When I was starting out in corporate treasury, there were only three types of commercial paper: euro commercial paper, United States CP, and asset-backed CP. These days, the types have proliferated, perhaps reflecting corporate directors’ acknowledgement that they’re stewards of their planet, not just their companies. So, we now have in our alphabet soup of acronyms for CP: GCP, SCP, and ESGCP (green CP, sustainable CP, and environmental, social and governance CP, respectively).
German property lender Münchener Hypothekenbank (MHB) issues ECP and GCP. One benefit of the latter, it says, is a saving in CP yield (the 'greenium' of around two basis points (bps). Other benefits MHB cites from issuing GCP include:
By contrast, SNCF, another issuer of GCP, says “there is no difference between our Green CP and our conventional CP”. Yannick Linck, head of funding at the French national state-owned railway company, says: “SCP is a tool for a company to commit to a more global ESG strategy.”
But while the benefits for a company of establishing and promoting its green credentials are wide-ranging and significant, they come at a price.
Unlike conventional CP, issuing CP with an ESG-dimension requires significant investment in establishing the processes, policies, and procedures internally (collectively known as a Framework). “It is a long process, and a certain setup is required before a bank or corporate can issue Green CP,” says Claudia Bärdges-Koch, head of debt investor relations & client acquisition, treasury, at MHB.
“There is a clear demand for ESG short-term paper but a shortage of issues due to difficulties in structuring legal documentation in order to reflect the underlying assets or indicators (KPIs) to classify the CP as ESG, especially with regulators and banks more and more careful with the threat of greenwashing,” adds Linck.
A company must also establish and manage external relationships – with second party opinion providers that will periodically assess and certify that the CP issuer has complied with the terms and conditions of its ESG framework and with market-based green principles.
The company’s transition to an ESG-focused company will mean designing and integrating ESG processes into its existing infrastructure and, where necessary, reconfiguring practices processes and behaviours.
ESG processes are likely to include:
The ICMA’s Green Bond Principles can serve as a guide and template to implement best practice in this evolving area, especially given the heightened reputational risk of issuers being charged with greenwashing.
Where the company’s Framework has already been established for other green financing instruments, such as green bonds, then it is relatively quick and straightforward to incorporate GCP into that Framework and to tweak existing conventional CP documents to, for example, refer to the issuer’s Framework.
By contrast, if a treasurer is starting from scratch, then Bärdges-Koch recommends undertaking a cost-benefit analysis, noting that costs relating to IT programmes and external reviews will be offset by the benefits of an additional funding source.
Permjit Singh FCT