Sustainable Finance

The theme “sustainability” has become weaved into most aspects of institutional policies and our daily lives. Finance is no exception, as we have witnessed first-hand the financial destruction caused by sub-prime credit during the Global Credit Crunch (GCC) in 2008/2009. Since then, credit has become more affordable and is increasingly being supplied by the non-bank sector. This however has resulted in an over-geared global environment with excessive levels of debt – evidenced on the balance sheets of households, corporates and governments.

A popular notion in sustainability is ESG, or Environmental, Social and Governance, which we believe is only half the picture. And the other half? Unless the mechanics and cost of finance fuelling ESG – and business in general – are not in themselves sustainable, the prospect for success in this regard is extremely limited. Historically, ESG-based investing- and finance has bumped its head against the lack of return on investment. This current world of low interest rates and low running yields has taught us that return of capital (as opposed to “on capital”) and taking a longer-term investment view have become much more prevalent. This situation has catapulted sustainable investment into the limelight as the world has come to realise that it is not about the quick, high returns anymore. Rather, it is more about taking a longer-term view to achieve return of capital in the first place –  then a return on capital that is both ongoing and affordable.

In effect, sustainable finance is the catalyst to achieving ESG investment objectives and will become a reality in corporate finance going forward, given that we foresee continued tough economic conditions with reduced margins and lower profitability in general. As a result, cost management and operational efficiencies have come much more into focus, and this includes the cost and tools applied in corporate finance.

In addition, we foresee sustainable finance becoming more prevalent for the following reasons:

  • Growing pressures on the current global financial system;
  • There are areas in the financial system that are not fit for purpose anymore;
  • Risk-return philosophies are moving away from short-termism;
  • The reality in the public sector is that traditional finance mechanics alone will not deliver on social infrastructure objectives and that the sustainable finance model will encourage private-public partnerships (PPPs); and
  • Traditional debt finance has reached global levels that are not sustainable nor affordable.  

We define Sustainable Finance as “the provision of tailor-made finance, structured utilising an optimum mix of financing alternatives, resulting in a flexible finance package where the cost is a function of business performanceand where our clients become members of our hands-on finance community”. The key concepts (in bold) in this definition can then be further unpacked as follows:

  • “Tailor-made” means that we look at the needs and requirements of the client (borrower) first to ensure we design a solution that is fit for purpose;
  • “Structured” relates to the tools we use, that is, we have several building blocks  we  use to  arrive at the solution;
  • “Flexible” translates into the ability to change course – as and when required. We all know that the only constant is change, and as business circumstances change over time, flexibility is provided to adapt to the new environment;
  • “Business performance” will dictate the effective cost of finance. Our solutions provide for affordable pricing when a business suffers, while we share in the upside during the good times. That is, “when the client suffers, we all suffer and when the client does well, we all do well”; and
  • “Community” means we offer more than just finance. We provide access to operational and process expertise, turnaround strategists, legal assistance and potential business synergies and contact framework.

The overarching advantages of sustainable finance relate to the benefits it offers to a broader range of stakeholders and the fact that it requires a much more hands-on approach by financiers. This will facilitate more of a partnership financing model, as opposed to the current detached and passive debt financing approaches.

Private Credit

PIETER VAN DER MERWE – Chief Investment Officer, Creation Group For this article, let us start with a proper definition for private credit: “Private credit

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