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Treasurers are looking more closely than ever at sustainability – but the industry can be confusing to investors and issuers alike, not least because of the plethora of different terms and acronyms in use, and the different interpretations of what those terms mean.
When approaching the topic of responsible investment, understanding the terminology is a good place to start. As Joshua Kendall, Head of Responsible Investment Research and Stewardship at Insight Investment explains, key terms that treasurers should be aware of include the following:
Environmental, Social and Governance (ESG). While the term ESG is well known, it means different things to different investors. Some may talk about ESG as the risk factors that are integrated into their decision-making processes, while others might cite ESG as the reason for screening companies from portfolios on ethical grounds.
PRI. The UN Principles for Responsible Investment (UNPRI, or just PRI) is an industry network and group promoting responsible investment. More than 2,000 investors collectively managing around US$100trn in assets, support the initiative.
Task Force on Climate-related Financial Disclosures (TCFD). Created by the Financial Stability Board, the TCFD aims to raise awareness that everyone has a responsibility for managing climate risks – companies, investors and pension funds.
Sustainable Finance Disclosure Regulation (SFDR). The first comprehensive global set of regulations covering responsible investment themes in Europe, with significant impacts for issuers and investors alike.
Impact. The concept of impact can be defined as achieving environmental and social outcomes – but it can also mean reducing the firm’s negative impact.
What does responsible investing mean for treasurers?
Where treasurers are concerned, Kendall says it is important to understand what this topic means for investors. “There is more emphasis than ever before on a company’s sustainability performance, isolating those companies that are potentially laggards in the management of sustainability-related risks,” he comments. And as Kendall notes, there is also more recognition that poor management of ESG issues can lead to credit risks, as well as the inability to borrow at a competitive rate.
In addition, the growing focus on this area means that companies are being held more accountable for sustainability issues – not least because any egregious developments can have a bearing on credit quality and the cost of capital. “This is perhaps an area which is new to some treasury teams,” Kendall notes. “It means getting more involved across the organisation to engage more directly with sustainability teams, hold them accountable for their actions, and ensure the treasury team has more visibility on what’s being done.”
What’s more, with issuers looking to introduce sustainability targets linked to the raising of debt and loans, there’s a growing need for treasury teams to consider how they can use sustainability within their everyday cash management activities.
Catalysts for change
Responsible investing is an evolving topic, but different parts of the world are experiencing different pressures. In the EU and UK, for example, regulatory developments like SFDR and TCFD are a significant driver – but regulation to promote responsible investment is less evident in the US.
At the same time, awareness of issues like climate risks has been raised by the efforts of individuals like David Attenborough and Greta Thunberg – and of course, reputation is an important consideration for companies everywhere.
Alongside these factors, the COVID-19 pandemic will likely continue to define the investor landscape for years to come. “Sustainability has a greater purpose than ever before,” says Kendall. “It’s not just seen as a ‘nice to have’, but as a ‘must have’.”
Where market drivers are concerned, another point of interest is the development of impact bonds. “These are a conventional bond where the use of proceeds is carved out to invest in specific projects which might have an environmental or social purpose,” Kendall explains. “That’s increasingly relevant for us as an investor, because we have clients expecting us to allocate a small percentage of their portfolio towards green bonds – but the big challenge is that there are not enough green bonds.”
As Kendall points out, there is “strong evidence” that a green bond issued by a treasury department may create opportunities to borrow at a lower rate than a non-green bond – “and that financial incentive is one that should be explored in more detail by treasury departments.”
In addition, he notes that while responsible investment has historically focused on equities and, more recently, on corporate bonds, “we’re starting to see asset class is now expected to have a process where ESG factors and stewardship factors are incorporated into the investment decision-making process.”
As Kendall concludes, “responsible investment is something that treasury teams should be spending a lot of time thinking about. It doesn’t just impact investors – it impacts treasury teams and corporations too.”
Thanks to Joshua Kendall for sharing his insights. You can listen to the accompanying podcast to hear more.
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