Historically, sustainability and finance have been siloed within many companies, but that division is fast disappearing, according to Emily Martin and Kingstun Nelson from Lloyds Bank.
Given double-digit inflation, rising interest rates, volatile FX markets, and an uncertain economic outlook, corporate treasurers have their hands full. Despite this, sustainability is certain to assume greater importance in 2023, as companies increasingly incorporate environmental, social and governance (ESG) objectives into their business strategy and treasury practices. To do so, sustainability and finance functions are collaborating as never before to take advantage of newly emerging financing opportunities.
ADDING VALUE FOR THE NEXT GENERATION
When it comes to sustainability, the construction sector faces challenges, concedes Bekir Andrews, environmental sustainability director at Wates Group. “The sector produces about 25% of the UK’s carbon emissions, or 40% when transport-related emissions are included,” he says. “Construction is also one of the largest consumers of raw materials and produces about 30% of the UK’s waste. Inevitably, we also encroach on nature. However, construction is a huge employer, builds assets that people need, such as housing, hospitals and schools, and has an important role to play in improving sustainability.”
Wates Group, which employs around 3,800 people, was established in 1897 and remains family-owned. As a privately held company, Wates is not subject to the same ESG reporting requirements as listed companies. “But the family’s goal has always been to pass on a better business to the next generation, and we believe that ESG is key to that. Moreover, by being at the forefront of ESG, we are able to attract and retain talent – and win more contracts,” says Andrews.
In 2020, Wates announced its 2025 sustainability targets for waste, carbon and the natural environment. And in 2021, its annual report identified the risks and opportunities presented by climate change under the Taskforce on Climate-Related Financial Disclosures (TCFD) framework – ahead of any legal requirement to do so. But as the environmental agenda has accelerated, Wates decided to more fully integrate its sustainability and financing strategy. “It became clear that a sustainability-linked loan (SLL), with margin discounts linked to ESG key performance indicators (KPIs), was the next step,” says Andrews.
Putting together an SLL was a steep learning curve, notes Arijana Vanstone, corporate finance and reorganisation lead at Wates. “Obviously, we’re familiar with the revolving credit facility (RCF) process but the SLL component, including the legal documentation, was unexplored territory,” she notes. “To compound the challenge, we were working to a very tight deadline given that we had an impending statutory audit. Choosing a bank with SLL experience – Lloyds Bank acted as the sole ESG coordinator – was critical to understanding the process and working at pace.”
CHOOSING THE RIGHT KPIS
Wates realised early on that it needed to set KPIs for its SLL that, while aligning with its existing strategy, stretched the business. “They had to be beyond business-as-usual,” says Andrews. Vanstone notes that the decision on which KPIs to choose was also partly motivated by practical implications: “If the KPIs weren’t ambitious enough, there was a risk that the lenders could turn down the proposal and we would have to find another KPI. At the same time, the KPIs also needed to be achievable. It required a lot of homework.”
In selecting its KPIs, Wates’ sustainability and finance functions worked closely together, engaging stakeholders across the organisation and drawing on Lloyds Bank’s experience. “Ultimately, we made choices that are material to the future of the business,” explains Andrews.
Wates’ first KPI seeks to reduce supply chain carbon emissions – which are part of Scope 3 emissions – by requiring 35% of its top 200 suppliers to introduce Science Based Target Initiative (SBTi) approved targets by December 2024. “While in some other sectors much of the focus is on Scope 1 and 2 emissions, Scope 3 is critical in construction: they represent 98% of our total emissions,” says Andrews. “But while suppliers’ emissions are key, many don’t account for carbon or haven’t set targets. Influencing the supply chain was therefore a priority,” adds Andrews.
Wates is working with the Supply Chain Sustainability School (jointly funded by various partners across a variety of market groups including tier one construction contractors) to provide suppliers with a variety of free tools and webinars to improve awareness. “These tools are especially important for SMEs. They don’t have the reporting requirements of PLCs and find it harder to navigate ESG issues,” says Andrews.
Most large organisations initially use an environmental economic input output model – an approved methodology under the GHG protocol – to calculate their Scope 3 supply chain data. Under the SBTi, companies have five years to switch to using actual carbon data for their carbon reduction targets rather than data derived from spend information. It is therefore essential that organisations have a strategy in place for capturing their Scope 3 data. “The KPI in our SLL is effectively an intermediate step to ensure our suppliers are ready to track their emissions by that time,” says Andrews.
Wates’ second KPI aims to create nearly £370m of social value over the next three years in the communities where it operates via apprenticeship schemes, volunteering work and other metrics that are part of the Themes, Outcomes and Measures (TOMs) framework for measuring and reporting social value, which attributes a cash value to each metric. “The social value target we chose was considerably higher than we would have otherwise generated,” says Andrews. “That’s the point.” Wates’ third KPI – to improve the number of women in senior leadership positions – was also about stretching the company to go beyond existing diversity targets.
THINKING BEYOND THE SLL
Having chosen the KPIs for its £90m three-year SLL and developed its proposal, Wates then presented to the three-bank syndicate, led by Lloyds Bank. “The Q&A was arguably the trickiest part of the process,” says Vanstone. “Preparing for it takes time, energy and efort, which is why KPI selection must be the outcome of a process of genuine engagement across the company.”
Vanstone says that deciding to pursue an SLL must be part of a broader commitment to sustainability. “Sustainability has to be part of everything you do if it is going to make a difference,” she says. “At Wates, our strategic growth is targeted towards segments that align with our agenda, and sustainability informs how we structure our balance sheet, approach M&A activity or allocate funds within treasury. There are challenges to prioritising sustainability, not least because of diverse regulatory standards around the world. And compliance can be onerous, especially for small teams. But the rewards are considerable, for the company, its suppliers, society and the planet.”
WATES’ TOP SLL TIPS:
- Consider your business and corporate finance priorities, so that ESG KPIs align with the company’s broader strategic direction.
- Consult widely with internal stakeholders, including top management and the board, to identify simple and relevant KPIs, and ensure the entire organisation is engaged.
- Appoint assurance providers early, so that both the costs and data requirements for KPIs are clear.
- Implement appropriate systems to capture data that is reliable and transparent, and straightforward to collate and audit.
- Develop strong partnerships with SLL syndicate banks to ensure that KPIs match the expectations of banks providing the facility.
If you would like to watch the full panel discussion, please visit: Sustainable Treasury | Sustainability | Lloyds Bank Business.
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