A funder’s take on where we are with sustainable finance technologies

And (while ESG should not be ‘wagging the dog’ of corporate finance strategy) fortunately, sustainable finance technology, in having reached circa 12 per cent of total investment-grade supply in EUR, GBP and USD this year to date, is well tested to meet the needs of efficient balance sheet management.

In public markets, sustainability features can be designated on a tranche-by-tranche basis, to help meet appetite for term and to enable matching of assets (eligible projects, such as housing stock) and liabilities.

Meanwhile, in the private placement market, where we have seen green and KPI-linked facilities, sustainability and commercial features can be combined, meaning transaction structures can be carefully tailored.

Along with public and private transactions, sustainability principles can also be applied to short-term instruments, to ‘greenify’ liquidity activities.

Delivering safe, secure, decarbonised homes

While sustainable finance serves as funding in the most practical sense, the resulting outcomes of the use of proceeds or sustainability-linked structures are what continue to capture the attention of those issuers and investors in pursuit of a better tomorrow.

In relation to use of proceeds, these benefits are described in terms of the environment (underpinned by the International Capital Market Association’s Green Bond Principles) or society (underpinned by its Social Bond Principles), or as a combination thereof. Where principles are combined, the financing is then termed ‘sustainability’, as we have explored in previous series.

Indeed, this sustainability moniker elegantly captures the duality of the social housing mission: to provide comfortable, affordable homes that are also energy efficient, in pursuit of strict performance requirements. The ability, then, to deliver that combination of benefits within one financing transaction – for example in a bond or a private placement – means complete flexibility for development plans of every size.

Many social housing issuers prefer that sustainability designation. But we should continue to consider the social structure, which although relatively under-supplied, still attracts the attention of institutional investors. And the Sustainability Reporting Standard for Social Housing (SRS) version 2.0 should aid future issuers with the associated reporting requirements.

At the same time, momentum is building behind sustainability-linked financing, reaching circa 25 per cent of sustainable finance supply this year. This technology, where the proceeds are for general corporate purposes, but the margin is impacted by attainment of certain performance targets, is another means to drive societal and environmental benefits.

Issuer beware – transactions in this format face increasing scrutiny, with a need to set material, stretching, ambitious targets.

But, structured effectively, sustainability-linked transactions give issuers the opportunity to showcase trajectory of their transition at a strategic level – for example, decarbonisation of their entire asset portfolio or, most commonly, in their emissions footprint.

This means an opportunity to demonstrate the positive improvements made, for example, to the energy efficiency of homes. While supply in this format occupies a relatively small portion of public markets, many lenders are paying more attention, and sustainability-linked loans occupy a growing part of the bank market.

Establish, develop and embed credentials

Carefully structured, sustainable finance transactions can deliver further benefits beyond the environmental and societal outcomes, acting as a ‘loudspeaker’ in the case of public transactions.

Indeed, a transaction can be an impactful means to showcase an institution’s ESG strategy, as a public affirmation of how sustainability is embedded across the organisation.

This can help issuers to stand out in crowded markets and to act as a robust reputational backstop during transaction marketing. If managed carefully, issuers can potentially avail of improved execution, meaning lower outright funding costs, while potentially adding a ‘green halo’ over the organisation.

Standing up sustainable financing – including the framework, second party opinion, and eventual reporting – is no mean feat however, and can quickly consume resources of smaller treasury teams.

Fortunately, we have also heard anecdotes of improved internal morale and engagement on sustainability topics following an issuance, where the process often draws on a cross-organisation team. 

Sustainable finance is therefore more than just the funding – it’s also the lens to help focus strategic priorities, and the platform on which a sustainability strategy can be developed and demonstrated.

Dean Shahfar, vice-president – debt and financing solutions, NatWest