Consideration of Environmental, Social, Governance (ESG) factors in investment decision making is rapidly moving up treasury agendas. Treasury Today Group talks to George Zinn, Corporate Vice President and Treasurer of Microsoft Corporation at the company’s headquarters in Seattle about its approach to ESG and how other corporates might benefit from its experience in the space.

George Zinn

Corporate Vice President and Treasurer, Microsoft Corporation

 

When it comes to issues of ESG and sustainability I really want to simplify it down to how this impacts treasury. There’s so much high-level discussion about ESG so I wanted to ask you, first of all, how much of a consideration is this for you and how does this manifest?

It manifests in a number of ways for the company and I can explain how that impacts treasury. Microsoft has taken a very affirmative and leading role in E, S, and G.

If you think about what we’re doing from an E perspective, we’re a rather large consumer of electricity. So, we’re considering sustainability issues related to our carbon footprint a lot and have some pretty aggressive targets. In 2012, we instituted a company-wide carbon fee, where each business unit is charged for their carbon emissions. This approach has driven greater awareness of sustainability across the company, incentivised changes in business practices and also created funds that we’ve used to invest in sustainability. The fees collected are invested in enabling Microsoft to operate as a carbon-neutral company since 2012 and supporting our investments in renewable energy – after reaching our initial renewable energy goals a year or more ahead of schedule, we recently set a new goal of running our data centres on 70% renewable energy by 2023 on our path to 100%.

The way that impacts treasury is that we’re working to make investments that can essentially make that public announcement come true. So, with regards to investments in clean energy, you can think about data centres receiving power from windmills, solar, and other sources of renewable energy. We can consider all sorts of green projects, as well as financing research and development efforts that could improve efficiency and reduce resource consumption, like underwater data centres for example.

That has been fascinating and it’s very impactful. The same is true for the S part of the puzzle there. We announced recently a US$500m commitment to support affordable housing in the greater Seattle area. We’re creating some very specific guidelines because treasury previously had been investing in Section 42 (a low-income housing tax credit programme) as, historically, we’ve been very focused on not having geographic concentration with such initiatives. We are doing the exact opposite with Seattle and it focused on an area roughly an hour commute of Bellevue, a suburb of Seattle.

That’s certainly a substantive amount of money that should, hopefully, have a dramatic impact.

Well, during our announcement in January, we had ten mayors stand alongside our CFO and President to make the announcement. They recognise it is a problem. We had a huge, really interesting presentation to show the statistics on it. But such initiatives require change within the organisation as well as the desire for action. Microsoft is stepping up here and saying: “Here’s some real money we’re putting to work.”

But inviting others, whether it’s individuals, companies or the state itself to help contribute to the cause is another challenge. And that has become, essentially, a full-time job for someone in treasury to execute on that.

So, if I think about the S and the G combined, I would say that Microsoft has also taken very much of a leading role in the governance piece. There have been a few very public announcements that we’ve made about helping out, for example, with our Defending Democracy Programme. The company offers a free added layer of security to candidates and related organisations with a service called AccountGuard. It will send out notifications when attacks are detected and help organisations take action to lock down their accounts. It also offers cyber-security education. There’s really an increasingly obvious differentiator between us and our competitors – their take on the issue of privacy and action on it is very different to Microsoft. We are actually the only one of this group of competitors that are GDPR-compliant today. Everyone else says they’re on the path to that.

And, the other important point in terms of privacy is that we’ve been willing to stand up to the US government in a very public way, with a case ending up in the Supreme Court where an individual’s data on a computer or a data centre cloud in Ireland was being sought by the US government. Our legal team advised going and talking to the Irish authorities, do it that way, with them coming to us. And then we give it to the Irish authorities because they have jurisdiction. That was the proper way to go about it. But the US government did not want to do that. The case went all the way to the Supreme Court, and Microsoft won. You do not see that kind of activity in these other companies.

Bringing the pieces together

We have considered the E, S and G fairly discretely. How do they all fit together, reinforce each other at Microsoft and what issues can arise in trying to make that so?

It’s interesting because we have the 401K [tax-qualified, defined-contribution pension account] which is a little unique to the US. Fiduciaries of the plan have a responsibility to make some prudent decisions. There’s a rule that keeps you out of trouble in terms of what you offer your employees that are plan participants. And right now, the legal standard, which is fascinating, would say that you really shouldn’t add an investment option that has inferior returns, even if the individual would prefer it.

In other words, you could come up with a portfolio that excluded all sorts of sin stocks, and those exist. There’s the ‘no tobacco’ and the ‘no weapons’ portfolio, for example. However, if that particular offering ended up having inferior returns to something that was more inclusive of the market and you didn’t offer that, you could be opening yourself up to legal liability. This is a really big issue because employees want some form of ESG in their defined contribution plan and so there’s a tension there. It’s a fascinating problem and we’re sifting through that right now, in terms of how to meet employees interest without exposing the company to potential liability. So that’s across the acronym.

Considering corporates more broadly, not all treasurers enjoy an open-ended remit in their organisations to change what they are doing. So how can treasurers who are perhaps weighed down by such limitations still consider ESG?

Well, one thing that we have here at Microsoft that is perhaps relevant is the diversity-investing programme. Prior to the 2018 Tax Cuts & Jobs Act we were one of the leading companies to include minority-owned, female-owned, and veteran-owned firms in our offerings. That became a big part of our business, working with those firms in our debt and commercial paper programmes. And one thing that is interesting in this respect is the CDARs (Certificate of Deposit Account Registry Service) programme. It supports the ability to invest money in local banks that are diverse and yet still have the equivalent of FDIC (Federal Deposit Insurance Corporation) protection on amounts greater than that for individuals because it gets wrapped together in a larger denomination. And you can do that directly or you can do that through a whole system, but you’re earning slightly better returns with the same sort of protection as, for example, a bank account. It’s a simple certificate of deposit, but it has this special attribute where you can put more money to work.

What advice can you offer to other people managing treasury teams who want to be operating best practice in this ESG space?

One thing I really like about my job is it seems like the content evolves all the time and these opportunities present themselves in different ways. I do think that one thing that we as a finance function have been doing, and Microsoft more generally, is recruiting from a diverse range of schools and colleges as opposed to just the household names.

There is a new approach here which is called ‘screening in’ rather than ‘screening out’: if you only go to certain schools and only look certain ways, you’re only going to run into certain people. And that’s how you end up screening out. The whole ESG space is a journey. It’s a lot like the digital transformation and I always add journey to that because I don’t think it ends – ESG is a journey too.