Strategic Sustainability in Investments for Corporate Treasurers: Understanding Green Bond Financing
by Aila Aho, Head of Sustainable Financing, Nordea, Wholesale Banking, and Andre Chanavat, Senior Product Manager, Thomson Reuters
The concept of green bonds dates back to 2007, when the European Investment Bank and the World Bank pioneered this type of instrument as a way of raising funds for projects tackling climate- and environment- friendly projects. Since then, multilateral development banks have continued to issue green bonds, mostly in relatively small sizes.
More recently, however, the market has seen an influx of new issues – and in 2014 alone, the market tripled in size. The recent growth has been spurred in part by a greater focus around the world on climate change, resource efficiency and green issues in general.
For corporate treasurers, the rise of green and sustainable bonds presents some interesting opportunities. Historically, sustainability has not sat within the domain of treasury – but in the last few years, treasurers have taken on more responsibility at the strategic level. This has included finding ways for their organisations to act responsibly from an environmental, social or governance (ESG) perspective.
In practice, most companies issue debt for investments that are within their growth strategy or needed to finance operations. Where green bonds are concerned, the challenge for treasurers is to understand how this can play to their benefit.
The Rise of Green Financing
by Aila Aho, Head of Sustainable Financing, Nordea, Wholesale Banking
Green motivations mean different things to different people. A professional asset manager, for example, may have a specific green bond fund. The fund may target investors who want to limit or allocate their investment funds to purposes that correspond to their responsibility profile, or that do not carry certain environmental risks. Pension funds, in contrast, have very long-term liabilities and therefore need to consider trends which have a long-term impact on economies, such as climate change.
Signatories to the Principles for Responsible Investment (PRI), a partnership with the UN and investors, integrate sustainability into their asset valuation, thereby contributing to the development of a more sustainable global financial system. These signatories already represent management of over $59tr of global assets.
Meanwhile, impact investors take evaluation to the next level, striving to change the behaviour of their investment targets. This could mean dropping projects that investors claim are a costly and risky use of shareholders’ funds, such as arctic drilling, or better management of environmental risks, i.e., initiate improvements that they believe would increase the long term value of their investment.
While motivations can vary, the common denominator is that all these investors consider environmental issues to be relevant to their asset selection. Indeed, most institutional investors are now seeking both environmental resilience and financial performance in their investments. These are not mutually exclusive goals: good ESG performance may indicate a well-managed company that is less likely to encounter unpleasant surprises. Equally, environmental excellence is no substitute for the requirement to meet financial criteria.