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Every CFO Should Know This: 'The Future Of Banking' Ties Verified ESG Performance To Cheaper Capital

This article is more than 6 years old.

Photo by Anthony Tyrrell on Unsplash

One typically does not expect innovation to be announced in an annual financial report.

It seems Danone is not a typical company.

Danone released its FY 2017 financial report on Friday and announced something important that, to my knowledge, has never been done before: Danone partnered with 12 leading global banks to lower their loan rates if Danone increases its verified positive impact in the world.

Boom. Impact alpha.

The deal on Danone’s $2 billion syndicated credit facility was led by BNP Paribas and includes Societe Generale, Credit Agricole, Natixis, HSBC, Citibank, JPMorgan, Barclays, ING, NatWest, MUFG and Santander. According to its statement, Danone’s third-party-verified ESG performance will be “directly impacting, upwards or downwards, the margin payable to the banks over the entire duration of the facility.” This may be the first time a company’s cost of capital has been explicitly tied to its third-party-verified ESG performance.

Cue the CFO party music—and there’s no party like an independent third party.

Danone’s decision comes on the heels of the recent warning letter to CEOs by the world’s largest investor that the CEOs risked losing BlackRock’s support if they fail to demonstrate that they create value for society. We may be approaching a tipping point in the evolution of capitalism where financial value creation is directly linked to societal value creation and systemic risk mitigation.

The Danone release addresses the understandable skepticism of some observers that it has been difficult to move the needle from lofty statements of principle to verified standards of performance. Danone goes even further, holding themselves accountable by linking verified ESG performance to concrete financial incentives and penalties.

If BlackRock were speaking directly to every CEO, Danone is speaking to every CFO, making a clear business case for pursuing credible impact-management strategies that result in third-party-verified high performance. Cécile Cabanis, Danone’s Chief Financial Officer said:

“We are thrilled to be a pioneer in combining both traditional financial and ESG criteria as drivers of long-term sustainable performance, and for our banks to support this vision. This move is consistent with Danone’s ambition to become a B Corp and with our long-term commitment to create sustainable value for our shareholders and all our stakeholders.”

The announcement states that one of two ESG criteria recognized in Danone’s amended credit facility is the percentage of Danone's consolidated sales from its Certified B Corp subsidiaries.Higher B Corp sales equals lower cost of capital. That’s pretty innovative.

The other ESG performance criteria include scores granted to Danone by Sustainalytics and Vigeo Eiris, two leading global providers of research and ratings of companies’ ESG performance. Yann Gerardin, head of corporate and institutional banking at BNP Paribas, said:

“A transaction that demonstrates that delivering on sustainability will ultimately drive economic performance? Yes, this is the future of banking.”

That the heads of corporate and institutional banking for a dozen of the world’s largest credit providersnotoriously the most fiscally conservative people in any boardroomhave affirmed that Certified B Corporations, and a select few other forms of rigorous third-party-verified ESG performance, are effectively better risks than traditional businesses may mean that “the future of banking” will become the future of business.

At its 2017 annual shareholder meeting, Danone* announced its intention to become a Certified B Corporation, becoming the first Fortune 500 company to publicly set such a goal. Toward that objective, as of December 31, 2017, Danone has four Certified B Corp subsidiaries—Happy Family, Les 2 Vaches, Aguas Danone de Argentina, and Danone S.A. (Spain). In April 2017, Danone’s North American subsidiary, DanoneWave, which accounts for roughly 20 percent of Danone’s global sales, adopted the benefit corporation legal structure, meeting the legal requirement for B Corp certification. Stonyfield was a Danone subsidiary at the time of its B Corp certification and will retain its certification under the company’s new ownership resulting from its recent sale (part of Danone’s regulatory compliance with its acquisition of WhiteWave, which merged with Danone North America into DanoneWave).

As part of its broad partnership with B Lab (the nonprofit behind the global B Corp movement) more than 10 Danone subsidiaries have completed the B Impact Assessment to get a baseline of their overall ESG performance; benchmark their performance against other Danone business units as well as the tens of thousands of other businesses that have used the tool; and set a course for achieving the minimum verified B Impact Score of 80 (out of 200) required for B Corp certification. Currently more than 2,400 Certified B Corporations operate across more than 130 industries in 50 countries, all of which meet the highest standards of overall social and environmental performance, public transparency and legal accountability to balance purpose and profit.

Every CFO of the more than 2,400 Certified B Corps in the world ought to be calling her credit providers today. Every other CFO ought to be asking her CEO what the company is doing to “be like a B Corp”—a couple of years ago, Fortune declared this to be one of the “5 Key Business Trends to Master”; now, we know one more good reason why.

*Lorna Davis, Danone’s Chief Manifesto Catalyst and ex-CEO of DanoneWave, has been seconded to B Lab and is spending 12 months helping other multinationals engage meaningfully with the B Corp movement.

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