With a lot of research having been produced, including by teams within Bank of America, around why organisations should care about sustainability, it’s well-understood that generally it can make the world a better place. But there are many other elements that dictate why organisations should care about sustainability and environmental, social, and governance (ESG) more broadly.
Firstly, a by-product of such engagement is the better relative performance of top ESG-ranked companies than those that are not known to be strong on ESG. A good ESG score, for example, equates to happier employees, less bankruptcy risk and, according to MSCI ESG Research, a generally lower average cost of debt funding.
But ESG considerations are not a new phenomenon. Shareholders have expressed concern about ESG elements for a long time. Often it is asked, for example, if management compensation is aligned with shareholder returns, if people within the organisation are happy or at risk of moving to a competitor, of if any lax environmental behaviour could elevate legal risk.
The current emphasis on ESG matters is helping to define and clarify such issues. It is also apparent that it is possible ‘to do good and do well’, and that treasury can have a significant role in helping their organisation move along that path.
Defining steps
The first step is therefore to align treasury’s approach with that of the overall organisational ESG agenda. This could be drawn from the group’s environmental policy, its HR policies that encourage diversity and inclusion, or its governance processes that are in place across the firm. It’s not sensible to try re-inventing actions that are out of alignment with broader organisational thinking, and so it’s important for treasury to have a firm understanding about overall company objectives.
Once this is achieved, consideration of best practice can follow. This means knowing what sector peers have already achieved, and likewise how top ESG-rated firms outside of your sector have been successful. But it also means gaining insight into how banking partners can assist. Many now have ESG at the top of their agenda and will be party to how a wide range of clients are leveraging best practice. The next stage is to think about who to get involved, and how to define some of the goals that will align with organisational aims.
With an issue as important as ESG, the ‘tone from the top’ is essential. Senior buy-in from the top of the organisation and from the top of treasury creates a powerful ESG and sustainability champion, helping to drive success.
When setting goals, it’s beneficial not to be too prescriptive when setting out how treasury will achieve those goals. This affords employees freedom to be creative in their thinking about solutions and about their interactions with other functions.
By drilling down into current problematic areas, as they relate to the overall ESG strategy, it can reveal a wide range of new opportunities within treasury that can help drive the ESG agenda.
As an example, the over-reliance on paper documentation can help shine light on the advantages of digitalisation, where products such as DocuSign can ease document flow, and moving payments to card or virtual card can enhance spend understanding.
Seeking opportunities
With sufficient thought, areas of opportunity in treasury can be broad. This could involve funding mechanisms, where in the transaction banking space sustainable supply chain finance can be used to reward positive supplier behaviours whilst maintaining supply chain integrity. On the investment side of the balance sheet, ESG is becoming a vital (and visible) part of investment strategies, and so it is becoming increasingly easy to find products that support social and environmental causes, allowing corporate cash to be put to good use, and meet liquidity, security and yield expectations.
Another area of opportunity is in provider selection. In light of your own organisation’s approach to ESG and sustainability, it’s useful to begin defining the kind of supporting questions that will be asked of suppliers in future RFPs, including those despatched to potential financial and technology vendors.
After tackling current problems and opportunities, it then becomes a matter of defining resources. Some aspects, such as getting rid of paper, may be relatively quick wins. Others, such as evolving the diversity makeup of the treasury team can be a longer-term process. The planning should consider this accordingly. Having made the decisions around ESG, setting out the goals and how they will be achieved, the final stage is to communicate the strategy internally and externally.
By defining the initial goals and means of achieving them, a process of alignment with corporate strategy is possible. By then taking the initiative and seeking out new and innovative approaches to sustainability and ESG, treasury success can percolate up through the organisation. Depending on the size of the organisation and the stage of its development, this can even begin to open the gates for treasury to influence progress in this space across the wider business.
