Cash prevails while sustainability-linked finance continues to fall in treasury agenda

• Corporate treasury continues to become ever more adept at responding to unpredictable macro-economic and political events, taking pre-emptive steps both to debt raising to capitalise on optimal conditions but also supporting their businesses across all treasury activities and markets.
• Despite a sense of fewer concerns of a lack of access to debt and a perceived lower risk of financial distress, preserving cash as a buffer for the unexpected or to deploy when investment conditions improve is a key focus of the treasury community. 
• For many, sustainability linked finance continues to fall considerably down the treasury agenda from its peak in 2021/2022, although those who already have it in place look likely to continue to do so.

Kristen Roberts, head of the UK Corporate Debt Practice, said: "Corporate treasury teams continue to develop new ways of dealing with emerging headwinds. Disruption appears here to stay and corporates are focussed on liquidity. A return to treasury fundamentals means that, for many, discretionary activities such as sustainable finance are now far down their agendas."

Published by Herbert Smith Freehills and the Association of Corporate Treasurers (ACT), the Corporate Debt and Treasury Report captures the developments and outlook for corporate debt and tracks the perception of ESG and sustainability in corporate debt finance amongst other trends.

Optimism is growing among corporates with a majority of respondents reporting a return to business as usual for the year ahead suggesting that they are increasingly acclimatising to challenges such as continued high interest rates. In comparison to 2023, double the number of respondents reported that macroeconomic and geopolitical events would have no, or a minor, effect on their 2024 debt strategy (41% compared to 25%). Nonetheless, many corporates are still mindful of upcoming macro-events, including the number of elections taking place globally in 2024.

The significance of cash and conserving it on a balance sheet for secure business activities was a recurring theme, with one respondent commenting: "Cash is king. Before, quantum and tenor [of debt] were key. Now, it is interest rates and management of working capital that are important." The ability to access multiple sources of liquidity was also seen as important for overcoming impediments and managing changing investor policies towards raising debt in the year ahead. 

The popularity of sustainability-linked finance continues to dwindle, a trend raised in last year's report. As one respondent commented: "In 2021 it [sustainable finance] was really in vogue…how could you not do it? A few years on far fewer are doing so". Although ESG and sustainability remain a core part of corporates' strategies, many businesses are reluctant to agree separate sustainability performance targets in their debt financings. Furthermore, 47% of respondents did not foresee ESG having any impact on their financing strategy in the next 12 months.

Concerns over reporting and verification requirements (59%) and overall ESG corporate strategy being more important than individual products (57%) were the top factors cited as inhibiting the greater adoption of sustainable finance products. These were followed by greenwashing concerns (45%), and concerns of public perception if the facility was declassified/targets were missed (19%).

"Sustainability-linked finance has, for many, lost its appeal, particularly for those who have not yet embedded that within their financings. In the bank market at least SLLs have proved to be time consuming to implement and, for some, cumbersome to deal with on an ongoing basis as well as creating wider risks and concerns to manage than the benefits provide. As sustainability increasingly forms part of the credit process its role in driving performance through margin adjustments looks set to diminish." Adds Kristen.

View the Corporate Debt and Treasury 2024 report here.