BEST PRACTICE SUSTAINABLE TREASURY: A STRATEGIC APPROACH 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 G ESG iven 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 UKs 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 UKs 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 familys 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, were 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 werent 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 Banks experience. Ultimately, we 42 ISSUE 1 2023 treasurers.org/thetreasurer TT ISSUE 1 23 pp42-43 Lloyds.indd 42 23/02/2023 13:23