Can sustainable finance turn corporate purpose into action?

Demand is high, and the growth potential is huge, amid signs North America is following Europe’s lead in increasingly incorporating ESG – environmental, social and governance – factors in finance to help achieve net zero by 2050, speakers at the recent FT Moral Money Europe Summit found.

However, some hurdles need to be removed for ESG to become standard practice, including the need to enhance and harmonise reporting metrics globally to help investors better measure the progress made in sustainability.

A “normalisation” of ESG investing

The Covid-19 pandemic has accelerated the shift witnessed over the past few years towards more sustainable finance. “Originally it was led by pioneering companies, but now, the vast majority of revolving credit facilities issued on investment grade so far this year were sustainability-linked: it is a sign that it is becoming mainstream,” noted Constance Chalchat,  Head of Company Engagement for BNP Paribas Corporate and Institutional Banking.

“It’s no longer a niche market,” agreed Anne Marie Verstraeten, UK Country Head, BNP Paribas. “Last year, sustainable bond issuance reached almost $500bn, a growth of $200bn year-on-year, and this compares to $266bn just in the first quarter of 2021. The cumulative sustainable bonds worldwide has reached £1.5trn. This is an incredible magnitude. The sustainable loans market is smaller but the acceleration in growth is comparable, having reached cumulatively $500bn with a step up this year with an issuance of $83bn just in Q1.”

There are also strong signs that North America is catching up with Europe on ESG investing. More than half of this year’s sustainable bond issuance was generated by issuers in the EMEA area, noted Anne Marie Verstraeten, and 10% in North America, showing the potential for further growth.

A solid roadmap to sustainability

Businesses should start their sustainability journey with a solid plan as it will be under the scrutiny of increasingly educated and demanding investors. “So many companies start with sustainable financial products with the wrong KPIs [key performance indicators]. For instance, they talk about diversity when they are an energy provider and what matters is gas emissions – or their level of indicators is sub-standard, or not ambitious enough,” stressed Chalchat.

One company that has led the way in the right direction is Unilever; it was one of the first blue chips to launch a sustainability plan, back in 2008 and it has since embedded sustainability into its governance and operations.

“Step one of our four-level plan was to get your own house in order,” noted Rebecca Marmot, Unilever Chief Sustainability Officer. The company saved €1 billion through eco-efficiency in its manufacturing and stage 2 is currently focusing on the wider value chain.

The company thinks that running sustainably is crucial commercially as consumers are increasingly putting sustainability at the centre of their buying choices, but also to attract and retain talent. “It is hugely important to create this culture because over 90% of our employees told us they work there because of our sustainability ambitions,” she added.

While the EU taxonomy on ESG is welcome as it creates more transparency for consumers and investors, the whole world needs a common language – global harmonisation with the same standards of disclosure and all the data on a unique platform and the use of technology. “Using technology solutions such as satellite mapping to check deforestation, or blockchain to trace products all the way from their source to the supermarket shelves can offer reconciliation solutions to investors,” remarked Marmot.

Wanted: the right metrics to incentivise good behaviour

As sustainable finance gains momentum, the need for correct metrics and the standardisation of KPIs is becoming urgent. “Collective ownership is required to protect against greenwashing, with more comparability within the sectors. Each sector should have two to five material KPIs to make it easier for investors to compare,” said Meryam Omi, Head of Sustainability and Responsible Investment Strategy at Legal & General Investment Management.

Omi added: “With so many commitments to Net Zero objectives by 2050, we need to see substantial short- and mid-term targets as investors want to see these plans put forward to votes. It could be in a shareholder resolution proposed by the company itself and/or investors – or should be in annual reporting disclosures that we can read and score.”

Anne Marie Verstraeten cites examples of KPIsdeveloped with customers such as UK retailer Tesco, which launched a sustainability-linked loan, “science-based and very specifically focused on greenhouse gas emission reduction.”

The conundrum businesses and investors face currently is the need to address the 2030 to 2050 gap, since most companies know how to reduce CO2 emissions by 2030. “We need disruptive technology, which means we need to invest in R&D now,” said Chalchat. “What we’re going to be increasingly seeing in the proceeds of green bonds, is this duality of short-term investment and long-term preparation in research,” she concluded.