Sustainability in a post-COVID world

Dec 03, 2020

Louise O’Mara considers how environmental, social and governance issues will impact on corporate decision-making in a post-COVID-19 era.

As focus on climate change continues to grow, there is a greater interest in what part corporates are playing in the fight against climate change. Mindful of this, companies are transitioning their business models towards lower or net zero emission models as an expression of their desire to combat climate change.

Stakeholders accelerating the sustainability agenda

Mindful of the attention given to sustainability, companies are transitioning their business models towards lower or net-zero emission models as an expression of a desire to combat climate change. Asset managers and financial institutions are increasingly supportive of the sustainability transition.

Funds invested in environmental, social and governance (ESG) assets are ballooning – sustainable assets under management have surpassed $30 trillion and could grow to $50 trillion by 2025. Companies are developing robust sustainability strategies so they can access this growing source of capital. In September 2020, AIB tapped this market with a €1 billion green bond. The transaction attracted significant investor interest, with the green format maximising depth of demand.

Net-zero and the supply chain

An increasing number of corporates are setting targets to be net-zero by a specific date. However, not all net-zero targets are created equal. The most challenging and most comprehensive target – Scope 3 – requires a company to achieve net-zero across all elements of its supply chain. In practice, this means that a company will require its suppliers to be net-zero, or it may have to purchase offsets to bridge that gap – at a cost.

Consequently, the supply chain contract might be renegotiated to reflect that cost or the company may move to a different net-zero supplier, avoiding the incremental cost. This is a tangible example of sustainability impacting on cost and pricing strategies. Accordingly, what we are beginning to see (in its early stages, but with rapidly building momentum) is the creation of a ‘net-zero club’ populated by companies that are part of the solution.

Green and sustainability-linked financing

Companies are increasingly linking sustainability key performance indicators (KPIs) to financing, and there is an array of finance options available. The simplest form is a green bond, where the proceeds are directed solely towards eligible green projects. For example, Citi led Ireland’s inaugural green bond in October 2018. The proceeds were allocated to projects that address climate change, clean water, and wastewater treatment.

Sustainability-linked bonds (SLBs) are linked to the sustainability objectives of the issuer. The cost of SLBs can vary depending on whether the company achieves its defined ESG objectives. As such, companies are committing explicitly to future sustainability outcomes and creating a financial incentive to achieve them.

Finally, the ‘greenium’ or green premium refers to the pricing advantage offered to companies using green bonds/SLBs due to a higher degree of demand from investors.

Co-dependency of finance and sustainability

Although we have historically seen sustainability and finance as separate entities, they have often existed in parallel. What is exciting about the ‘net-zero club’ and the ‘greenium’ is that they represent tangible examples of sustainability directly improving margins – sustainability meeting finance in its most fundamental sense. As consumer sentiment continues to shift, we should expect finance and sustainability to walk hand-in-hand in the same direction.

Louise O’Mara is Head of Corporate Bank Ireland at Citi.