Time running out for companies as lenders and investors tighten the screws on sustainable finance

Banks are becoming more stringent on lending criteria as they focus on ensuring their portfolio meets net-zero targets

by | October 19, 2021 | bobsguide

Companies are hastening work on setting clear ESG strategies and monitoring progress as investors have ramped up pressure on ensuring their portfolio meets net-zero targets.

“[For investors], the very core of the business is going to be counted in the commitment to net zero,” said Steve Russell, head of business restructuring services at PwC.

“It’s not just suppliers and activities of the bank that are going to count in the measurement of [ESG], it is the [borrower] as well.”

Banks are now looking to invest in companies with credible transition plans. In fact, 72 percent of investors said a clear and demonstrable ESG proposition increases their likelihood to extend financing, according to a survey by PwC. For example, 59 percent of investors said they were more likely to extend financing to a company with a diversity and inclusion (D&I) policy in place.

“It comes down to if you want to have access and want to have options around how you finance the business, you’re going to have to […] set out a strategy, a way of measuring, explaining, and disclosing the journey you’re going on,” said Jason Higgs, partner at PwC.

“If the lenders are doing sustainability-linked loans and the borrowers do not adhere to these standards, then the lenders will not be able to say these are sustainability-linked loans and that will have a knock-on impact on vendors, their capital base, and potentially regulatory requirements too.”

Sustainability-linked loans often come with better financing terms to the extent of saving from “a couple of basis points” to “20 or 30 basis points”, he added.

Investors are also experiencing pressure from their own stakeholders to focus and streamline the portfolio to meet ESG targets.

In fact, 44 percent of respondents said they were experiencing pressure from their own investors and stakeholders to extend financing to companies with a clear ESG or D&I policy in place, according to PwC’s survey.

Monitoring progress still a barrier for companies

Lenders are now asking companies for demonstrable and measurable progress of their ESG strategies, said Russell.

However, Higgs argued that one of the biggest barriers for companies in being able to demonstrate their progress is monitoring progress.

“Many set out headline strategies [and] views and try to verbalise where they’re going,” said Higgs. “It becomes much more difficult setting what it looks like in tangible numbers and commitments.

“The further step that’s even more difficult is monitoring progress and refining and driving change.”

In fact, the survey found 51 percent of UK businesses said they have yet to develop ways to measure success despite clearly articulating their ESG proposition.

Meanwhile, disparity between the C-suite and other senior level executives in attitudes around ESG and D&I prevents the business from having a unified approach.

Companies should utilise multiple channels at multiple times and be consistent with internal messaging as they are with external communications with stakeholders, said Russell.

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