Why sustainability needs to diffuse beyond the capital markets
Gearing the financial sector to a sustainable mindset must spread wide and deep, such as how to incentivize ESG concepts into the finance of the all-important supply chain
17 May 2019 | Darryl Yu

The drive to support sustainable practices in everyday processes is gaining momentum as concerns around climate change and the growing inequality across the world deepen. From waste recycling to increased corporate transparency, the sustainability drive is cutting across multiple industries including financial services where ESG (environmental, social and governance) is becoming a hot topic of conversation.

Specifically, financial services help companies seek easier financing options for green or socially beneficial projects. Green bonds (a bond with proceeds earmarked for green projects), for instance, which were a rarity just a decade ago, have grown from strength to strength, breaking out from Europe and becoming a viable financing option for companies in other jurisdictions like those within North America and Asia.

According to Moody’s Investor Service, the total green bond market is expected to raise US$200 billion in 2019, having generated US$167 billion in proceeds a year earlier. Compare these volumes to those in 2013, when the size of the market reached just US$11 billion, a little over 5% of this year's anticipated volumes. Some companies are now looking beyond bonds and are turning to green loans as a viable method for financing their sustainable projects.

Yet despite the green bond achievements over the past decade, this aspect of the sustainability push only represents the tip of the iceberg when it comes to the role of financial services.

Outside of the capital markets numerous companies have taken the initiative to incorporate ESG scoring into their financial supply chain, providing better supplier finance terms to suppliers that meet their standards. One such company is Pimkie, which decided a couple of years ago to develop an internal ESG scoring system for its suppliers, curtailing partnerships with suppliers that failed to reach the standards deemed to fit their sustainable vision.

More recently, Walmart announced that it would provide preferential financing packages to suppliers whose activities support the hypermarket’s sustainability targets. Another company, Tom Tailor, a fashion and lifestyle company, had a similar vision in mind, creating a supplier programme where the discount rate depends on the supplier’s ESG score – thus giving a strong financial incentive for suppliers to improve their ESG standards.

However, unlike sustainability in the capital markets where many analysts believe a common standard could help spur more confidence in issuing green bonds, sustainable financing arrangements in the supply chain have to be tailor-made to the specific needs of the company.

While companies such as Pimkie may draw upon external sources for inspiration concerning exactly what ESG entails, the obligation rests firmly on a particular company as to how best they should evaluate the sustainability standards of the stakeholders they interact with. Only if companies acknowledge this responsibility can this form of financing flourish on a wide scale in the overall push for sustainable solutions.

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