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Driving ESG and Sustainable Finance is core to RMB's solutionist thinking for clients

Nigel Beck

The Future of ESG

While ESG (Environmental, Social, and Corporate Governance) is not a new topic, the very definition and role that ESG plays in the dealmaking environment is shifting. Banks are accustomed to considering ESG criteria in their risk assessments, and institutional investors have incorporated ESG factors as a screening tool. Yet, as sustainability issues assume centre stage globally, so ESG and sustainability considerations are being integrated into companies’ core strategic priorities, with board oversight and C-suite focus.

Gearing up for COP26
The UN Climate Change Conference (COP26) will bring parties together between 31 October and 12 November to accelerate action towards the goals of the Paris Agreement and the UN Framework Convention on Climate Change. In the run up to the event, we at RMB have seen a number of sovereigns, as well as a number of South African companies, making net zero commitments. This includes scope 1, 2 and 3 emissions (with scope 3 capturing indirect emissions like those from the supply chain). So, while many B2B companies may not be feeling the consumer pressure, those in large corporate supply chains are starting to experience increasing pressure from their customers, as well as shareholders and other stakeholders, to align to net zero and, therefore, need to start thinking about their own sustainability strategy and the financial solutions (including advisory and funding) available to support their journey.

The state of the sustainable finance market

Sustainable finance has transitioned to the mainstream. According to data from Bloomberg NEF, the global sustainable finance market (including loans and bonds) was valued at about US$983m YTD (to September 2021), already a 30% increase on 2020, and 73% up on 2020 on an annualised basis. The Sustainable Finance market in South Africa is relatively nascent, with limited issuances in the years up to 2018. The local market has, however, seen an explosion of activity in 2021, both in scale and diversity of issuers and instruments. As at September 2021, loan and bond issuances totalling over R25bn have been concluded in sectors as diverse as SOCs, real estate and healthcare – a three-fold increase on 2020, with close to a quarter of 2021 to go! It has become clear that investors are increasingly willing to support companies with a clear sustainability strategy.

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Transition finance – a trend to note
Transition finance is a new “segment” of sustainable finance that we expect to deliver significant growth in the coming years, providing sustainable funding solutions to traditionally “brown” or fossil fuel intensive companies that have, to date, not materially benefited from the growth in the Sustainable Finance market. Companies that have committed to net zero by 2050 need to start delivering on their strategies to achieve short and medium term goals that demonstrate progress on this commitment, and identify organic and inorganic opportunities to improve their sustainability profile. Transition finance will be an important mechanism to enable them to achieve this. As part of the Paris Agreement of 2015, developed countries pledged to mobilise at least US$100bn a year in climate finance for emerging economies between 2020 and 2025. This funding hasn’t fully materialised. However, in the run up to COP26, several developed countries have reaffirmed or even increased their commitments. We at RMB are hopeful that increasing flows from developed countries to support the “just transition” through transition finance mechanisms will be one of the outcomes of the conference. 

A shift in ESG measurement
Many institutional investors have fully integrated ESG factors into their investment decision-making process, adjusting valuations for those factors that can be quantified, and modifying portfolio construction for more intangible ESG factors. Measurement is growing to encapsulate short, medium and long term targets. Environmental factors can be more easily measured, compared with social factors that are more complex, but increasingly focused on by debt and equity investors alike. While, traditionally, measurement has been used to quantify risk, the industry is fast evolving to a place in which companies with a clear sustainability strategy and a positive environmental and social impact will emerge as leaders. 

 

Important ESG trends
To ensure companies benefit appropriately from their leadership in this space, we believe it is important that they consider some of the following key ESG trends: 

 

  • Expectation that sustainability is core to their overall company strategy, and that ownership of that strategy is driven by the non-executives and executive management team. 

  • Increasing transparency to demonstrate progress on their sustainability journey and the impact that it is expected to have on its broad set of stakeholders.

  • Independent verification of key short, medium and long term key performance indicators (KPIs), with executive remuneration linked to the achievement of these KPIs.

  • Greater standardisation of reporting to enable comparison between companies and across sectors, like reporting aligned to the Taskforce on Climate-Related Financial Disclosure (“TCFD”), with science-based targets.

  • Integration of ESG and sustainability considerations throughout the investment process as a value creation opportunity.

  • Pre-IPO candidates and publicly listed companies providing comprehensive ESG disclosure and adequately addressing ESG risks and opportunities as part of their strategies, to ensure that investors recognise their sustainability credentials, in order to access sustainability-focused investors.

In conclusion, ESG is fast assuming a central role for companies the world over. As regulatory, consumer, stakeholder and investor interest in sustainability intensifies, this is not a trend that companies can ignore.

Beck is Head: Sustainable Finance and ESG Advisory | RMB.