IGTA Journal - Summer 2020

For many corporations, green and sustainable nancing has become a signi cant area of focus in the past couple of years. As Tom Bolton, head of corporate nance at Thames Water, points out: “It’s something that’s been around for a long time, but in what feels like a relatively short space of time, it appears to have become mainstream.” This topic will only become more important in the future. Before the coronavirus crisis escalated, industry commentators had pinpointed sustainability as one of the top considerations for treasurers this year. While the current situation may hinder planned activity for some, sustainability continues to be an important topic for companies around the world. For treasurers, navigating the green and sustainable nance market is something of a challenge – not least because some areas of the market are at an earlier stage of development than others. At the same time, there’s a certain degree of overlap and confusion when it comes to the terminology used to describe the di erent routes available. WHAT’S IN A NAME? Where language is concerned, terms like ‘green nance’, ‘sustainable nance’ and ‘transition nance’ are sometimes used interchangeably, but each has a distinct meaning. • Green nance. Kwok Liu, deputy treasurer, funding & investment at National Grid’s group treasury, explains: “We see green nancing as a type of nancing where proceeds are used to speci cally fund certain projects with environmental bene ts. The market standard in Europe is for this type of issuance to be aligned with the International Capital Market Association’s [ICMA’s] Green Bond Principles.” • Sustainable nance. Sustainable nancing, Liu says, involves linking the coupon paid to a sustainability metric or goal, and aims to promote wider sustainability criteria or commitment to the UN’s Sustainable Development Goals – “but it’s a product that is perhaps not as well developed as green nancing”. • Transition nance. As well as green and sustainable nancing, another emerging area is that of transition nancing. The focus of this is on sectors that are currently ‘brown’, but are working to transition to green. In March, UK gas distribution network Cadent announced that it had issued the UK’s rst transition bond in the form of a 12-year €500m issuance. The proceeds will be used to reduce greenhouse gas emissions. • Impact investing. While not a form of nancing, impact investing is another term that is gaining traction in the sustainability conversation. “It’s about the philosophy of investors when they make a decision on where to allocate their capital,” explains Liu, “which includes both nancial considerations and the positive impact that can be achieved in terms of social bene ts and bene ts to the planet.” While ESG factors may be top of mind for many companies, when it comes to debt issuance it’s clear that di erent parts of the market are at di erent levels of maturity. At this stage, green bond issuance is seen as a well- trodden path for companies – not least because of the structure brought by the ICMA’s Green Bond Principles, which are intended to provide guidance for issuers, investors and underwriters. As Lisa Dukes, deputy group treasurer of power company Drax, says: “If you’re launching a green bond, you know what’s expected of you.” Sustainable nance and transition nance, in contrast, are at an earlier stage of development, and as Dukes remarks, “there is de nitely a lack of structure around those markets.” Likewise, green and sustainable nancing is more developed in some regions than in others, with Europe appearing to be particularly advanced. Thames Water was the rst IGTA eJournal | Summer 2020 | 41