By adopting the concept of ‘sustainability-linked’ to FX, the Co-op sets an example for companies across all sectors to link sustainability performance and financials.
Supporting local causes and tackling climate change
The Co-op is the UK’s largest consumer co-operative, owned by millions of members. It is a major food retailer and wholesaler; the largest funerals provider in the UK; a major provider of regulated consumer legal services; the UK’s largest provider of probate services and a major provider of life planning and insurance products.
Established in 1844 and employing 62,000 people, the Co-op focuses on its social goals and community-led programmes, acknowledging that its business success means it can give back more to its members and its local community.
As part of its ‘Co-operating for a Fairer World’ vision, the organisation is also accelerating its action to help tackle climate change. In May this year, Co-op launched its ten-point climate plan, laying out how it will reach net-zero by 2040 across its business areas. This includes a pledge to reduce the impact of operations by 50% and products by 11% by 2025, whilst offsetting greenhouse gas emissions of products and services, including food and drink in the interim, to achieve carbon neutrality by the same year.
Pioneering ESG FX through Co-op and NatWest teamwork
A longstanding customer, the Co-op turned to NatWest’s FX team to discuss aligning their emissions target with their FX trading – a concept the NatWest team introduced to the Co-op team a few months earlier.
Co-op purchases some goods from overseas suppliers and pays for them in foreign currency. As part of its Treasury Strategy, the market risk of currency price movements is managed through a currency hedging programme. This helps to give Co-op certainty of the Sterling cost of overseas products it buys.
In order to establish a sustainability-linked FX agreement that would deliver clear alignment between the Co-op’s treasury function and the wider Co-op Group’s climate goals, the two teams discussed the Co-op’s existing Green Key Performance Indicators (KPIs) in their Revolving Credit Facility (RCF) and agreed on slightly adjusted longer-term KPIs that would feature in the FX sustainability-linked agreement.
The contract, which both parties signed in July, specifies that if the Co-op meets its approved science-based target to reduce the Group’s operational emissions by 2025 (that is an absolute 50% reduction in scope 1 and 2 emissions in the 2025 calendar year, compared to 2016), the Co-op will qualify for a sustainability-linked rebate correlated to the volume of FX trades booked with NatWest between now and the end of this financial year.
At the same time, the agreement effectively allows the Co-op to continue to book FX transactions with NatWest with no change to their daily process.
Briefly explained: the concept of ‘sustainability-linked’
Sustainability-linked products are most prevalent in the sustainable debt markets, such as sustainability-linked bonds or loans. The cornerstone of a sustainability-linked product is that the product’s financial and/or structural characteristics can vary depending on whether or not the selected Key Performance Indicators (KPIs) reach the predefined Sustainability Performance Targets (SPTs).
By linking the achievement of sustainability targets to a financial incentive or punitive measure, the users of sustainability-linked financial products are committing explicitly to future improvements in sustainability outcomes within a predefined timeline.
Setting an example for linking sustainability performance and financials
Fabio Madar, Head of Currencies at NatWest, commented on the FX agreement: “We are delighted to have supported the Co-op on aligning their FX trading with their emission targets, adopting the concept of ‘sustainability-linked’ to FX. The Co-op is the first UK supermarket to sign such an agreement with us, and sets an example for companies across all sectors in linking sustainability performance and financials. This concept of ESG FX is also a great example of NatWest’s purpose in action, helping our customers to achieve their ESG goals.”
Graeme Sidebottom, UK Corporate FX Sales at NatWest, stated: “We’re very pleased to be able to support the Co-op’s ESG strategy through this ESG FX agreement. This was a strong collaboration across the whole NatWest franchise, and we’re excited that we can yet again actively contribute to social, economic and environmental progress in the UK by supporting customers with sustainability at their heart such as the Co-op.”
Simon Nuttall, Head of Tax, Treasury & Insurance at The Co-op, said: “The world is experiencing a climate crisis and we need to work together to avoid it. Working co-operatively and accelerating action is the only way to mitigate and reduce impacts on our natural world, and to ensure stable food supply chains in the future. It’s part of our ‘Co-operating for a Fairer World’ vision. Linking our emission targets with our FX trading is the next logical step, and follows on from our sustainability bond issuance, our sustainable RCF agreement and we thank the NatWest team for their support, encouragement and expertise."
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