ESG and sustainability continues to climb up the corporate treasury agenda for UK businesses as those features in the corporate debt capital structure are increasingly better understood and incorporating them in financings becomes less onerous.

In the latest annual Corporate Debt and Treasury Report, more than two-thirds (71 percent) of respondents expect to include ESG or sustainability features in their next financing, reflecting a steady increase over the past two years (50 percent and 65 percent in 2020 and 2021 respectively). At 47 percent, sustainability-linked loans are the most likely to be implemented followed by sustainability-linked bonds and green bonds, each at 28 percent.

Published by Herbert Smith Freehills and the Association of Corporate Treasurers (ACT), the Corporate Debt and Treasury Report captures the trends and outlook for corporate debt and tracks the growth of ESG and sustainability in corporate debt finance. Asked whether they consider that ESG and sustainability has become the norm in their principal debt financings, respondents were almost equally split with 53 percent saying no and 47 percent yes.

Kristen Roberts, finance partner at Herbert Smith Freehills, says: "ESG and sustainability continues to be the topic of treasury conversations. The general trend towards ever greater proportions of debt containing ESG or sustainability-linked features continues as the barriers to engaging in ESG and sustainability-linked financing subsides."

Unsurprisingly, the positive economic outlook reported in last year's research has receded with 70 percent of respondents this year citing a neutral to negative outlook. The threats of inflation, spiralling energy costs and ongoing supply chain issues were highlighted as headwinds. The risk of the Brexit UK-EU trade deal unwinding due to the operation or potential suspension of the Northern Ireland protocol was also raised as a potential concern to continued business investment and overall business health. 

"While the outlook may be less positive, the challenges facing the market are not expected to curtail the supply of debt but may impact on terms, pricing and the timing of raising debt," adds Kristen.

Comparing their organisation's expenditure to last year, over half (53 percent) said they plan to increase spending on dividends, reflecting shoring up of balance sheets during the pandemic and the healthy bounce-back of businesses. Slightly under half (48 percent) suggested greater capital expenditure possibly due to deferrals during the pandemic and the availability of super deductions for capital allowances, followed by working capital at 42 percent, which could be attributed to concerns around ongoing supply chain pressures.

View the report here