The global financial industry may be responsible for negligible direct carbon emissions, but self-reported data from insurers, banks, and global asset managers has brought a grim reality to light. As per recent CDP reports, the finance sector’s ‘funded’ emissions exceed its direct emissions by over 700 times- indicating that lending, insurance underwriting, and investment portfolios need to be more mindful of the businesses and enterprises they support.

The need of the hour is a new ESG-oriented credit appraisal process that rewards enterprises with proven ESG performance. On the flip side, this could make it harder for enterprises that do not prioritize sustainable goals or engage in ESG reporting to obtain financing for new projects.

The traditional credit appraisal process
Conventional credit appraisal of borrowing enterprises typically evaluates specific financial metrics (like profitability, revenue growth, debt repayment capacity, EBITDA, and debt-to-equity ratio) and non-financial parameters (like the enterprise’s business, its place within the industry, and its internal management).

ESG and the credit appraisal process
With internal and external stakeholders now focusing on sustainability, credit appraisal agencies, lenders, and underwriters are incorporating ESG factors systematically and strategically in the capital lending process, to address significant market and idiosyncratic risks in the debt markets.

In this regard, the UN-PRI (Principles for Responsible Investment) is a particularly relevant network. Established as a network of investors and financial institutions who work together to incorporate ESG factors into lending and investment decision-making, the UN-PRI is leading the change towards more sustainable corporate lending practices. The network defines six principles for responsible investment and acts in the long-term interests of the financial markets, global economies, and the overall environment.

Initiatives like the UN-PRI are encouraging capital providers to inquire about the financial materiality of the borrower’s ESG efforts, look at how procurement, manufacturing, and delivery processes can be decarbonized, and assess whether the borrower’s business model has been adapted to keep pace with competitors.

ESG overlay on the conventional credit appraisal process

Source: https://www.deloitte.com/global/en/services/risk-advisory/blogs/the-role-of-esg-in-the-credit-appraisal-process.html

Instead of a complete overhaul of existing credit appraisal processes, capital providers can overlay ESG criteria within the current system. The upgraded scorecard that lenders use to assess borrowers could include various quantitative and qualitative ESG metrics to calculate environmental, social, and governance scores and evaluate an enterprise’s eligibility for capital or other financial support.

Benefits of ESG compliance for borrowing enterprises
Enterprises, across industries, at some point in their growth story, require additional capital to pursue their business targets. Modern lending criteria are likely to continue including ESG compliance in their decision-making and fund allocations, which can give enterprises a stronger stand in consideration of lending.

Enterprises seeking capital can benefit from complying with local ESG norms, implementing enterprise-wide ESG initiatives, and reporting these practices publicly.

6 ways in which Treeni can help your organization create value via ESG reporting
ESG reporting can be a crucial element in increasing your capital lending score and making you a preferred borrower for capital providers. Treeni’s comprehensive ESG reporting solutions give your enterprise the competitive edge it needs to create value over the long term and increase the chances of obtaining capital funding when required. Here’s how.

• Top-line growth
  ESG compliance and reporting strengthen your enterprise’s ESG proposition, thereby attracting B2B and B2C stakeholders who prioritize sustainability. This, in turn, can strengthen your brand’s image and network within the community, lead to top-line growth, and be instrumental in obtaining better access to resources.

• Cost reductions
  ESG compliance paves the way to having more clarity into business operations, tracking waste, and enabling decision makers to implement measures for better usage of resources. It can also lead to adopting environment-friendly options like energy consumption, which surely leads to opportunities for cost reductions.

• Regulatory and legal value-adds
  With SaaS-led platforms like Treeni’s Resustain™, an organization can set specific goals and be more compliant. Clear reporting and improved awareness of being a responsible business can in turn lead to seeking and getting special benefits like government subsidies for ESG initiatives and even other schemes through which the government intends to support and encourage businesses in a sustainability-driven economy. Such grants or validations can improve the enterprise's credibility score for the lending assessment.

• Productivity boost
  With heightened awareness in society, companies that take ESG measures and are compliant and transparent attract better reputations and talent. With Treeni’s end-to-end reporting solutions, enterprises can set defined goals to enable and measure employee motivation and talent attraction.

• Investment and asset optimisation
  ESG initiatives can improve the enterprise’s ROI by facilitating meaningful long-term capital allocation. Further transparency about such initiatives in the ESG reporting acts as a confirmation of the organization’s commitment to ESG goals. Such actions and declarations can help the organization hold itself accountable and offer real assurance to the lenders of its commitment to ESG goals.

• Supply Chain Sustainability
  Treeni’s resustain(™) provides the ability to manage supply chain sustainability, including scope 3 emissions. This ensures that enterprises emphasize the importance of supply chain sustainability and the need for a complete view of the value chain in their ESG risk and performance management, which creates a competitive advantage and provides investors with a more compelling reason to invest in the company.

Conclusion
ESG is rapidly moving from voluntary reporting to a compliance concern, and it will be crucial to how capital providers perceive an organization. Enterprises that are slow to address ESG requirements and take the measures necessary to become ESG compliant will find it increasingly difficult to access capital easily.
However, with Treeni’s resustain™ Enterprise, a SaaS-based ESG reporting platform, you can ensure that critical stakeholders like investors, lenders, and customers remain aware of your enterprise’s ESG initiatives and the measures you are taking to make a strong case for capital lending and enable business growth.

Ask for a resustain™ SMB demo

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