Treasury Practice

Driving sustainability in treasury

Published: Mar 2022

Corporations are continuing to place more focus on sustainability and ESG – but how can treasury teams embed sustainability into their activities? From green bonds and sustainable SCF to paperless processes and digital signatures, there’s no shortage of opportunities for treasurers to further the sustainability agenda.

Wind power plant

The importance of sustainability and Environmental, Social and Governance (ESG) considerations to multinational corporations continues to grow. Seventy per cent of respondents to Treasury Today’s Global Sustainability Study 2021 said that sustainability is reflected in their organisations’ core values, while 76% said that sustainability is now a board-level issue. Half of all respondents reported that their companies have a sustainability ‘champion’, and almost a third have committed to net zero.

“In a relatively short period of time, ESG has gone from being something that’s at times been seen as a standalone agenda item to absolutely central, and increasingly embedded as a core part of planning and strategy. It’s increasingly integral to every decision our customers make,” says Andrew Blincoe, Head of Corporates and Institutions at NatWest. “The increasing focus on ESG continues to be driven from across the range of stakeholders: by customers, colleagues, by boards and executives.”

In addition, the expectations of potential future employees represent another driver for focusing on ESG. “We’re all seeing this huge positive shift in mindset around ESG (Environment, Sustainability and Governance),” says Chris Jameson, co-head of product management for GTS EMEA at Bank of America. “The next generation of talent isn’t going to sign up to a company that doesn’t have strong ESG credentials, and live up to those credentials.”

Embedding sustainability

For treasury teams, likewise, ESG is an increasingly central priority. PwC’s 2021 Global Treasury Survey, for example, identified ‘Driving ESG’ as one of five top priorities for corporate treasury, alongside business partnering, raising digital acumen, optimising cash and financial risk.

However, there are a number of ways that treasury teams are working to embed sustainability and ESG considerations. Green and sustainability-linked bonds and loans are becoming increasingly mainstream, as Treasury Today’s Global Sustainability Study illustrated: 27% of respondents had used a sustainability-linked loan or RCF, while 26% had used a green bond. All respondents said they had signed up to ICMA green bond principles.

At the same time, the scope of activities included in sustainability has become much broader. “It’s interesting to look at the evolution of the types of financing included in this topic,” says Blincoe. “If we go back a little while, we primarily saw the ESG financing agenda emerge around raising green bonds. Now the focus is not just on conventional capital raising – it’s much broader, including, for example, driving ESG through all parts of the supply chain.” As Blincoe points out, companies are looking not just at their own carbon footprints and ESG targets, but also at the materials they use, and the carbon footprint of their suppliers.

Rise of sustainable SCF

The importance of the supply chain to a company’s sustainability was highlighted by Treasury Today’s Global Sustainability Study, with 48% of respondents including supply chain selection and management as a KPI to monitor ESG performance.

With more companies seeking to make their supply chains more sustainable, the use of sustainable supply chain finance (SCF) continues to grow. In a recent webinar with NatWest, Alex Ashby, Head of Markets, Group Treasury at Tesco, explained how the retail group has integrated sustainability into its supply chain finance programme, with suppliers able to access lower funding costs if they are performing well against their sustainability goals. Other companies, likewise, are turning their attention to the opportunities of sustainable SCF programmes.

ESG has gone from being something that’s at times been seen as a standalone agenda item to absolutely central, and increasingly embedded as a core part of planning and strategy.

Andrew Blincoe, Head of Corporates and Institutions, NatWest

“There are a number of ways that you can use supply chain finance in this regard,” comments Duncan Lodge, Head of Traditional Trade, and EMEA Head of Trade & Supply Chain Finance Product Management at Bank of America (BofA). “Yes, you can think about tiered pricing for suppliers that meet certain criteria. But it’s also a very flexible tool, and we’re seeing it used in a number of ways within our client base.”

For example, says Lodge, companies might consider sustainability when deciding which suppliers should be given access to an SCF programme from the outset. “This might mean focusing on suppliers that are meeting ESG criteria – or it might mean isolating a specific flow within your supply chain,” he explains. “An energy company, for example, might choose to empower the suppliers that are part of their wind turbine supply chain.”

Transactions and investments

Beyond finance, other areas may present opportunities for treasurers to embrace sustainability. In the transactions space, for example, digitisation can be harnessed to reduce the prevalence of paper – and, indeed, plastic.

“The most visible place for people to start has always been paper,” says Jameson. “Whether that’s bank statements, cheque processing or physical cash collection, the drive from paper to electronic has really been accelerated by the Covid pandemic.” He explains that the adoption of digital signatures has been a significant shift, alongside the adoption of mobile wallets and online self-service tools. And where plastic is concerned, he notes, companies are increasingly shifting towards virtual card payments.

ESG also has a role to play in investment decisions. As Jameson explains, treasurers are already looking to weave ESG into their investment approach – and in a rising rate environment, “it will be very important not to lose sight of the ESG approach in an investment strategy, and not to give way to yield alone.”

Seeking consistent standards

It’s clear that there are numerous opportunities for treasurers to drive sustainability across their activities. But in this rapidly evolving area, there are also a number of obstacles that treasury teams need to consider.

“It can be quite overwhelming,” comments Christian Aue, VP Corporate Finance at Dürr Group. “You have a lot of changing regulation and market demands, and you need to keep on top of those – especially with the taxonomy adding new criteria. It can be challenging for mid-to-small-sized treasuries to address these topics.”

Blincoe says that while there is some progress towards consistent standards from a governance and reporting perspective, “We are very much on the journey.” He notes that most large corporates are evolving their own views about how they can make a difference, and how their activity should be appropriately measured. “Unsurprisingly, though, we continue to see appetite from across the spectrum for consistency in reporting metrics – investors are asking, ‘How can we read across one company’s ESG viability and compare it to another one?’ The criteria they are using to measure themselves are quite different.”

Efforts are underway to address these issues. Blincoe points out that some standardisation is under way across different asset classes, for example among banks working on syndicating loans. “We continue to see progress towards developing a consistent view across customers and sectors, and it’s interesting to see how finance will converge around the transition to net zero. Measuring carbon will be one of the issues at the heart of mobilising finance,” he adds.

Enabling change

Where transactions and trade are concerned, the speed at which treasurers can enact change is another possible hindrance. “Systems are notoriously costly to change – and if you’re going to bring in new payment mechanisms that are more ESG friendly, there’s a cost to that,” notes BofA’s Jameson. “Processes may be quicker to change, but it can take time to ensure the governance is in place and get buy-in from the team.” In addition, he notes that it takes time and effort to change a consumer’s behaviour – for example, by asking them to make payments using a different channel if they have historically posted cheques.

Addressing the proliferation of paper documents that is still associated with trade transactions has also long been regarded as a challenge. But as Lodge notes, “Fortunately there are a number of key ingredients now coming to the fore that make digitisation increasingly achievable, including the rule of law.”

For one thing, the G7 model law on electronic transferable records (MLETR) is currently being written into country law by some of the G7 members, which is intended to enable the legal use of electronic transferable records domestically and across borders. In addition, last year the International Chamber of Commerce released its Uniform Rules for Digital Trade Transactions (URDTT). “Having a framework for what happens when documents of title move between counterparties is really important, as it gives companies and banks confidence as they start to adopt these digital alternatives,” says Lodge.

Enablers of progress also include the rise of ecosystems such as the Marco Polo network, in which multiple counterparties come together to drive digitalisation and agree on common standards. Blockchain, too, may have a role to play in helping to remove paper from trade processes and drive digitalisation.

Another challenge is the issue of greenwashing, and the question of how to define what does or doesn’t qualify as ESG. “The good news is that there are established ESG consultancies and rating agencies, and many of these have experience of supporting trade finance transactions and facilities,” says Lodge. “There are also a number of second party opinion providers out there that can assess your internally-created ESG criteria, and give you confidence that what you’re doing does indeed achieve the goals that your company is striving for.”

Achieving excellence in ESG

Dürr Group logo

Global mechanical and plant engineering firm Dürr Group was recognised as the Highly Commended Winner in Best ESG Solution in the 2021 Adam Smith Awards. The winning solution centred around the issuance of the company’s third sustainability-oriented Schuldschein loan, in which the company achieves a lower financing cost once ESG targets have been reached.

Speaking about sustainability more broadly, Christian Aue, VP Corporate Finance, says that sustainability is one of Dürr’s key enablers – “and one of the most important aspects of this is to enable our customers to be sustainable themselves.” Where treasury is concerned, he says the value treasury can bring to the organisation is by putting a spotlight on the topic of sustainability. “Also important is the way that you communicate with your bank, because you need to be credible in what you’re doing with sustainability,” he comments.

In recent years, he says, banks have built up their expertise on this topic. “They are also shifting their product focus to be able to offer treasury solutions which are sustainable or green. And of course, they also now challenge you, because it’s getting more and more important for them to think about how they build up their customers.”

But as Aue notes, this is not a one-way street. “We are reviewing all of the products we use, and also our partners, in terms of how they are engaging with sustainability. So it’s not just the banks asking us about this topic – we also expect our banks to act in a sustainable manner. And we are also reviewing all of our projects to see where we can instil the topic of sustainability.”

Nevertheless, Aue points out that not every area of treasury should be infused with a sustainability element. “We’ve discussed some products where we’ve decided not to go ahead, because it doesn’t make any sense for us to do it.”

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