3 key facts about sustainability frameworks and ESG KPIs you need to know

Whether your company is looking to realize a green project or considering sustainable financing in general, the obvious question is: What are the best options that suit my business and sustainability strategy?

In this article, we walk you through 3 crucial factors you should consider when it comes to sustainable finance and ESG (Environmental, Social, Governance): Identifying the right solution for your needs, the relevance of different sustainable financing formats and frameworks (including a 1:1 comparison chart), and the importance of strong sustainability KPIs.

In addition, our sustainability experts give you pro-tips on how to make the most of your sustainable transition journey while avoiding greenwashing.

For many purposes or projects, sustainable financing is the obvious choice, while it is lesser known that even ’general purpose’ financing formats can be linked to sustainability performance – with many advantages.

A clear benefit of sustainable finance in general is that it boosts your long-term strategy and brand positioning by committing to measurable ESG targets. Projects that align with EU Taxonomy (and thus fulfill the strictest EU requirements for sustainable finance) are 100% green and can be disclosed as such in your sustainability report.

Make sure to thoroughly analyze the options with your trusted bank relationship manager. Depending on the financing format, ESG experts can help you identify suitable green or social project categories or define ambitious ESG goals and targets.

At RBI for instance, in the role of ESG coordinator and structurer, our experts can additionally devise ESG clauses for the term sheet or documentation and join you at the lender presentation if required. If RBI is in the lender role only, we still offer to review clauses and targets in the draft agreement.

The next important factor, depending on the chosen financing format: The corresponding framework. Sustainable finance experts can support you in writing the framework as well as coordinate the external review by a Second Party Opinion (SPO) provider.

So you’ve identified a suitable financing solution, joined forces with a reliable banking partner and maybe even created a framework for your sustainable activity. It’s time to look at sustainability goals and KPIs: What to consider when setting your targets? Is an external ESG rating more important?

Above all, sustainability KPIs should be material for your industry and reflect your business model – for instance, for a technology company, energy usage and greenhouse gas emissions from servers ought to be a priority KPI.

Furthermore, your sustainability performance targets should be ambitious. When setting too ‘soft’ a target, you run the risk of getting called out for greenwashing by investors and other market participants.

5 ways to avoid greenwashing

• Make sure your KPIs are meaningful and impactful – avoid vague definitions
• Align your goals with company’s sustainability strategy and stakeholder expectations
• Consider linking Sustainable Development Goals (SDGs) with your KPIs
• Adopt a science-based approach: Use quantifiable metrics, ensure historical data accuracy and transparency
• Make sure that the annual Sustainability Performance Targets (SPTs) represent a measurable improvement over time

It’s recommended to take current market practice into account, like standards by the LMA (Loan Market Association) or the ICMA (International Capital Market Association) – depending on the financial instrument. This is a very dynamic environment however, and worth keeping an eye on.

While external ESG ratings are often an important factor for investors, they can lack comparability, as different rating agencies apply different methodologies.

According to a study about sustainability and green finance conducted by LBBW with German decision makers and finance managers in March 2023, 47% of survey respondents prefer their company’s tailor-made KPIs to external ratings.

Measuring sustainability is complex, therefore the selection of relevant KPIs requires special expertise and often needs external consulting with your banking partner. It might be a daunting feat at first, but quantitative ESG data collection will become increasingly important in the future.

To sum up, once you find the optimal financing solution for your business, linking the relevant sustainability goals and setting the right framework is crucial for a well-rounded sustainable financing package. The ESG landscape will continue to change and evolve. An experienced and well-connected partner can support you with additional know-how and expertise to take on this transition well-equipped.