As alarm bells ring louder about the impact of climate change and as governments seek to strengthen corporate governance and transparency, the regulatory environment will continue to evolve. ESG issues are increasingly dominating the regulatory agenda and in turn, the way financial institutions and corporations approach business. Governments around the world are introducing ESG-related requirements that place a significant reporting burden on companies and their treasurers.
Deloitte’s Global Treasury Survey, published in November 2022, identified ESG as a key regulatory trend. Treasury’s involvement in applying an organisation’s ESG agenda was mainly focused on promoting a diverse and inclusive workplace (the social aspect of ESG). More than half of the respondents identified this, with 42% saying they were involved in issuing sustainable debt instruments, and 38% following ESG requirements proposed by their financial institutions.
The survey notes that ESG discussions are making their way to the boardrooms and are increasingly interconnected with the financial market through debt instruments with new covenants, measurements and reporting. “Similarly, corporate treasurers are reviewing their investment policies to include more sustainable instruments and taking a proactive role in the ‘net-zero’ agenda,” it says.
Since 1st January 2021, premium-listed commercial companies have been required to make “comply or explain” disclosures in their annual reports in relation to recommendations by the Task Force on Climate-related Financial Disclosures (TCFD). This requirement was subsequently extended to standard listed companies. In October, the TCFD issued its final annual status report on adherence by corporates and financial institutions to its recommended disclosures on climate risks. The TCFD will become part of the International Sustainability Standards Board (ISSB), which released its climate risk disclosure standard in June 2023.
The TCFD report says 58% of companies disclose in line with at least five of its 11 recommended disclosures (up from 18% in 2020). However, it observed that climate disclosures remain a rarity in financial reporting.
While corporate treasurers are “very anxious” to comply with rules and regulations, a recurring theme is that it is often difficult to know exactly what the rules and regulations require, says Damian Glendinning, Chairman of the advisory board of consultancy CompleXCountries and former treasurer at Lenovo.
“Treasurers are very literal people and it is much easier for them to comply with rules and regulations if they know what it is they are meant to be doing,” he says.
At present, one of the biggest pains for corporate treasurers, he adds, are requirements around know your customer (KYC) guidelines and regulations. KYC is an element in various anti-money laundering and counter-terrorism financing regulations globally and falls under the governance aspect of ESG.
KYC requirements are designed to fight illegal activities that use the financial industry to move or hide money. The remit of KYC policies has been extended in the past few years in recognition of the interconnectedness of the global financial system. Financial services institutions are required to verify the identity, suitability and risks involved in each of their business relationships with all of their customers, be they large multinationals, SMEs or consumers.
Although most corporate treasurers have “given up complaining” about KYC requirements as they recognise the extent to which banks have to vet their customers, says Glendinning, there are two problems that remain. “First, there is no defined standard for banks to meet their KYC needs. Most attempts to enable corporate treasurers to share data on KYC have had limited to no success. Treasurers have to share the same data with many different banks and also the same data to different functions within the same bank,” he says.
Further, the KYC disclosure process is “incredibly intrusive”, he says. “If you are a signatory on a bank account, you will be asked for a copy of your passport, mortgage or rental payments, phone bills etc. This is not a good discussion for a corporate to have over and over again with the CFO and/or CEO.”
Royston Da Costa, Assistant Treasurer, Ferguson, says treasurers would benefit from more clarity around KYC. “The problem with KYC, and the reason that it remains an outstanding issue, is that it is very difficult for banks to agree anything in terms of a format for reporting. We can’t boil the ocean and have to progress one step at a time,” he says. “Agreeing a single format would be really helpful for treasurers.”
Corporate treasurers must respond to each request for KYC information from their financial institutions or risk delays to their transactions, according to international financial messaging cooperative Swift. “Global and multi-banked corporates can receive large volumes of individual KYC requests from each of their different banks, putting a strain on their business relationships,” Swift says.
Swift has set up the KYC Registry, a central repository that stores current KYC information for a company that a financial institution can download, which allows the standardised exchange of nearly all KYC information and reduces the burden of the KYC process on both the financial institution and the corporate customer. Glendinning says KYC rules often create conflicts with requirements under the EU’s General Data Protection Regulation. “If you need a copy of someone’s passport, you are not supposed to retain it on file. In turn, this is one of the problems KYC utilities face – that, together with the absence of a clear standard, which means they all want different things, and general banking secrecy rules.”
During a session at the recent Eurofinance conference, Glendinning said panellists argued in favour of virtual accounts as a way to greatly reduce the amount of KYC work banks need to do and hence reduce the amount of requests for information that corporate treasurers receive. “I find it interesting that KYC is used as a sales point for virtual accounts. While it may be true, it seems to be putting the cart before the horse,” he says.
In a recent article on its website, Société Générale’s Elise Hoyet, Head of Virtual Account and Payment Factory Solutions, noted that virtual accounts don’t require the complete KYC needed with “real accounts.”
One of the initial drivers for corporate adoption of virtual accounts, she added, was to avoid the burden of KYC, as it was an obvious benefit. “Today, a more important driver for corporates is the possibility of creating a more agile structure underneath their physical layer of bank accounts.”
In the same article, Edwin Hartog, Head of Global Transaction Banking, Netherlands, wrote: “Treasurers can cut out a lot of physical accounts and replace them with virtual accounts. This not only gives the benefit of lighter KYC but also enables faster concentration of balances. Corporates can quickly pull their balances together at a header level or at the main level defined in the company structure.”
During his discussions with treasurers, Glendinning says concerns were raised about anti-money laundering (AML) requirements. “Payments are often held up and a corporate treasurer will not know why,” he says. “Under AML rules, if a bank comes across a suspicious transaction, it is duty bound to hold up that account and is not allowed to say why, in order not to alert the initiator of the transaction that it is under investigation. At present on AML, it is best to avoid receiving payments from customers with Arab or Russian sounding names. These may be perfectly innocent, but they are more likely to raise red flags in the banks’ compliance departments.” While corporate treasurers are anxious to comply with the principles of AML legislation, there needs to be greater clarity and communication so they can understand what is going on, he adds.
There is additional focus on governance for corporate treasurers in the UK as a review of the UK Corporate Governance Code was launched by the Financial Reporting Council (FRC), with the submission deadline for comments closing in mid-September 2023. The FRC describes the review as a “limited revision aims to enhance the Code’s effectiveness in promoting good corporate governance”. Changes include a revised framework of prudent and effective controls to provide a stronger basis for reporting on, and evidencing their effectiveness; improving the functioning of comply-or-explain; and revisions to reflect the responsibilities of the board and audit committee for sustainability and ESG reporting, and associated assurance in accordance with a company’s audit and assurance policy. The FRC intends to finalise the new Code by the end of 2023.
A crucial aspect for all corporate treasurers in dealing with ESG matters is data availability and quality, says Andy Schmidt, Global Industry Lead – Banking, CGI. “It is difficult for corporate treasurers to get an accurate picture of their ESG performance if they do not have the right data,” he says. “One of the problems is that banks, regulators and corporates alike have a desire for an ‘Athena’ moment, where a solution jumps out at them, fully formed. But we all need to build the right tools together. Mistakes will be made, but over time, fewer mistakes will happen.” The ISO 20022 standard, a single standardisation approach (methodology, process, repository) to be used by all financial standards initiatives, will help, says Schmidt. “Over time, corporate treasurers will be able to leverage information in a common format. Reporting standards will also help.”
Schmidt says banks are focused on determining their corporate clients’ Scope 3 emissions – indirect emissions that occur in the upstream and downstream activities of an organisation, such as purchased goods and services, business travel, waste disposal and transport and distribution. This will provide an opportunity for banks and corporates to move to more sustainable supply chains, he notes. “As more corporates start reporting and more banks assemble that data, more informed discussions will take place. A bank can use this as a ‘matchmaking’ opportunity, introducing corporate clients to more ESG friendly suppliers, which will help them to reduce their Scope 3 emissions,” he says.
Tackling ESG rules and regulations will require a collaborative approach, with the ideal being dialogue between regulators, banks and corporates, he adds. Like Glendinning, Schmidt says there is a lack of clarity about the most appropriate framework for Scope 3 reporting. “I think there is an opportunity for transaction banks to shine here – they have the data and risk analysis capabilities that can give a global view of ESG. Banks cannot compel their corporate clients to act in a certain way, but they can certainly help to influence them.”
Schmidt believes ESG reporting and compliance will require an “iterative approach” and there should be a “certain level of forgiveness for corporates and banks as they are trying to do the right thing, but maybe not in the right way to begin with”.
Recognising that ESG compliance is “just another data exercise” and part of larger initiatives to improve data quality and usage will help corporate treasurers to recognise that they “have the muscles they need and most of the tools to drive the right insights – insights that they can act on,” says Schmidt.
Regulation and legislation are focused on achieving a particular objective and regulators are not necessarily concerned with how user friendly a regulation might be for the people out there, notes Glendinning. “Compliance can be difficult for corporate treasurers because most regulations are not designed or driven by treasury to start with. Yes, treasurers are all about compliance, but they also face practical issues such as getting cash from A to B. This can be very challenging.”
On a more optimistic note, Da Costa reflects that the European Market Infrastructure Regulation (EMIR), which laid down rules on over-the-counter derivatives, central counterparties and trade repositories, was “very painful” for treasurers to comply with. However, EMIR compliance procedures now run automatically in the background at most treasury departments. “Many of these regulations were quite intrusive for treasury departments but they have delivered strong benefits to treasury, ensuring controls are robust and fit for purpose.”
