The growing importance of ESG in funding decisions

This article was first published in South West Business Insider magazine.

In recent times, we have seen a surge in the significance of environmental, social and governance (ESG) strategies across the business world.

Progress in standardising reporting and measurement is ongoing. Thanks in part to better data, it’s increasingly acknowledged that there is a direct link between a more holistic approach to doing business and enhanced performance.

The benefits for businesses go beyond improving their appeal to customers, suppliers, employees and investors by showing they are making a positive impact on society and the environment. Upping your game in this area is now also crucial when it comes to seeking financial backing.

Lending dialogues

In the course of my work advising businesses on their debt funding options, I have seen how companies’ ESG strategies have become integral to the credit evaluation processes of most lenders.

In the current market, decision making is generally taking longer as caution prevails and more robust diligence and testing are being undertaken. ESG is also featuring more prominently in lending dialogues, as the major banks deploy intelligent tools to equip frontline staff and customers in these areas.

Improving your ESG credentials will only enhance your ability to secure the funding you need at competitive rates.

Most, if not all, lending applications now require a borrower to articulate their ESG strategy. The impact of having such a clear plan can range from reduced borrowing costs to outright rejection without one. For instance, in a recent real estate transaction, major lenders refused to proceed without the client disclosing their ESG efforts, albeit without expecting a fully polished strategy.

Regulation is driving much of this transformation. However, underlying this regulatory push is a fundamental shift in mindset, from seeing ESG practices as simply ‘the right thing to do’ to recognising them as imperative actions. Failure to comply will cost you competitively and reduce potential value.

Lenders are meeting their own ESG objectives through responsible lending practices, ensuring their clients are focusing on sustainability issues, as well as offering tailored financial support for ESG specific initiatives, for example solar panels.

Help is at hand

The longer-term interest rate outlook is favourable and the funding market has much capital to deploy, so businesses should not be deterred from realising their ambitions. Improving your ESG credentials will only enhance your ability to secure the funding you need at competitive rates.

For companies yet to embark on this journey, there are numerous online tools available to help with this. These will guide you through a comprehensive questionnaire, providing a rating based on sector, size and location benchmarks. In addition, they offer helpful recommendations for improvements.

In essence, ESG is not just a passing trend; it’s here to stay. If it is not high up on your company’s agenda yet, the time to start is now, as all stakeholders will demand clarity on your stance in the future. Moreover, you should reciprocate by understanding the principles and strategies of your counterparts. ESG engagement is our collective responsibility.

Find out more about PKF Francis Clark’s award-winning corporate finance team.