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BOARD MEMO 2021

Sustainable financing – a win-win?

Sarah Solum

Sarah
Solum

Managing Partner, Silicon Valley

Pamela Marcogliese

Pamela
Marcogliese

Partner, New York

Green bonds and similar variations including social bonds, sustainability bonds and transition bonds, are debt instruments whose use of proceeds are earmarked to fund sustainability-related projects. Because there is no widely-accepted definition of sustainability, or even of ESG (environmental, social and governance), issuers have wide latitude when deploying the proceeds from these financings.

Recent examples have included energy efficiency and clean energy projects, investments in green buildings and clean transportation, circular economy initiatives, affordable housing projects, a commitment to racial equity and, in light of the pandemic, support for small businesses and COVID-19 recovery. As part of the financing process, issuers commit to publishing a report on the allocation of proceeds, typically accompanied by an independent third-party assessment confirming this allocation of proceeds and the compatibility of chosen projects with investment eligibility criteria.

Green bonds are having their moment right now. Reportedly, not only are they often oversubscribed by investors, but they also tend to lead to more favorable pricing terms for issuers compared to their non-green equivalents. In many ways this is not surprising; for years we have seen investors’ focus on, and appetite for, ESG increase. For example, money continues to shift from actively managed funds to passive-strategy funds (including index funds such as BlackRock, State Street and Vanguard) who have been at the forefront of the push toward better corporate ESG practices. Similarly, demand for impact investing is robust, standing at an estimated half a trillion dollars for 2019. It is not surprising, therefore, that companies benefit by attracting these ESG-focused investors.

But this trend is not only confined to green bonds; in fact, similar dynamics are also present in the equity markets. In particular, we have seen strong demand from impact investors in the IPOs of mission-driven companies including, in 2020, the IPOs of two “public benefit corporations”. Conversations with investment bankers on this topic have indicated that companies with better ESG profiles and track records tend to have equity (and debt) that trades more favorably than companies with poorer performance.

Therefore, whether it be the issuance of green or other sustainable bonds, conversion to public benefit corporation, or simply an increased focus on ESG performance, as companies evaluate the relative benefits of their sustainability social initiatives (many of which are highlighted throughout this publication), boards and management should not overlook the potentially favorable financial impact of these commitments, too.