Companies and their finance providers have strategic, financial and moral incentives to work towards a sustainable economy. Increasing pressure to respond to issues such as climate change have resulted from a shift in social norms and the recognition of financial implications due to failing to act. This is especially apparent in debt markets where lending and investment decisions, as well as the creation of products, are starting to integrate environmental, social and governance (ESG) issues. Accounting for Sustainability (A4S) has created this guide through extensive interviews with lenders and debt investors for treasury teams in response to these trends to ensure they are able to understand, take advantage of and play a leadership role in accelerating the transition to sustainable finance.

The premise of the report is set by establishing the business case, outlining how the consideration of sustainability is important for corporate treasury. Considering the perspectives and experiences of market participants and members of the A4S CFO Leadership Network, it highlights drivers for sustainability practices and how considering these can lead to benefits. These benefits include access to a wider pool of debt providers, lower borrowing rates and alignment of the company’s values with those of its lenders and investors. This represents the growing momentum for change alongside the increasing integration of ESG factors into all forms of debt. The report puts a spotlight on green, social and sustainability bonds to show how opportunities exist to tap into the rapidly growing market for products with explicit environmental and social aims.

Diving into the debt provider perspective, key insights are provided based on analysis of primary research collected from interviews with debt investors and lenders. Giving current perspectives and the reasons behind them, the report uses these insights to help guide organisations to engage with, and influence, debt providers and their lending decisions.

Key insights suggest:

• ESG is integral to risk assessment
• Transparency and consistent information is essential
• Engagement and strong relationships facilitate change

The report highlights that treasury teams are pivotal to an organisation’s strategy, funding, and success. Therefore, treasury teams need to play a greater role in responding to sustainability considerations. Organisations that consider sustainability in their debt finance activities will receive greater opportunities for, and access to, funding, with potentially lower costs, while supporting an overall strategic objective of being a long-term sustainable organisation.

Based on current practice, the report provides guidance for treasury teams by exploring four key activities related to obtaining and managing debt finance. Maturity maps are used to benchmark their current approaches and understand how they can advance.

Some activities explored include:

• Identifying the need for finance, type of finance and parties to work with
• Determining pricing covenant and term-sheet criteria
• Managing relationships and continuous engagement

There are a range of practical examples across key actors in debt markets including banks, asset managers, credit rating agencies and corporates, such as HSBC, Fitch Ratings, Pennon Group and Sainsbury. They are used to illustrate how ESG considerations are being integrated into debt financing, providing a look at a changing landscape and increased momentum for embedding environmental, social and governance considerations in debt markets.

1. For the debt market as a whole, it is vital for lenders and investors to price the risks they are taking fully into their financing decisions. This is not yet the case in relation to environmental, social and governance (ESG) risks for the majority of debt financing in the mainstream market.
2. There has been a shift in understanding in the last few years, through green bond issuance and ESG integration by credit rating agencies, that organisations can align their treasury and sustainability objectives to improve environmental and social outcomes.
3. While there is opportunity for corporate treasurers to drive and respond to change through practical actions, it is necessary to include other actors in the debt market such as regulators, stock exchanges, credit rating agencies, investors and lenders.
4. Credit rating agencies are starting to play a major role in influencing organisational behaviour and investment allocation by integrating ESG factors into ratings processes. Today, the integration of ESG into investment decisions is not just a matter of downside risk - it is also about capturing growth opportunities.
5. Increased focus on sustainability is driving growth in the sustainable investment market and starting to bring changes to the mainstream investment market. Data shows a 131% growth in the global sustainable investment market between 2012 and 2018.
6. Alongside growing integration of ESG factors into all forms of debt, significant opportunities exist to tap into the rapidly growing market for products with explicit environmental or social aims. E.g. the rise of green bonds: in 2018 US$167.3 billion of green bonds were issued, compared with just US$41.8 billion in 2015.
7. The perspectives of debt providers are changing, whereby sustainability considerations are starting to play a larger role in the decision-making process. These perspectives, such as the significance of reputational risk, will have major implications on organisations' ability to acquire debt finance, and the cost of this finance.
8. The role of treasury teams is closely linked to the risks and opportunities of sustainability in organisations. It is essential to build common understanding of sustainability within the organisation and the opportunity to integrate it into debt raising decisions.
9. They key for treasury teams is to consider sustainability throughout their activities, whether it be determining pricing or covenant and term sheet criteria. They need to take into account both short and long-term criteria for actions and focus on sustainability.
10. Maturity maps are just one tool that organisations can implement to benchmark current approaches to different activities and understand how they can be enhanced. The map captures the different dimensions of identifying the need for finance, the type of finance and the parties to work with.