Taking Smaller ESG Steps, Bypassing the Green Bond Road (for Now)

# Capital Markets

# ESG

Options in the ESG financing field range from CP to credit facilities, money-market funds and time deposits.

Not quite ready to issue ESG bonds? Nearly half the assistant treasurers (ATs) in the projects and priorities session of a recent meeting of NeuGroup for Large-Cap Assistant Treasurers cited ESG as a top priority. However, most said their companies were not quite ready to issue an ESG-based bond and expressed interest in various ESG alternatives.

Issuing an ESG bond requires significant legwork and sufficient ESG-qualifying initiatives to warrant the funding.

Banks are providing a variety of alternatives that may pack less punch than a sizable bond offering but nevertheless enable companies to dip their toes in the water.

Green CP. The AT of a major agriculture-related company said Bank of America pitched “green” commercial paper the week before. “We want to do a sizable bond that’s sustainability linked, but we want to let it marinate a bit,” he said. “The CP side was really interesting to me.”

A peer from a healthcare company expressed her interest in the notion, noting that Bank of America, as a relationship bank, would likely pitch her as well on the ESG option.

A different bank offered a member at a tech company green deposit accounts, which the bank would use to fund borrowers’ ESG projects. “Not very yield friendly, and more to check the box,” the member said, adding his company would prefer to pursue a more holistic ESG strategy.

Only upside. A consumer-goods company AT asked if his peer at the healthcare business had looked into sustainability-linked credit facilities. Rather than having to tie the funding specifically to sustainable initiatives, the credit facility and drawn fees are linked to meeting the borrower’s ESG goals.

He added that his firm is in a similar situation, since it does not actually need to raise significant capital, but it does have projects that will require financing.

“The credits are typically structured so that there’s upside when you meet your targets but no downside if you don’t,” he said.

Another member noted that her team is getting up to speed on ESG-linked credits, in preparation for the company’s credit facility that comes up for renewal next year.

Parking cash sustainably. A technology firm AT noted his company’s focus on ESG, actively choosing minority-owned banking partners for stock buybacks and other services. About a year ago, his team began investing cash in ESG money markets.

“We’re not getting much yield anyway, and those funds are quite competitive with non-ESG funds, so we’re not losing anything there,” he said.

SMAs are trickier. The tech-firm AT said his company invests longer term in separately managed accounts (SMAs) and occasionally analyzes the investments through an “ESG lens” to determine whether the holdings are ESG supportive or not.

“One thing we find challenging is there’s no consistent rating or ranking for ESG—whether supportive or non-supportive—so we’re trying to work through that and figure out what we need to think about going forward.”

Bark worse than bite. The AT of a global media company said his company hadn’t seen itself as ready yet for an ESG bond, but when his team dug into the market’s current dynamics that view changed.

“Now we’re going back to a couple of our banks who may lead an ESG offering to ask if they can help us build a good story,” he said.

On the pension side, he said, his team is exploring ESG in the pension scheme along with an asset advisor to determine whether to change some investment policies and views about asset managers.