For paper and packaging companies, there are several ways to leverage the sustainable finance market

How paper and packaging companies can get off to a good start on their journey to merging their financing needs with their sustainability strategies, was the focus of a presentation by NatWest’s Daniel Bressler and Rupert Taylor during the 2023 PRIMA Paper and Packaging Conference in Vienna. Read here what they had to say. 

Being late can have its benefits

However, being late doesn’t always come with penalties: The emergence of sustainability-related disclosure regulations, the continued use of ESG ratings by investors and the emergence of green use-of-proceeds and sustainability-linked structures for sectors means that paper and packaging companies can now benefit from a more harmonised landscape whilst being able to leverage the opportunities that the increasingly broader sustainable finance market offers. Of course, there’s a steep learning curve to climb, too: these firms need to be aware of how investors will view and value their sustainability strategies, targets, and disclosures. 

These emerging ESG reporting regulations, such as the Corporate Sustainability Reporting Directive (CSRD) in the EU, mean that by complying with this regulation, paper and packaging companies will provide more information that investors and other stakeholders, such as ESG ratings providers may use. Therefore, equipped with this deluge of ESG information, paper and packaging companies should proactively manage ESG ratings (and agencies) to ensure that these important external benchmarks are accurate. 

ESG ratings can provide powerful start for sustainability journey

ESG ratings will often shape the first impressions investors will have about a company. While ESG ratings have their drawbacks, they are fast becoming a key tool for investors and other stakeholders, such as lenders and even corporate customers, to determine the sustainability profile of a company. Therefore, for paper and packaging companies it is important to understand the different environmental, social, and governance metrics that are used by ESG rating agencies. 

As a first step, these companies should identify current ESG ratings and identify their ESG ratings that have room for improvement. This is not always a straightforward exercise as different rating agencies will have different rating scales and may use a paper and packaging sector specific approach or something more universal. Once the various ratings’ ESG indicators and weightings are understood, paper and packaging companies can engage with ESG rating agencies to improve their scores. Finally, as ESG ratings continue to become a part of investor and other stakeholder assessments of paper and packaging companies’ sustainability performance, these companies should monitor their ESG ratings and validate the information used for them is accurate. 

Alongside answering investor questions related to their ESG ratings, paper, and packaging companies can also proactively leverage their strong ratings for sustainable finance transactions. ESG ratings can be used as part of investor presentations or Bloomberg announcements, for example. Including ESG ratings as part of an ESG bond’s marketing documents does incur additional costs, however, this can help validate strong ESG credentials. Such an approach can be used for green, social, sustainability or sustainability-linked (GSS/S) issuances, but also for conventional transactions.

Sustainable finance instruments have a lot to offer but accessing the market requires preparations

Paper and packaging companies do not have to issue in a green or sustainability-linked format, as opposed to a conventional format, but the GSS/S format allows borrowers to align their financial and ESG agendas, meaning they can demonstrate to their stakeholders what they are doing with regards to ESG, and their commitment to it. It also makes borrowers accountable for ESG commitments in a public way. And, although often a secondary driver, it may allow paper and packaging companies to tap into material investor and bank demand to lend into sustainable structures. 

Sustainability/ESG criteria can be introduced into multiple forms of financing, including bank debt such as both revolving credit facilities and term loans and furthermore, sustainability-linked foreign exchange products and derivatives are also starting to become mainstream. In essence, all sustainable finance and banking products achieve the same thing: they incentivise corporates, typically through an interest cost discount or premium, to meet stretching ESG-related key performance indicators.

However, in order to include sustainability as part of their financing strategy, paper and packaging companies will need to allocate dedicated resources to help define their ESG strategy, metrics and commitments and produce a GSS/S financing framework (for ESG-labelled bonds). We have seen paper and packaging companies utilise both the use of proceeds format and sustainability-linked format. For example, DS Smith has issued bonds under their green financing framework, evidencing their commitment to their ‘Now and Next Sustainability Strategy’ focussed on circularity, carbon reduction, nature, and people & communities. Similarly, Finnish wood and biomass company Stora Enso had agreed a revolving credit facility of €700 million with lenders, which is based on a pricing mechanism linked to reducing absolute Scope 1 and 2 greenhouse gas emissions by 50% in 2030 from a base year of 2019. 

Regardless of the structure used or the ESG rating, investors and increasingly lenders and other stakeholders will still want to understand how paper and packaging companies are managing the material sustainability-related risk and opportunities. With the increased focus from regulators on sustainability impacts companies’ direct operations, supply chain and use of products, paper and packaging companies may be compelled to provide metrics and targets related to their sustainability performance and can integrate this along with their sustainability strategies for their financing needs.

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