Funding & Investing

Investing in the future

Published: May 2013
Three satellite dishes in the sunset

In the 1700s, pharmacy group Alliance Boots took its social commitments seriously by providing cheap medicines for poor people. In 2013, the same social and ethical values are part of the company’s DNA. “Corporate social responsibility (CSR) is so much easier if the values are incorporated into what people do,” explains Richard Ellis, Director of CSR at Alliance Boots. “So whether you are a treasurer or a beautician working for Alliance Boots, we say incorporate these values into the way you do your job.”

That may be easy for Ellis to say. After all, CSR is his sole remit and he works for a company with a strong ethical brand. But how and where does a corporate treasurer fit into all of this, if at all? Does environmental, social and governance (ESG) have any applicability to what they do? Even if they work for a company where ESG and CSR are core to its brand, how can a treasurer, who is typically focused on cash preservation and liquidity, incorporate sustainability and ethical considerations into their investment decisions?

Sustainable and ethical investments typically entail applying negative or positive screens to evaluate particular factors (tobacco, alcohol, weapons, etc), direct investments in renewables or carbon credits, investing in funds which contain issuers that are screened against ESG benchmarks, or ethical investments such as Islamic finance.

A number of EU corporate pension funds already integrate ESG into investment decisions, according to the European Sustainable Investment Forum (Eurosif). Eurosif’s 2011 Corporate Pension Funds and Sustainable Investment Study found that 56% of surveyed corporate pension funds had a Socially Responsible Investment (SRI) policy in place, 60% consider that ESG factors affect a pension fund’s long-term performance and 66% indicated that having an SRI policy is part of their fiduciary duty.

Pension funds, however, are typically long-term investors and are willing to tie their capital up for longer periods. Corporate treasurers, on the other hand, tend to take a more short-term view.

A short-term investment horizon

“Most corporates are in a net debt position so if they have got cash they tend to invest that in short-term bank deposits or money market funds (MMFs),” says Michael Wallis, Group Treasurer at Marks & Spencer. “That is more about securing cash and maintaining principal, whilst still getting some sort of return.” Royston Da Costa, Group Assistant Treasurer, Treasury Systems and Development, Wolseley Group Services, states that Wolseley’s policy regarding investing surplus cash is quite specific. “We either deposit short term with our relationship banks or use a select number of MMFs, based on their relationship with our banking partners,” he explains.

In Europe, the uncertain economic outlook reinforces the need for treasurers to stay short when they are investing unless they are told otherwise, remarks Olivier Brissaud, former Managing Director of Volkswagen Group Services and Chairman of the Association des Trésoriers d’Entreprises en Belgique (ATEB). “In Europe at least, treasury is about making sure the company has – at any time – enough money to implement its business strategy. That by definition is a conservative investment profile,” remarks Brissaud. “If the treasurer goes outside the traditional constraints provided for treasury and invests in ethical or sustainable investments they might lose money.”

Finding out information about sustainable and ethical investments is also challenging for treasurers. “It is not that easy to find any ratings agencies that rate the ethical behaviour of companies,” says Brissaud. For that reason ethical investments should be done through a company’s CSR team, as they are responsible for (re)building a link between a company and society. François Masquelier, Chairman of the Association des Trésoriers d’Entreprise à Luxembourg (ATEL), says communication about potential ethical and sustainable investments is not great. “That can perhaps explain why ESG is not (yet) an issue for a vast majority of our members,” he says.

Masquelier says treasurers are more focused on counterparty risk and on how to get decent (and if possible, not negative) returns. “The recent financial crisis has focused energies and priorities on other issues,” he says. “Furthermore, even for longer-term investments, I am not convinced that CSR and ethics are top concerns. We should regret this but it is a fact. I’m convinced that things will evolve. Let’s remain optimistic and see – often treasurers are followers.”

Shareholders versus sustainability

In the case of longer-term investments, Jeff Wallace, Managing Partner at Greenwich Treasury Advisors, says companies with huge hoards of cash may be more likely to apply sustainable and ethical investment criteria. However, long-term corporate excess cash is mostly related to interest rate securities and very little equity, which is where most sustainable and ethical investments are made. When it comes to bond investments, Wallace says treasurers are paid not to lose money. “In fact they could lose their job if a bond investment went bad,” he says.

Sometimes treasurers are involved in investment decisions made by the company pension scheme. Wallis of Marks & Spencer sits on the investment committee of the company’s pension scheme. He is not directly involved in investment decisions but says the committee takes the ESG side of things very seriously. Marks & Spencer’s pension scheme is a signatory to the UN’s Principles for Responsible Investment (PRI).

“It is not that easy to find any ratings agencies that rate the ethical behaviour of companies.”

Olivier Brissaud, former Managing Director of Volkswagen Group Services and Chairman of the Association des Trésoriers d’Entreprises en Belgique (ATEB)

Although treasurers concede they should perhaps look at other types of high yielding investments, including sustainable and ethical investments, Da Costa says they are still governed and guided by internal policies, which are set by the board, which in turn refers to its shareholders. While some shareholders are focused on short-term returns, others like private equity firms that invest for the longer term are insisting that companies pay closer attention to ESG. New York based private equity firm, KKR, which led a buy-out of Alliance Boots in 2007, believes ESG is essential when it comes to value protection (making sure a company it invests in doesn’t lose money due to any ESG issues), value management (ensuring a company achieves best value) and value creation (integrating ESG into product sustainability to ensure operations run better).

Smarter investment decisions

Elizabeth Seeger, sustainability lead at KKR, says sustainable and ethical investment pays off in the short term, as well as the long term. In December 2012, KKR announced $365m in cost savings and revenue from its Green Portfolio Programme of companies by reducing greenhouse gas emissions, waste and use of water. “Environmental efficiency does have an impact on the financial performance of companies and on the bottom line in the short term,” says Seeger. However, she says most people tend to think of ESG as being separate. “Part of the problem is the terminology – ESG, CSR, etc,” she explains. “People fail to realise that just because you are thinking about cash flow doesn’t mean you are not thinking about ESG issues.”

This raises a number of important questions for treasurers. Treasurers manage cash flows, but what about the quality and sustainability of those flows? “We have a tendency to think about economic systems as though participants only need to worry about the micro issues which affect them, and everything else will fix itself,” observes David Pitt-Watson, a Senior Fund Manager and Treasurer at UK charity Oxfam. Although corporate treasurers may think their actions will have very little impact, Pitt-Watson says they should take a step back, look at what they are doing and how it fits with things happening in the rest of the world. What can they do to make sure they are supporting responsible investment? How can they modify their actions whether working on their own or with others?

But does ESG mean sacrificing capital preservation, liquidity and yield – aspects treasurers most care about when making investments? “In the minority of cases, you may have to sacrifice profitability,” says Pitt-Watson, “but once ESG is integrated into your system it becomes less costly and often profitable. If everyone focuses on sustainability issues, we will all be much better off.”

Keith Welks, Deputy State Treasurer for Pennsylvania, says many asset owners have become accustomed to entreaties for investments that are sustainable but are not good investments from a principal preservation and yield perspective. “As a result, some of them run for the hills if they get a whiff of ESG, even if the opportunity might otherwise still be appropriate for them. I believe you can make these kinds of investments work in many instances. You need to think about the structure that works for you as an investor with multiple objectives and look at opportunities with open eyes.”

Much like a corporate treasury, Pennsylvania State Treasury has a prudent investor obligation, which means it must invest in a manner that preserves principal, maximises liquidity and generates returns or yield. In 2005 a new State Treasurer was appointed in Pennsylvania, and Welks and other members of the treasury team were asked to consider a fourth factor when making investments – an added benefit to the state’s economy, a particular segment of the population or an appropriate public policy objective.

“That is when we started looking at the energy efficiency of residential homes that would cost owners less,” says Welks. Treasury set up an investment scheme for homeowners offering them low-rate loans (11,000 loans worth $80m) for energy efficiency measures. It recently aggregated a large number of the loans and sold them in the secondary market. The loan portfolio generated a yield of 5%. “It has outperformed fixed income investments,” says Welks, “generating appropriate and acceptable returns with limited risk, which gives us the opportunity to make funding available to 11,000 homes.”

Pennsylvania State Treasury also developed an investment fund where it provides 20% equity for making energy conservation improvements to old college buildings. By focusing on proven technologies and also providing a steady stream of income, Welks says the college fund addresses two of the most common objections to clean energy: it avoids technology risk and provides liquidity much earlier in the investment cycle.

Where it uses external investment managers, treasury also started asking them about their sustainability criteria – employment of women and ethnic minorities, environmental and sustainable practices both by the managers and the investments they review. “We’ve gotten pretty anodyne responses to our inquiries so far,” says Welks. “Right now we’re at the stage of deciding how we apply the information that we have. We still expect a good rate of return from our investments with these managers but we are also looking for double or triple line benefits. As prudent investors we try to figure out what are the attributes we should be looking for in order to make smarter investment decisions that make money for treasury.”

MMFs with a conscience

Fund provider Amundi in France has made it easier for corporate treasurers to gain investment exposure to ESG without really having to do anything. It applies SRI criteria to its flagship MMF, Amundi Treso EONIA ISR, which has €25 billion in assets under management. Amundi’s SRI filter is applied to all issuers in the fund and its team of SRI analysts do all the groundwork in terms of assessing the SRI credentials of issuers.

“We are providing customers with additional analysis, which adds value,” says Patrick Simeon, Head of MMFs at Amundi, adding that most of the French corporate treasurers that invest in its SRI MMF have responded with interest. Assets under management in the Treso EONIA ISR fund have increased by 25% since 2011. In terms of the fund’s performance, in this asset class Simeon says the main issue is that the investment universe is over weighted towards banking and financial names with an average SRI ranking. “This doesn’t weigh much on the performance of the MMF,” he explains. “It is purely adding transparency. The key element of our approach is security and liquidity. Performance is the cherry on top of the cake.”

Dominique Blanc, Head of SRI Research at Novethic, a leading CSR and SRI research centre in France, says there are significant assets in SRI MMFs in France. According to its research, in 2012 the French SRI market saw growth of 39%, following a growth of 69% in 2011. Although corporate investors are not necessarily asking for SRI, Blanc says they are not saying no to it either. “The financial and risk characteristics of these funds are the same as traditional MMFs, but as a value add they have a sustainability aspect,” he explains. A breakdown of SRI assets by type of owner shows that in 2012 corporates made up 6%, the fifth largest group behind insurers, pension funds and public funds.

Sustainable bonds

Another asset class that presents corporate treasurers with SRI opportunities are sustainability bonds. Last year, FMO, the Dutch development bank in the Netherlands, issued a $41.3m six-year sustainability bond for KLM Royal Dutch Airlines. Treasury and Risk Manager, Vijay Panday, made the investment on KLM‘s behalf. “KLM is pleased to participate in the sustainable bond issued by FMO,” he stated. “This combines our financial strategy to further reduce our US dollar currency risk and our strategy to be leading the industry regarding sustainability.” KLM is a signatory to the UN Global Impact initiative of 1999. It also occupies the sector leadership position in the Dow Jones Sustainability Index.

“More and more investors are attaching a value to the non-financial aspects but it’s still not mainstream,” remarks Huib-Jan de Ruijter, Director of Financial Markets for FMO. The sustainability bond developed for KLM was the first issued by the development bank, which uses negative screens to exclude certain companies, and also applies environmental and social requirements such as the IFC Performance Standards on Environmental and Social Sustainability to all its financing activities. The cash flow of the bonds are not directly linked to the credit risk of a specific project and FMO has a AAA credit rating. “The bond matched the needs of KLM’s treasury and it can be tailored in terms of tenor and currency,” de Ruijter explains. He says treasurers should look at sustainability bonds in the same way as they look at other investments, but the extra bonus is the non-financial component. “I am not suggesting that they should get more on the non-financial side and give up something on the financial side. They don’t need to make that trade off.”

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