“Evidence suggests that companies with a declared purpose perform better on important metrics over time than their less-purposeful peers. (Purposeful companies have a clear role in the world that offers them a reason for being, and promise to work for all their stakeholders rather than just shareholders.) How is this new idea of corporate purpose manifesting in corporate Treasury?”
Executive Fellow, London Business School and is on the Steering Committee of The Purposeful Company
A purposeful company should have its purpose resonate through every aspect of its strategy and operations. A purposeful company understands how the core process by which it makes money is aligned to its purpose. It understands which stakeholder relationships are most important to its purpose and how it impacts all stakeholders. A good purpose, well-articulated, will flow through into everything the company does, including the treasury function.
Treasury decisions that might have been based on optimisation of the balance sheet come out slightly differently when a company looks through a purpose lens. Purpose could play out in treasury strategy through strict rules on how quickly to pay suppliers. It could manifest in conditions a company won’t accept in loan covenants to stop creditors doing things that damage the purpose. Elsewhere, purpose could be aligned to employees. For a company where the key purpose is to provide a secure livelihood for employees, for example John Lewis, this could impact how aggressively it negotiates on pension covenants. In another example, a renewables company focused on the transition might look carefully at its banking partners and the extent to which they finance activities that contribute to CO2 emissions.
Unilever, and its purpose to make sustainable living commonplace, is the archetypal example of a purposeful company. The company has unpacked what this means in terms of the way it makes money and how it integrates across its business operations. It actively invests behind the brands it believes are aligned with its purpose and divests from brands that don’t align because they believe purposeful brands create faster growth.
Unilever also looks at the whole ecosystem in which it operates. For example, it works with its supply chains to enable them to deliver products in a sustainable way, which has had treasury implications: the company offered €500m of cash flow relief to support livelihoods across its extended value chain during COVID.
One of the problems that arises is where a company feels that the purpose can only describe the good things it does, and therefore ignores the bad. This can undermine purpose. Discussions about purpose must be grounded in the reality of what the core business is. There are businesses that do messy, difficult things and face genuine conflict with certain stakeholders, but they can still be purposeful. It lacks authenticity if a purpose statement is contrived and does not face up to the reality of the company’s business. It is a good idea to be honest, otherwise it creates dissonance and backfires on relationships. Employees are particularly engaged and motivated by purpose and attuned to hypocrisy.
There are now an increasing number of companies looking at purpose with serious intent. But it is difficult to do, and a multi-year process with pitfalls along the way. But we have already seen that organisations that have figured out what their purpose is, and how they impact their key stakeholders, have been better placed to respond to COVID.
VP Treasury and Financing
Danone has integrated purpose since 1972, enabling the company to create both shareholder and societal value. We aim to inspire healthier and more sustainable eating and drinking practices and believe that the health of people and the health of the planet are interconnected. This is now pegged in our ‘One Planet One Health’ vision.
This purpose and vision is embedded across the business, and our treasury and finance divisions are empowered with the tools to match that purpose. This is particularly evident in our funding strategy.
We are a component stock of leading social responsibility indexes including the Dow Jones Sustainability Indices, Vigeo Eiris, MSCI ESG Ratings and the FTSE4Good Index. Inclusion in these indices involves a long assessment process and this transparency and credibility can drive our investment decisions.
Our goal is to contribute positively to all 17 Sustainable Development Goals, but we have prioritised three particularly: SDGs 2, 3, and 6 around Zero Hunger, Good Health and Wellbeing and Clean Water and Sanitation, respectively.
Two years ago, we partnered with our core 12 banks in a facility that lowered our cost of borrowing if we increased our positive impact, all verified by a third party. We raised US$2bn in a syndicated credit facility whereby our ESG performance directly impacts – upwards and downwards – the margin payable to the banks over the entire duration of the facility. So far, our external metrics have shown that we are improving our ESG performance.
We have also done a social bond in line with our purpose to create and share sustainable value with all our stakeholders. In 2018 we were the first multinational to sell a social bond in line with the new Social Bond Principles set out by the International Capital Market Association. We had really good results, and a strong reception from investors. I believe this is because we are credible; we were able to demonstrate to investors that this topic has been a long journey for us.
Proceeds from our social bond have gone towards research for specialised nutrition. Funds also support entrepreneurs and start-ups, communities, and healthcare in emerging markets. Proceeds from our social bond also finance mangrove planting in Senegal to create carbon credits, and we support farmers in our supply chain to guarantee stable income for farmers and long-term collaboration on sustainability issues.
When it comes to putting in place this kind of financing, we must partner with banks that really believe in our purpose. It involves a great deal of discussion and collaboration and involves working with banks that are well connected with ESG investors. We find that our purpose also attracts investors to our traditional, or classical debt. I believe investors like our paper also because of our purpose.
Managing Director, Head, Trade & Treasury Solutions Americas
Nearly every conversation we’ve had with corporate treasury teams and finance officials in recent months has included discussions around sustainability, and increasingly, purpose. The typical questions we ask include how the company is integrating sustainability into procurement and labour practices, or we might ask for more insight into their energy and water conservation policies. More often than not, the response is positive, but the person tasked with sustainability isn’t just the treasurer. It is usually a combination of roles split between the chief sustainability officer and treasury.
The push towards sustainability and broader purpose is being driven by growing concerns emanating from a company’s stakeholders, particularly employees. Employees are driving companies to push the envelope and become more responsive. There was a time a company could say they didn’t know anything about purpose. Now most companies realise that purpose and sustainability make a big difference in employee engagement and how they are perceived by the outside world. It is also right for companies to try and make a difference in society and, of course, COVID has also played a factor.
There is a clear difference between integrating purpose and sustainability. In companies that are clear about their purpose in society, the commitment of employees across the board is more tangible. It is easy to determine corporate purpose when talking to employees. You can ascertain whether it is a new fad or something that lies at the core of corporate strategy. Companies that have a sense of purpose have a direction driven from the top of the house. They are not just giving lip service to the concept.
In the supply chain, purpose usually manifests around procurement and what a company is asking its suppliers. Purposeful treasury teams will look beyond basic regulatory needs to truly analyse their sourcing and supplier selection processes; they will ask for compliance from their suppliers and get tough on them to improve the whole ecosystem.
In fact, purpose isn’t exclusive to green endeavour. An oil company can be purposeful by, for example, working with local communities and contributing to society. A company’s core products may not be sustainable, but their practices could be contributing and giving back to society in multiple ways. There is no one right answer in the approach to this.
Companies with a purpose anchored in societal benefits often find it easier to attract investment – investors have a clear preference for companies in this category. In fact, much of the drive for purpose is coming from institutional investors and pension funds increasingly asking companies what motivates them. However, purpose doesn’t lower a company’s cost of borrowing and the PR benefits of integrating purpose are modest.
The benefit comes from the fact employees are much more motivated to work for a purposeful company. The next generation is far more conscious of purpose than previous generations. Consumers are also motivated by purpose. It allows consumer-facing companies to tap a demand pool based on their sense of purpose.
“COVID-19 and the strained US-China relationship is causing companies to rethink their supply chains. How are companies beginning to change their supply chains, and what does it mean for corporate treasury?”
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