sustainability linked transactions over the line, he adds.
“Sustainability-linking in deals is falling by the wayside because there isn’t the time in the transaction timetable to implement it,” says Roberts. “Investors now want to be 110% certain that there’s going to be no threat to them from finger pointing due to greenwashing.
“It is a pivotal issue for banks. They want the targets and KPI to be challenging for the borrower but they are not looking at it from a financial perspective. It’s much more about potential reputational damage.”
The report also highlights how treasurers expect rising inflation to play a greater role in their decision making in 2022. While the number of respondents expecting to make use of interest rate hedging remained static for 2022 versus 2021, the number of corporates planning to not use interest rate hedges in the year ahead fell to 18%, down from 38% in 2021.
Part of the difficulty for treasurers with inflation is the sudden acceleration in the rate this year, says Roberts.
Earlier this month the Bank of England (BoE) hiked rates by quarter percentage point to 1%, the central bank’s fourth increase since December – the fastest pace of policy tightening in 25 years. The BoE also warned the UK will experience double digit inflation for the first time in 40 years later this year, with interest rates expected to rise to 2.5% by middle of next year to combat rising inflation.
Meanwhile in the US, where inflation hit 40-year highs, the Fed’s latest 50 basis point (bps) hike took rates to a target range of 0.75% – 1%. The central bank is expected to follow up with another 50bps in June, with the Economist Intelligence Unit predicting it will raise rates seven times in 2022 to reach 2.9% in early 2023.
Roberts says the rapid acceleration in inflation presents treasurers with several challenges: “It has come from nowhere fast, and it’s very high. That makes it very difficult to manage for treasurers, particularly when it’s forecast by the BoE to drop off to 2% in around two years.
“It will demand more wide-ranging measures than simply putting in place interest rate hedging to reduce the risk of increasing floating rate debt interest payments.”
The wider inflationary impact, for instance on goods, capex and wages, poses budgeting challenges for treasurers, particularly as profit margins are squeezed, which will be more likely in an environment where passing on rising costs becomes difficult, says Roberts.
“Whilst the BoE is projecting that high inflation is a circa 18-month to two-year issue, there’s no guarantee of that, nor that inflation won’t rise further than the 10% already predicted for later this year,” he adds. “The extent and the uncertainty of the duration of higher inflation also it makes it more challenging to effectively hedge floating rate debt interest costs over a longer horizon.”
Treasurers are advised by Roberts to decide their debt strategies sooner rather than later.
“Just in the last few weeks we have seen US Private Placement and Debt Capital Market pricing widen significantly,” he says. “To the extent that fixed rate debt needs to be raised, treasurers would be prudent to consider actioning that now to guard against the risk of further interest rate rises beyond those which have already been priced into deals.”
Treasury teams should ensure they have the latest market intelligence on the range of derivatives that are available to them to deploy, particularly those which will be best suited to the current spike in inflation.
A broader inflation-related concern for Roberts is that the high inflation environment is unprecedented for junior treasurers and managing in it could prove very challenging for them.
“Younger treasurers likely won’t be sufficiently familiar with all of the products and the options out there. So if you don’t have your playbook from, say, the mid/late 2000s to hand, it’s going to be difficult. You’re going to get those surprises out of left field. Separately it’s the kind of environment that could lead to personnel issues due to talent being poached by other treasury teams.”