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Financing Through the Lens of ESG: Impact of Policy and Challenges to be Overcome

Services: ESG, Finance and Capital Markets DATE: 21/10/2022

On 20 September Richard Kelly, David O' Mahony, and Alma Campion, all partners in Matheson's Finance and Capital Markets Group led an insightful discussion on the topic "Financing Through the Lens of ESG" with a particular focus on challenges posed by policy.  Matheson's guest contributors were:

  • David Doyle, Head of Public Affairs and Public Policy EMEA S&P Global;
  • Howard Hughes, Head of ESG Origination for Europe, Barclays International Corporate Banking;
  • Michael Patten, Chief ESG and Corporate Affairs Officer, Glanbia plc; and
  • John Sherlock, Head of Treasury, Glanbia plc.  

The first half of the discussion was led by Richard Kelly and David Doyle who discussed the outlook for ESG-related financing in both Ireland and Europe and the impact of future policy changes. In the second half, the focus was on ESG-related financing from both a borrower's and a lender's perspective.

David Doyle set the framework for the discussion by explaining how the term "ESG" is, in itself, an amorphous term. Despite the intention to provide certainty, policy considerations are introducing new paradigms in ESG and this is reflected in the regulatory framework. Some noteworthy points from the discussion were that:

(a)            It is becoming increasingly difficult to explain the ESG sustainable finance policy agenda to clients who want to invest sustainably. Specifically, competing definitions are emerging such as what is meant by "sustainable investment" and with the introduction of the EU Taxonomy Regulation 2020/852, a new layer of terminology has come into focus;

(b)            There is also a breakdown in the early consensus as to what should be included in the definition of "green" as evidenced in recent discussions about the treatment of nuclear and gas;

(c)            While the influence of ESG on capital markets can be seen from the late 90s, in more recent times the emphasis has shifted more to innovation, specifically the creation of new products and services but also measures to enhance the transparency of existing products, such as the development of new ESG indicators for credit ratings;

(d)            A key challenge for the future lies in the area of disclosure, specifically the need to establish a global baseline for all stakeholders  to enable ESG analysis to be conducted based on reliable, assured, comparable data from companies; and

(e)            Europe is intentionally pursuing a gold standard strategy in sustainable finance and is credited for pursuing an ambitious policy agenda. However, the speed with which these standards are emerging risks diminishing coherence. This was a key point in the initial discussion. The design may not be perfect from the outset and lessons can be drawn from the journey of the GDPR which was described as the equivalent benchmarking tool in relation to the right to privacy. Despite these teething problems, the Sustainable Financial Disclosure Regulation 2019/2088 (the "SFDR"), the EU Taxonomy Regulation, and the EU Corporate Sustainability Reporting Directive (the "CSRD"), while granular, establish new data ecosystems. Because they have extraterritorial effect, they now represent new global standards. The US is taking a more cautious approach and the UK, in a post- Brexit world, possibly has the advantage of learning the lessons in relation to the implementation of EU measures.

In the second half of the discussion, Michael Patten and John Sherlock from Glanbia plc, described the company's experience with ESG-related matters as being evolutionary.  Glanbia's ESG journey has been a voluntarily assumed journey in response to experience rather than regulation.  The current focus is on science-based targets and the emphasis extends beyond sustainability to also encompass diversity, inclusion (gender, race and ethnicity) and governance.  The Board of Glanbia plc has a formal ESG Committee aligned with UN Principles for Responsible Investment Definitions whose remit extends to ethics, health and safety, and responsible nutrition.  As the pace of change at EU level continues, a disconnect between EU and US standards is emerging, something which Glanbia plc are mindful of given their presence on both sides of the Atlantic.  Meanwhile, taxonomy reporting processes are in place and preparations are underway for the CSRD and the introduction of the Corporate Sustainability Due Diligence Directive which is in draft form.  They noted that the emphasis should be on developing an ESG strategy from the outset which can then be reflected in all aspects of the business.  From a treasury perspective, sustainability - linked loans represent one of the last steps in the ESG journey.  It is fundamental that Sustainability Performance Targets and their related KPIs, required for any sustainability - linked loan, are derived from the company's overall ESG strategy rather than vice versa.

Howard Hughes from Barclays noted that, in terms of who is driving the ESG agenda, lenders are being led by regulators as climate change is viewed as a systematic risk.  Most Central Banks seek to guard against three different types of risk: physical risk as in damage to property, transition risk as in assets being devalued and reputational risks driven by concerns expressed by customers, investors and pressure groups.  Lenders are having discussions with borrowers at the moment in terms of incorporating the sustainability linked loan principles into their financing arrangements.  Sustainability-linked facilities have specific base line requirements conditional on reliable ESG data and this represents a key challenge for borrowers.  Other challenges for borrowers include lack of internal resources and systems, lack of a global standard on sustainability performance targets and other metrics and an evolving regulatory and legislative landscape.

If you would like to see a recording of this discussion, please contact our Knowledge Insights team.