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We’re seeing an increase in the number of companies using short-term ESG financing solutions. But why?
“Teach a man to fish and you feed him for a lifetime” is a well-established dictum. Yet, what if the man is hungry right now?
In the past, short-term ESG product solutions carried a degree of contempt: “What’s the point in green features if you’re getting your money back in a few months?” would have been a typical comment. The prevailing belief was that only longer-term financing instruments were appropriate to finance common sustainability goals.
In recent months, however, we’ve seen a proliferation of short-term ESG financing solutions and structures. There are several drivers behind this trend:
- Survival: What use is a 2050 plan if you can’t make it through 2020? The coronavirus economic shock has reinforced the importance of the narrowest interpretation of sustainability: financial sustainability. Hence we’ve seen dedicated short-term lending facilities set-up by various financial agencies, and indeed the first coronavirus early- repayment clause in a bond that anticipates access to such support.
- Cost-efficient financing mix: A 100% bond-financed transition plan is arguably unnecessarily costly. Treasurers have therefore started exploring ways of aligning their commercial paper programme with their sustainability objectives. We’re currently in discussions with clients around various green and Sustainable Development Goals (SDG)-oriented Commercial Paper (CP) products.
- Flexible funding: Companies want to be able to respond quickly to a continuously developing marketplace impacting their sustainability products and services. Short-term debt, such as CPs and loans, can often be rapidly drawn (in response to new investment and acquisition opportunities) and repaid (as a result of disposals or higher than expected product returns).
- Investment constraints: Many ethical-oriented investors are also facing relatively restrictive investment criteria, which prevents them from taking the market risk inherent in longer-dated securities. This is one of the reasons why NatWest Markets introduced ESG Deposits last year – to offer a short-term ESG-friendly alternative to these accounts.
So, while a long-term mindset amongst market participants is essential, do not discount ‘myopia’: Short-term funding products are additive and part of the solution.