BDO’s first Sustainability Networking Forum of the year focused on the topic of sustainable finance, taking into consideration the current prospects on sustainability, national targets, and ultimately the impacts on the company-financier relationship. The conversation focused on the landscape of sustainable investing, how companies can access sustainable markets and funds, and what processes are put in place to identify potential investments, with speakers: Jacques de Haan (Commonwealth Bank), Alexandra Humphrey (Impact Seed) and Nicholas Boyd-Mathews (Eden Asset Management).
According to the International Energy Agency, to reach a net-zero future, globally we need to invest US$5 trillion every year for up to 30 years – the largest reallocation of capital in history. But are the funds available? And if so, who is allocating them and based on what criteria? Our panel investigated how sustainable finance is growing and changing and how companies can position themselves to access this capital.
Too much money, not enough (good) projects
With such an enormous sum of capital to be shifted over the next 30 years, the question must be asked: do we have enough money directed to sustainable ventures? From our panel, a resounding “yes, but”. The ‘but’ indicates the challenges of finding quality projects to invest in, with difficulties in both identifying sustainable businesses and projects as well as evaluating them. Nonetheless, demand for sustainable investments continues to strengthen, underlined by this stark warning from panellist, Nicholas Boyd-Mathews: “I think we will get to a point where if you don't have a sustainability report in all three areas (E, S, G) that you won't be able to attract investment from capital markets”.
Ultimately the message is clear: funds are available for those with progressive and ambitious approaches. In Nicholas’ words, there is “too much money and not enough good projects”. Nicholas also drove home the challenge of matching projects up with the right funders explaining that ESG fund managers are still facing the challenge of understanding the good, the bad, and the great in the context of environmental, social and governance (ESG) matters. This remains the challenge: how do we make financing decisions on such complex things as environmental impact between vastly different companies?
A new approach to financing
To understand how decisions are made when financing ‘sustainably’, it’s helpful to understand why this investment is occurring at all. While we know that funds are required to achieve net zero, the motivators to do so can be less clear. At the moment, drive sits firmly on the side of the investors and lenders, with some of this reallocation being driven through private equity and conscientious investing but a large portion being moved through risk management. Financiers have wised up to both the potential impacts of climate change and the reputational risk of investing in and lending to the wrong projects. This risk only continues to grow as the public becomes more educated about climate change, the environment, and ethical business practices. As the reputational risks for both investment funds and banks grow, our panel agrees: when investing in a new venture, transparency is critical.
When trying to identify potential investments, there isn’t currently a standardised process or baseline to assess a company’s ESG credentials. While the number of rating agencies has exploded over the last five years, the panel all point to a severe lack of consistency between rating agencies. Depending on the criteria, any company may be considered excellent on one rating platform and terrible on another. This is because of the intricacy of comparing complex environmental and social topics between vastly different operations, not to mention comparing positive and negative impacts. This leaves investment managers with varying levels of detailed knowledge to undertake their own ESG assessments of each potential investment – a complex proposition.
Our panellists each explained their own approach, with the resounding agreement that ratings have little to do with the decisions made at the end of the day. Instead, a qualitative approach that assesses the company’s drive for genuine improvement has been the focus, which means financiers are now becoming closer to business partners than ever before, working closely with companies and projects to understand their approach and define improvement and sustainability for them. Panellist Jacque De Haan from Commonwealth Bank underlined this, indicating that they are working with their clients closely to understand their sustainability strategies and what ‘sustainability ambition’ means for them.
Historically, the relationship between a lender and a company has been limited to Know Your Client information requests and has been primarily focused on the loan and use of funds. This new age of sustainable finance heralds a fundamental shift in that relationship in the future.
The bottom line
In such a complex space, it can be difficult to understand where to direct your efforts. Our key takeaways are:
- First in best dressed – smaller companies should start understanding their key environmental and social risks and impacts now to avoid missing out on competitive finance in the future
- Prepare for a higher level of transparency in your reporting and a higher level of engagement from your lenders and investors on sustainability issues.
Find out more
We host Sustainability Networking Forum events quarterly - find out what’s coming up.
Our National Sustainability Services team has extensive experience in sustainability across Australia. Contact us to find out how we can assist your business on your sustainability journey.
Thanks to our panellists
- Jacques de Haan - Director, Sustainable Finance, Commonwealth Bank
- Alexandra Humphrey - Head of Impact Finance, Impact Seed
- Nicholas Boyd-Mathews - Chief Investment Officer, Eden Asset Management
- Catherine Bell - Principal, Sustainability, BDO (Panel chair)