Treasurers are set for another tough year as events across the global economy continue to present challenges across the board. However, despite this, the importance of environmental, social and governance (ESG) factors in overall debt strategy continues to increase in scale and intensity.
Those are the key findings from this year’s landmark Corporate Debt and Treasury Report, produced by Herbert Smith Freehills (HSF) and the Association of Corporate Treasurers (ACT). It reveals that although confidence levels are on the rise, 70% of treasurers report a neutral to negative outlook, with fewer than one in four expecting business as usual with a positive outlook.
And with the impact of Brexit and COVID still being felt, the most recent crisis in Ukraine has led to many treasurers accepting ‘crisis mode’ as a semi-permanent state of affairs. Indeed, as one said, “War is the third major crisis for the UK in the past few years and so maybe we should always be in crisis mode or assume another crisis is ahead and work on supply chain resilience, more working capital, more inventory."
To that end, treasurers are focusing intently on business-critical factors. However, the substance of that varies. As the report notes: “On the one hand some respondents noted that the pandemic had triggered the shoring up of balance sheets, thereby removing or reducing the impact of current events on their debt strategy, but over a quarter of respondents were taking action to create liquidity or waive debt terms in order to maintain business as usual activity.”
For some, that means bringing forward planned refinancings, with almost one in five respondents seeking “to lock in costs of funding now given the expectation that rates would now increase in a number of Western markets”. And the appetite to take on debt remains strong, with 36% of respondents planning to take on new debt and 57% planning to refinance their existing debt.
A closer look under the bonnet reveals that slightly under half (48%) suggested greater capital expenditure possibly due to deferrals during the pandemic and the availability of super-deductions for capital allowances, followed by working capital at 42%, which could be attributed to concerns around ongoing supply chain pressures.
But it’s clear that ESG will be a significant part of any financing conversations. As one respondent pointed out, "Every single bank wants to talk about ESG", while another explained that “two years ago when we mentioned green they [potential private placement investors] just got their phones out – that's not the case now”.
Certainly, when it comes to the ESG agenda, the message is clear, according to Kristen Roberts, finance partner at HSF: "ESG and sustainability continues to be the topic of treasury conversations. The general trend towards ever greater proportions of debt containing ESG or sustainability-linked features continues as the barriers to engaging in ESG and sustainability-linked financing subsides."
The drivers behind that trend vary. For some (32%), embedding ESG into financing plans “aligns with corporate strategy”, with a further 28% explaining that it also helps to appeal to customers and stakeholders. Few, however, believe that – short term at least – ESG and sustainable finance is a low-cost option.
“Some respondents noted that the time and cost of developing sustainability frameworks were significant and should not be underestimated,” the report notes. “Synchronising the implementation of that and raising debt continues to be challenging for a number of corporates.”
With 23% of respondents identifying the pricing benefits of sustainable finance was not sufficient to make it worthwhile, squaring that circle is a growing challenge, the report says. “Pricing advantages alone are not sufficient to justify the investment in sustainable finance,” the authors note.
And, they say, consistent with that, “Respondents noted that pricing advantages are not a key driver here. That might support an argument that the most efficient/lightest touch treasury approach to ESG is to support the creation and implementation of the business's sustainability framework but not to pursue sustainable finance itself.”
With that said, for those pursuing sustainable financing, sustainability-linked loans (47%) and bonds (28%) are proving popular, with both increasing their share over last year’s figures.
So where next for sustainable finance? The biggest step change, according to a majority of treasurers, would be the development of more rigorous and standardised frameworks. Sixty-five per cent saw this as the next priority in growing ESG-linked financing, with 61% identifying increased reporting also critical.
The full report is available here
