Five industry experts discuss the future of the fund finance market in the age of ESG and economic turbulence.
Bradley Davidson, ESG lead, RBS International
Jamie Mehmood, head of fund finance advisory, Deloitte
Sarah Lobbardi, founder, Avardi Partners
Bronwen Jones, fund finance partner, Reed Smith
Shelley Morrison, head of fund finance, abrdn
Funds Europe – How do you see ESG in fund financing developing? In particular, do you expect growth in hard metrics for environmental targets and/or a greater focus on the social and governance dimensions?
Bradley Davidson, RBS International – Some funds have had ESG strategies for years, but current market dynamics show that a robust response to environmental and social factors is becoming a prerequisite for any fund to remain competitive.
As funds develop and implement their strategies, there’s an increasing number of customers looking to link ESG KPIs to their financing or to attract cheaper cost of funding if they’re investing in specific green assets or projects. I expect sustainable finance structures will be commonplace in the short term as managers look to evidence the benefits of their ESG approach.
Over time, I wonder whether there will be a place for sustainable finance as we see it today because if we think more broadly about what the market is trying to do and where we are shifting to, the end goal is to deliver a truly sustainable economy. Therefore, long-term, sustainable finance should just be finance.
In the interim, what’s going to drive that change is that lenders, us included, set ambitious climate targets and allocate capital towards decarbonisation. Climate and carbon emissions are the focus of the market right now.
As lenders set their own targets, they’ll be assessing their customers’ climate credentials.
So, even if you aren’t applying for a specific sustainability-linked or green loan, you are going to be assessed based on your climate impact and how you’re accounting for climate risk. Increasingly, those assessments will be quantitative.
There’s been a rise in ESG assets globally – roughly a 150% increase over the last decade. So, we’re at a crossroads now where we’re considering a double materiality.
The question is not just: ‘Are you accounting for ESG or climate risk?’ It’s also: ‘What will the impact of the decisions you make have on the outside world?’
“In the interim, what’s going to drive that change is that lenders set ambitious targets and allocate capital towards decarbonisation.”
People sometimes conflate the two, which can lead to confusion. There are those taking the approach that ESG is a risk management technique, and lenders will ask for that information to understand the financial impacts of ESG risks.
But on the other side, you’ll see more of those hard targets and those stretching goals where the fund is saying, ‘Here’s what we’re going to achieve across environmental and social development.’ This approach may appeal to investors and other capital providers aligning their portfolios with broader societal requirements.
Ultimately, if you are not accounting for ESG risk at all, your cost of capital will go up as we’d expect to see for lack of risk management across any stripe.
Jamie Mehmood, Deloitte – The change in the adoption of ESG linkage in fund finance is being driven by a societal shift. Even three to five years ago, most managers had an ESG department and a stated position on ESG. But we’re on a journey, and now it’s about embedding ESG, so it becomes mainstream and part of every decision.
From a finance perspective, ESG metrics are evolving, but there’s also a broader piece, which is about societal change and expectations from the consumer. The consumer will drive the expectations of the investor, which in turn drives the expectations of the manager, and that then drives the expectations of the financing. It goes all the way through that chain.