Green ideas: How sustainable finance benefits businesses

November 16, 2022

The past decade has seen enormous growth in sustainable finance. An increasing number of finance executives are starting to consider how it could benefit their businesses.

This article was originally published as part of the 2022 CFO Insights Report from U.S. Bank.

Business demand for sustainable finance is soaring. According to one analysis, the sustainable bonds market hit $1 trillion in 2021 – and bonds are far from the only option on the table. Today, banks can offer businesses greater flexibility and a wider range of sustainable finance possibilities than ever before. Perhaps unsurprisingly, then, a new U.S. Bank survey of 750 U.S.-based finance leaders shows that 84% are open to raising sustainable finance. Yet just 31% have done so in the past three years.

For finance leaders exploring sustainable finance, what do they need to know about the fast-changing landscape, and how can they benefit from the options available? 

How sustainable finance makes economic and ESG sense

For any established company, pivoting to a more sustainable model requires investment. It might involve the refit of energy-inefficient premises, acquiring new machinery that cuts carbon emissions and reduces wastage, or developing new, more sustainable products. 

While specific needs vary between sectors and businesses, some of the drivers for the rise of sustainable finance are felt everywhere. They include fast-rising consumer expectations of sustainability, a factor driving consumer-facing firms to focus on their ESG credentials. Other enterprises are feeling political and regulatory pressure bite, especially as momentum builds on net-zero carbon-emissions targets. Shareholders and investors, current or potential, are also increasingly interested in sustainability.

Raising sustainable finance can be a powerful signal to those stakeholders that the company is committed to improving its sustainability profile. In addition, companies can often benefit from cost advantages compared with traditional finance options. In general, the price can be a couple of basis points lower than traditional finance. That is, in part, the result of banks’ own strategic commitments to sustainability, commitments that are now backed by a range of options to support businesses in delivering the changes they need.

Extending sustainable finance beyond green bonds

Over the past decade, green bonds, issued by banks or other organizations to fund major investment projects, have dominated sustainable finance. These are likely to remain a critical part of the landscape.

 However, for many situations, bonds are not appropriate. Even companies that have benefited from issuing bonds in the past may find new requirements emerging. In addition, companies now have access to a raft of sustainable finance products; these fall into two broad categories.

The first type is defined by rules on the use of proceeds. Companies are obliged to use funds raised on specific eligible investments; that is, on defined sustainability projects.

The second type comprises products structured to include a variable-pricing component, based on whether the borrower hits certain pre-defined KPIs or sustainability performance targets (SPTs). These products offer companies flexibility in how they use the finance raised, while building in a strong price-based incentive to deliver sustainability improvements.

Such SPTs have traditionally been based on levels of greenhouse gas emissions. But today, while emissions targets are still almost always included, more companies are also including KPIs on other ESG commitments. Retailers might target their use of plastic, for example, while manufacturers might focus on employee safety.

Forging ahead on a sustainable path

The emergence of these types of products reflects the recognition by banks that every business needs to create its own unique sustainability pathway. As such, banks are typically highly flexible in working with companies to identify the form of sustainable financing most appropriate for them. 

Nevertheless, banks will sometimes push companies to be more ambitious, for example when agreeing on SPTs. Many targets will be based on companies’ existing commitments, backed by materiality assessments; however, in some instances, they must consider external factors. On greenhouse gas emissions, for instance, the Science Based Targets initiative (SBTi) is urging businesses to align their targets with recommended measures to limit global warming. While recognizing that some industries have more difficulty than others in incorporating radically different standards, lenders are still likely to challenge those that fall short. Lenders may also look at sustainability standards set by industry watchdogs for particular sectors. 

Three steps to sustainable finance

For treasurers or CFOs seeking sustainable finance options in the future, there are three key steps to consider in preparation: 

  1. Develop the company’s finance framework The most important part of preparing to seek sustainable finance is to review the company’s finance framework. Finance leaders need to be realistic in balancing their businesses’ sustainability aspirations with the constraints of their fiduciary responsibilities.
  2. Identify key sustainability metrics For banks, one of the challenges is verifying that finance is being channeled to the sustainability projects for which it is earmarked, and having confidence in the sustainability metrics they have chosen to employ. Universal measurement and reporting practices have yet to be established; while this is happening, companies can put in place robust reporting metrics and processes. Aim to demonstrate three years’ worth of data to build confidence with lenders.
  3. Develop reporting and assurance processes Once robust metrics are established, companies need to assure stakeholders and lenders that they have rigorous reporting of sustainable finance initiatives. Stakeholders of privately owned companies that do not have the same regulatory reporting obligations as publicly owned firms will be particularly insistent on this point. Consider running a mock assurance exercise to build confidence in the data and refine processes, ensuring that your business is in the best possible shape to seek sustainable finance when the time comes.

The sustainable finance market is still in its infancy, but it is maturing fast. It seems likely that the vast majority of U.S. businesses will have incorporated some aspect of sustainability into their financial and banking structures within the next few years. For finance leaders in any sector, there is no better time than now to start laying the groundwork for that shift.
 

We surveyed 750 senior finance leaders to see how they are navigating a new wave of unexpected challenges, including rampant inflation, talent shortages and supply chain bottlenecks. Explore their answers in the 2022 CFO Insights Report from U.S. Bank.

Related content

Increase working capital with Commercial Card Optimization

Modernizing fare payment without leaving any riders behind

4 benefits to paying foreign suppliers in their own currency

3 reasons governments and educational institutions should implement service fees

A simple guide to set up your online ordering restaurant

Tap-to-pay: Modernizing fare payments pays off for transit agencies and riders

Tech tools to keep your restaurant operations running smoothly

The future of financial leadership: More strategy, fewer spreadsheets

The surprising truth about corporate cards

Understanding and preparing for the new payment experience

How Everyday Funding can improve cash flow

Demystifying ISO 20022

4 ways Request for Payments (RfP) changes consumer bill pay

ABCs of APIs: Drive treasury efficiency with real-time connectivity

Access, flexibility and simplicity: How governments can modernize payments to help their citizens

Automate accounts payable to optimize revenue and payments

Automate escheatment for accounts payable to save time and money

Banking connectivity: Helping businesses deliver the easier, faster, more secure customer experience of the future

Cashless business pros and cons: Should you make the switch?

Escheatment resources: Reporting deadlines for all 50 states

Higher education and the cashless society: Latest trends

How to improve digital payments security for your health system

Restaurant surveys show changing customer payment preferences

Innovative payroll solutions may help attract hourly workers

Key considerations for online ordering systems

Payment industry trends that are the future of POS

Take a fresh look: mass transit is going places

Want AP automation to pay both businesses and consumers?

Managing cross-border payments in emerging markets

Role of complementary new channels in your payments strategy

Ways prepaid cards disburse government funds to the unbanked

Real-time payments fuel innovation

Webinar: Approaching international payment strategies in today’s unpredictable markets.

Webinar: CSM corporation re-thinks AP

5 winning strategies for managing liquidity in volatile times

ePOS cash register training tips and tricks

How the next evolution of consumer bill pay makes it easier to do business

Integrated payments healthcare benefits

Leading the way for real-time payments

Managing the rising costs of payment acceptance with service fees

Real-time answers about real-time payments

Safeguarding the payment experience through contactless

Standardizing healthcare payments

COVID-19 safety recommendations: Are you ready to reopen?

Time is money: Intelligent Payment Routing saves businesses both

What corporate treasurers need to know about Virtual Account Management

White Castle optimizes payment transactions

Transition to international ACH

Drive digital transformation with payments innovation

Rent payments: What’s changing for commercial real estate

Unexpected cost savings may be hiding in your payment strategy

Benefits of billing foreign customers in their own currency

Top 3 ways digital payments can transform the patient experience

Hospitals face cybersecurity risks in surprising new ways

Navigate changing consumer behavior with service fees

Creating the ideal patient journey

5 reasons to upgrade B2B payment acceptance methods

3 benefits of integrated payments in healthcare

Addressing financial uncertainty in international business

Webinar: AP automation for commercial real estate

How blockchain technology is changing treasury

Beyond the back office: real-time payments

Crack the SWIFT code for sending international wires

How AI in treasury management is transforming finance

Three healthcare payment trends that will continue to matter in 2022

Making the cross-border payment decision: Wire or international ACH?

3 ways to make practical use of real-time payments

Instant Payments: Accelerating treasury disruption

Can faster payments mean better payments?

Hospitals face cybersecurity risks in surprising new ways

Consolidating payments for healthcare systems

Enhancing the patient experience through people-centered payments

Digital trends poised to reshape hotel payments

Restaurant survey shows changing customer payment preferences

Transition to international ACH

Unexpected cost savings may be hiding in your payment strategy

Colleges respond to student needs by offering digital payments

Luxury jeweler enhances the digital billing and payment customer experience

How Everyday Funding can improve cash flow

Disclosures

Start of disclosure content

Loan approval is subject to credit approval and program guidelines. Not all loan programs are available in all states for all loan amounts. Interest rates and program terms are subject to change without notice. Mortgage, home equity and credit products are offered by U.S. Bank National Association. Deposit products are offered by U.S. Bank National Association. Member FDIC.