The ongoing transition from interbank offered rates (IBOR) and evolving regulations related to environment, social and governance (ESG) are among the regulatory obligations of most concern to treasurers.
The majority of respondents in Deloitte’s Global Treasury Survey – 61% – said the transition to risk-free rates (RFR), or alternate reference rates (ARR) would ‘most likely’ affect their work in treasury over the next 12 months. Deloitte noted in the survey that the transition is in progress at the corporate level across countries and is likely to become ‘business as usual’ in the near future.
ESG regulation, on the other hand, will become much more prevalent, said Deloitte. Sixty percent of respondents cited ESG as likely to have a significant impact on treasury, driven by financial institutions and corporate policies.
Treasurers in the UK should also be aware of the upcoming Corporate Reporting Reforms, says Aisling Kavanagh, Head of Deloitte’s Treasury Assurance Practice. “The reforms seek to drive trust in corporate reporting and business through improving transparency and the nature of information provided,” she says.
In May, the UK Government announced a revamp of the country’s corporate reporting and audit regime. The reforms include the creation of a new regulatory body and the introduction of greater accountability for big business.
The regulator will be tasked to reduce the risk of sudden big company collapses, said the Government. In 2018, construction giant Carillion collapsed, leaving £7bn of debts. A £1.3bn claim on behalf of the contractor’s creditors, brought by the official receiver, is under way, with the receiver alleging that Carillion’s auditor, KPMG, failed to properly audit the accounting of 20 significant contracts.
There are several measures proposed within the reforms, says Kavanagh, some of which will require the support of the treasurer to implement. “One of the key measures will require directors to make an explicit statement on the effectiveness of internal controls and the basis for that assessment will be included in the annual report. As a starting point, treasurers will need to work with the wider business to evaluate and confirm the robustness of the existing risk and controls framework within treasury and will likely need to support this assessment on an annual basis.”
Additionally, the replacement of the current viability statement with a new resilience statement will require companies to report on matters that they consider a material challenge to resilience over the short and medium term. “Many treasurers will already support going concern and the viability statement, however the level and nature of detail provided is increasing. Treasurers may need to provide additional support in relation to forecasting, stress tests and provision of quality data,” says Kavanagh.
She adds that guidance and timelines for implementation of the UK reforms “are constantly evolving. However, given the volume of upcoming change, there are some ‘no regrets’ activities that a company and the treasurer would benefit from – ahead of further guidance.” Meanwhile, in the European Union, the European Commission is assessing corporate reporting, with an impact assessment based on consultation scheduled to be issued before the end of the year. The assessment will cover problems with the quality of corporate reporting and compare possible options to remedy these problems.
ESG and treasury
Reporting requirements are also a significant aspect of ESG activities, particularly regarding the environmental impact of companies’ activities and treasurers have a role to play. The mandatory Task Force on Climate-related Financial Disclosures (TCFD) were created by the Financial Stability Board to improve and increase reporting of climate-related financial information.
At a recent ACT roundtable, delegates heard that while ESG ranks high on the public agenda and for policymakers, as well as in conversations between treasurers, their banks and advisers, investment in “ESG-friendly vehicles” remains relatively small compared to standard alternatives. A challenge to the adoption of ESG solutions is the level of subjectivity and numerous methodologies that can be applied to achieve different outcomes, making it difficult for treasurers to assess the credibility of solutions in a consistent way or to align with their corporate sustainability objectives.
A considerable challenge is the lack of data and comparable credit ratings for ESG investment vehicles. While issuer credit ratings are widely accessible to investors, says the ACT, access to specialised ESG data remains “limited and expensive”, meaning a comprehensive view on the sustainability of an issuer is the preserve of only the most well-resourced investment managers.
This issue was raised at an ACT roundtable earlier this year, where participants said a paucity of credible ESG money market funds (MMFs) and a lack of scale to support the largest investors, plus an inconsistent use of peer and investment universes for comparisons on which to base decisions, were all factors to consider.
Participants heard that while ESG has become much more prominent in business and treasury, it is not often the primary consideration for treasurers’ day-to-day decision-making. When it comes to where they place their money, participants argued, a treasurer’s overarching remit to preserve capital and liquidity remains the priority. What has changed, they said, was the level of visibility of ESG and the onus to report on whether or not considerations of ESG factors played a role in the investment decision-making process.
Ernst & Young’s most recent CFO Barometer found that almost 55% of all companies report sustainability information, although 80% indicate that they are not obligated to. Companies want to be prepared for the future standardisation and integration of sustainability reporting, says EY, but there is still “some catching up to do, as people seem to underestimate the work that needs to be done and the time window in which to do it”.
EY noted that “not every” CFO is familiar with the EU Taxonomy Regulation, which has created an EU-wide classification system that provides a common framework for identifying which economic activities can be considered “environmentally sustainable”.
“First and foremost, the Taxonomy links sustainability with financial KPIs, which is why the CFO is so important,” says EY. “Only in the next step does it make sense for the CFO to take a step back and for a dedicated sustainability management profile, like a Corporate Sustainability Officer (CSO), to take the reins. Such profiles exist within corporations today but to a limited extent. The idea is that the CSO works closely with the CFO, the latter acting as a financial advisor. In any case, the CFO must stay involved, for one thing, because an integrated report is needed.”
Deloitte’s Treasury Survey assessed the role of treasury in organisations’ ESG strategies. A majority (51%) said treasury helped to promote a “diverse and inclusive workforce”. The issue of sustainable debt instruments – such as green bonds, sustainability-linked loans, and social bonds – was cited by 42% of respondents.
Other ESG-related roles identified by treasurers included revisiting policies and procedures to improve sustainability, investing in sustainable investment instruments, applying ESG requirements for counterparties, following ESG requirements proposed by financial institutions, and replacing inhouse data with cloud computing. Only 15% of respondents said they were not involved in their firms’ ESG strategies.
Global bank J.P. Morgan identifies nine areas of activity for treasurers in supporting a firm’s ESG strategy. These include reviewing the company-wide ESG strategy to understand core ESG priorities like greenhouse gas reduction and net zero carbon emission targets and sustainability development goals. Treasurers should establish an ESG stakeholder working group to evaluate ESG priorities across treasury partners in addition to benchmarking ESG performance to understand how third parties such as rating agencies view ESG performance and benchmark against industry best practices.
Further, treasury policies should be reviewed to identify ESG factors to improve and drill-down into financial targets across daily treasury activities. Treasurers should create transparency around current and future state targets with reporting on internal metrics and external scorecards and engage with partners to regularly test whether proofs of concept have helped.
Know your customer (KYC)
Governance – the G in ESG – has particular relevance for treasury. During a European Association of Corporate Treasurers (EACT) panel discussion, Noëlle Belmimoun, Senior Legal Counsel at ArcelorMittal, said of the more stringent regulatory regimes that require more information about customers, “strangely after so many years, we still face a heavy administrative and time-consuming burden. The situation is the same as seven years ago, with many non-standardised requests for information. Financial institutions are working to develop standardised documentation, but we have seen no improvement in this area and we all struggle to accommodate bank requests.”
KYC is a significant element in the fight against financial crime and money laundering, and customer identification is the most critical aspect of it. International regulations influenced by standards such as those developed by the Financial Action Task Force (FATF) are implemented in national laws. EU directives such as the AML IV and V require financial institutions to verify the identity, suitability, and risks involved with maintaining a business relationship.
At the practical level, Belmimoun said, KYC has had a negative impact on the company’s relationship with its banking partners. How a bank handles KYC is now one of the criterions that the company assesses before entering into a relationship.
Séverine Le Blévennec, Global Head of Treasury, Aliaxis, believes a lack of harmonisation between banks and companies is an impediment when it comes to KYC. “We are looking at how we can automate the exchange of data and retain fewer staff to deal with the data that cannot be automated. Technology could help us even more here.”
Tarek Tranberg, Head of Public Affairs at EACT, said regulators walk a tightrope between encouraging innovation and forcing adoption of standards. Regulators are looking to identify where there is scope for harmonisation and the removal of duplication in KYC rules. “Regulators realise that KYC compliance is very burdensome and that in the past there has been too much room for manoeuvre in individual EU states. They are looking to harmonise all requirements from the top down and develop a regulatory instrument across all members states to avoid the additional burden of minutely different requirements across member states. But this will take a number of years.”
Threat or opportunity?
François Masquelier, EACT, recently wrote that in general, most treasurers see regulations or their amendments as a “threat and a financial and administrative risk”. They might involve more expensive financing, more expensive coverage, more documents to produce more quickly and tax restrictions.
However, regulation, even if it is restrictive, can have benefits, notably that of making markets more transparent, efficient, competitive, accessible, resilient, and less subject to systemic risks. “These are positive effects that are often overlooked and yet are essential,” he wrote. “Who wouldn’t want a more resilient financial system that is less subject to systemic risks? We believe that any regulation can be an opportunity to revisit its procedures and processes and consequently strengthen its internal controls.”