Getting closer to clients with sustainable finance

Creating a sustainable global economy will require trillions of dollars in investment, and financial institutions face political and societal pressure to direct capital flows to the cause.

The sector has responded with commitments such as the Glasgow Financial Alliance for Net Zero (GFANZ), launched at COP26 in 2021, in which institutions representing $130tn in assets pledged to “accelerate the decarbonisation of the economy”.

These commitments have materially transformed the market for sustainable finance, says Marco DeBenedictis, Head of Structuring and Sustainable Lending at Barclays Investment Bank. They have increased the supply of financing and intensified competition between banks to fund sustainable businesses and projects.

“If there's healthy competition, you've got more data points, more potential transactions, more projects coming online and more capital flowing,” he explains. “Projects that were previously unviable are now becoming viable because of regulatory and government activity, increasing competitive tension on the banks' side.”

In other words, DeBenedictis says, market forces have given rise to commercial opportunities.

When we surveyed executives at financial institutions last year, the majority (67%) identified pressure from external stakeholders as the primary driver of their sustainability initiatives. But 56% prioritise areas “which present the greatest opportunities for profit and growth”.

This includes the opportunity to deepen relationships with clients by helping them to meet their sustainability targets. In this way, a portfolio of sustainable finance products, brought to market with a robust, high-integrity approach, can help institutions win the trust and loyalty of their customers.

Strengthening client relationships with sustainable finance

Sonali Siriwardena, Global Head of ESG at Simmons, says: “Over the recent years, we have continued advising our financial institution clients on the usual green and sustainability-linked products, from loans and bonds to trade finance and liquidity solutions. This allows them to provide clients with familiar products, but with a sustainability angle.”

"In Europe, between 30% and 50% of our clients are looking for a sustainability-linked product. In the UK, it's about 20% to 25% of the market." says DeBenedictis.

Demand has grown quickly in Europe and the UK. “In Europe, between 30% and 50% of our clients are looking for a sustainability-linked product. In the UK, it's about 20% to 25% of the market,” says DeBenedictis. He sees this as an opportunity to “build stronger relationships with corporate clients”.

Siriwardena adds: ”More recently, we've seen an appetite from our clients to get involved in more innovative transactions such as blue bonds and debt-for-nature swaps. As this is still new to the markets, the road is not straightforward. It’s rewarding to identify the right stakeholders to launch these products and to work hand in hand with our clients to define the scope of credible sustainable blue transactions, ensuring the products meet all legal requirements while satisfying market demands.”

Among the financial institution executives we surveyed, ‘entering new markets’ is the top priority for their sustainability initiatives: 57% rank it in their top five priorities, compared with an average of 48% across sectors.

Some geographic markets are ready for an expansion of sustainable finance, says DeBenedictis. “The whole Middle East market has been agitated by a focus on sustainability,” he explains.

Siriwardena agrees: “There is a recent but strong surge in interest in sustainable finance in the Middle East, likely accelerated by COP28 held in Dubai last year. This wave of enthusiasm has already led to major deals, including the recent issuance of the first Sustainability Sukuk by Emirates Islamic, listed on Nasdaq Dubai.

“We are also observing significant developments in Asia, with several local regulators introducing sustainability guidelines and frameworks,” she adds. “Financial institutions are reaching out to us, looking to navigate these emerging regulations and capitalise on the opportunities they present.”

From Barclays’ perspective, the bank’s primary objective is to use sustainable finance products to bolster its offer to existing markets. “Our strategy is to be a large transatlantic corporate and investment bank, plus a retail bank in some markets,” DeBenedictis says. “Sustainability is a way of enriching that strategy and making it more robust.”

Growing the sustainability opportunity with robust products

Financial institutions’ greatest concern, when it comes to sustainability, is the risk of breaking the rules: in our survey 55% rank this in their top five worries in line with the cross-sector average. They are especially aware of the harm this could do to their reputation, with 66% agreeing that the reputational risk outweighs the risk of legal penalties.

“At a product level, the key is to ensure that we're working with the right parties,” says DeBenedictis. The bank not only works with lawyers but also works closely with regulators around the world to ensure its products are aligned with market standards and principles.

This is not just to minimise risk but also maximise opportunity, he adds. “The most important thing for this market, especially for corporate, sustainability-linked offerings, is trust. Having a robust product helps us grow the market, and benefits everyone.”

For individual transactions, the bank employs a thorough ‘check and challenge’ process, DeBenedictis says, with enhanced due-diligence requirements for certain sectors.

"COVID taught us the importance of having robust supply chains. So we look at what kind of due diligence clients are doing around their supply chain, such as whether they score their suppliers for sustainability.” explains DeBenedictis.

Supply chains are an area of particular scrutiny. “COVID taught us the importance of having robust supply chains,” DeBenedictis says. “So we look at what kind of due diligence clients are doing around their supply chain, such as whether they score their suppliers for sustainability.”

Siriwardena emphasises that “even if it may sound unusual, financial institutions are exposed to supply chain and human rights risks”.

He adds: “These risks should not be underestimated, as they can have significant implications for both the institutions and their clients. It is crucial to ensure that there are appropriate governance measures in place to mitigate these risks effectively.”

How third parties can help financial institutions

So far, innovation in sustainable finance has been led by the front office, DeBenedictis says. Ensuring effective governance requires constant education and collaboration with compliance and legal teams.

“We have management teams and forums that walk our compliance and legal partners through [new developments] all the time,” he says. “That relationship is the most important thing.”

External parties also play a role in building an institution’s sustainability know-how and capabilities. “I think there is more education that can be done, not just about the risks but the opportunities as well, through a third party such as a law firm offering training sessions and sharing best practice,” DeBenedictis says. “Law firms are adding to the finance ecosystem in that way.”

Simmons & Simmons, for example, offers comprehensive ESG services to financial institutions by providing training on emerging sustainable finance trends such as debt-for-nature swaps and blended finance, as well as advisory services on ESG risk management and regulatory compliance. Through the firm’s ESG regulatory, transactional and risk management offering, it helps empower in-house legal teams to be effective partners to their business colleagues in seizing the opportunities in sustainability.