Given that Environmental, Social and Governance (ESG) issues appear to be here to stay, a clearly defined ESG strategy can help secure a business’s current and future financing needs, as well as bringing wider value to the business itself.
In recent times we have seen a very clear raising of the importance of ESG amongst company directors and also investors and other financiers. This convergence of the focus on ESG between the providers and the users of capital has undoubtedly been a major factor in the growth of ESG financing projects.
As a result, there is now a growing list of deals which can be described as “green financings”. These deals cover a wide range of sectors and deal sizes. A number of these deals incorporate a pledge by the borrower to adhere to ESG-related targets whilst the facilities are in place. A number of other funds have only been released to the borrower on the basis that the proceeds are funnelled into ESG projects. The speed at which such lending has been taking place, and the wide breadth of what can be defined as ESG borrowing, can make it difficult for borrowers to shape an ESG strategy underpinned by performance goals and/ or investment plans which are appropriate for the business, as well as being attractive to funders.
Green finance guidelines for borrowers and lenders
A number of organisations have produced literature for borrowers and lenders, which intend to create a standardised format for defining green strategies and aims. This literature illustrates the increasing maturity of ESG financing options, as well as striving to steer clear of any perception of so-called ‘greenwashing’.
Raising your game to achieve this high ESG bar can often be easier said than done. In a world where wide ranging “green priorities” are frequently written and spoken about, business owners need to work out what their green goals are and what strategies they need to pursue to achieve these goals. Most current discussion appears to focus more on the E, and climate change specifically, than on the S and G. With the UK government having promised to hit net zero by 2050, all business owners are likely to feel a need to move to a greener future and develop carbon-free initiatives. However, it is likely that the S and G will start to be talked about more over the next few years.
ESG appears to be very much here to stay and so, from a funding point of view, borrowers need to realise that ESG is becoming ever more deeply embedded into credit department procedures. Consequently, it’s essential for business owners to realise that a successful funding request will have to cover off the ESG angle, unless there is an obvious reason why it doesn’t need to.
Indeed, this requirement to cover off the ESG angle is already in place. In recent months, there have been reports of some funders declining to support deals where they consider that the borrowers’ ESG strategy has not been suitably defined. It would be misleading to give the impression that funders are taking a position which means that all businesses need to already have a fully developed green strategy to raise finance. However, it is becoming clear that funders believe that a detailed analysis of the credit credentials of a business is only possible if a clear strategy on ESG exists or is being progressed. Therefore, showing lenders that ESG is a priority at board level has become a must have for obtaining finance.
The ESG bar is high and may continue to go higher. However, the increased maturity of ESG as a discussion topic, as well as the expanding availability of ESG-focused literature, should help borrowers to understand that a focus on ESG may well provide an opportunity for business owners to conclude attractive financing deals, allowing them to achieve their goals and consequently increase shareholder value.
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