ESG is often no longer the first question asked by banks and investors in financing discussions with companies as attention shifts to old-fashioned questions of how much money companies make and how they do so.
The issue of returns has come back to the forefront in a difficult year that has seen interest rates rising and inflation peaking. It also comes as financiers start to dig into companies' energy transition plans and calculate the cost of decarbonisation as the economics of ESG come under increasing scrutiny.
"In my view, the ESG discussion is maturing. The conversation has moved on. Investors are now back to the nuts and bolts of what companies have understood drives investors," said Brendan Moran, senior banker for energy and natural resources at Societe Generale.
"ESG is still a very important factor, but it doesn't always lead the conversation as it did 12–18 months ago. It's back to fundamental basics like 'talk to me about your cashflow and dividend policy and also I'd like to understand a bit more about your sustainability journey'."
This new realism is also being driven by US investors who are under pressure to justify sustainable investments by the vocal anti-ESG lobby in the US.
Market conditions have clearly played a big part in the changing narrative. Some companies have put plans on hold to issue in ESG formats due to market volatility, particularly debut issuers, but ESG remains a major consideration for both labelled and conventional issuance.
"This year certain companies have absolutely had less of a focus on ESG as they've been battling other challenges. It doesn't mean that sustainability has dropped off their agenda," said Hannah Simons, head of sustainability at Lloyds Bank Corporate Markets.
But even if priorities have changed, ESG considerations are still key to financing conversations. “ESG is so much embedded now that it is ‘business as usual’. More and more – in particular in the investment-grade world – we see ESG analysts in the same room with credit and portfolio analysts trying to assess the evolution profile of a company, its targets and capex plan,” said Franck Rizzoli, head of ESG financing advisory at BNP Paribas.
And even if day-to-day financing discussions no longer begin with a conversation about ESG, companies' transition strategies remain a core issue for C-suite executives.
Rizzoli said he is talking to investor relations officials, CFOs and CEOs about the impact of ESG targets on their businesses. Atul Sodhi, global head of debt capital markets at Credit Agricole, is having similar conversations.
"There is no doubt that ESG is a key topic and will remain a key topic. ESG has become more strategic and is engaging the attention of boards, CEOs and CFOs," Sodhi said.
This is also having an impact on banks with still more ESG teams being established to advise issuers on ESG-labelled and conventional debt, which is blurring the lines as sustainability becomes enmeshed in corporate strategy.
For example, German carmaker BMW opted not to issue in ESG format in June when it agreed an €8bn syndicated revolving credit facility but presented its strategic focus on sustainability as part of the syndication process, including a sustainability fact sheet and questionnaire.
“ESG is fully embedded and in particular for conventional deals, ESG is an assessment that you need to pass,” Rizzoli said.
Some of the market's more forward-thinking companies are already pricing their transition plans. For example, Italian utility Enel on November 22 presented its 2024–26 strategic plan which mapped out its total gross capex of €35.8bn in the next three years through higher investment in grids and a "less capital intensive and less risky" approach to renewables.
Around €18.6bn of gross capex will be devoted to transmission, approximately €12.1bn will be for renewables, about €3bn will be for the customer business which, with European grants of €3.5bn and €6.1bn of partnerships in renewable projects, will bring net capex spending to around €26.2bn, Enel said.
Enel also confirmed its target to close all its remaining coal plants by 2027 and its ambition to reach zero emissions across all scopes by 2040. The company, a pioneer in sustainability-linked debt, said it expects sustainable finance to reach around 70% of total gross debt by 2026.
"The really hard mileage comes from phase two of ESG. For companies that is how they are going to deliver on the ambitious statements that they've made and that's where I think the conversation is moving on to now," said Simons.
Moran agrees. "The costs of decarbonisation can be real and there is by nature a lot more scrutiny on this at the moment. In my view the decarbonisation journey was not always going to be smooth and linear. It's going to go through these ups and downs because of the broader economic backdrop," he said.