How green funding can support your ESG agenda

We’re in a new corporate age: one in which companies are expected to do right by the full range of economic and social stakeholders. As a result, the environmental, social, and governance, or ESG, agenda has assumed a new prominence in boardrooms.

Organizations will have different priorities when it comes to tackling the agenda, of course. Large food retailers, with their reliance on plastic packaging that has a way of ending up in our oceans, might be especially concerned with the environmental component, while manufacturers with workforces in developing countries might concentrate more on the social component, and so on.

Whatever the differences, carbon neutrality is the common underlying commitment that many enterprises and governments are now making. These organizations now recognize that they have responsibilities to more than just their shareholders and their bottom lines.

Why has this new ethic spread so fast? Part of the reason is because good ESG practices are good business. Energy-efficient operations quite often prove to be cash positive, which means that a company’s annual savings may exceed the service fee incurred by adopting more efficient solutions. Additionally, customers in the developed world increasingly consider the size of a corporation’s carbon footprint as a factor in their purchasing decisions.

Raising money the ESG way

In this new environment, even raising capital has taken on a distinctly green color.

Witness the rise of green bonds, offered by green investment funds and other investment bodies. The World Bank issued the first such bonds in 2009, and they have gained popularity over the last five years. Green bonds, $157 billion worth of which were issued in 2019, raise money earmarked for green projects, whether in renewable energy, pollution prevention, biodiversity preservation, transportation, or anything else. What makes them attractive for issuers is the tax incentives they bring.

Green loans support the same sorts of green projects their bond cousins do. Borrowers benefit from interest rates that might fall as green projects are implemented and sustainability goals are met.

Then there are sustainability-linked bonds and sustainability-linked loans. Capital raised using these instruments isn’t as narrowly targeted as the proceeds of green loans and green bonds are. That characteristic makes them better for organizations that want more leeway in what they do with their money—so long as that money works toward sustainability-related goals in a general way.

Finally, there are sustainability—as opposed to sustainability-linked—loans and bonds. These finance projects with a mixture of environmental and social goals.

Meeting the new benchmarks

Success with debt instruments like these can do wonders for a company, even beyond the benefits associated with the particular debt instrument itself.

For example, it can translate into higher company sustainability ratings from ratings firms. That high rating will in turn attract investment, whether from big institutions or from private investors who are increasingly interested in “investing their values.” In fact, research indicates that 85% of retail investors are intrigued by sustainable investing. In a great example of a virtuous circle, a higher sustainability rating will make it easier for a company to borrow money or issue debt on a green basis in the future.

There are other ways to boost a sustainability rating. As documented in the corporate social responsibility reports that have become standard annual publications in the business world, companies are cutting carbon emissions, teaming up to remove plastic from ocean waters, working to improve work conditions, boosting transparency along their supply chains, tackling representation and inclusion issues, helping reduce the carbon footprints of their commuting employees, offering sustainable choices in their on-site dining options, and so on down an increasingly long line.

They’re also investing in smart technologies that make their operations and facilities greener, more efficient, and more comfortable for employees.