Standard Chartered Bank’s Stuart Keelan and Desiree Pires discuss how navigating inflation risk, hedging and sustainability are key themes for treasury teams coming out of the pandemic.

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The pandemic has triggered a fundamental restrike in market pricing for interest rates, foreign exchange and commodities, said Stuart Keelan, Financial Markets Head of UK & Europe at Standard Chartered, speaking during a recent Treasury Today podcast. Corporates have responded by restructuring their hedging programmes across their rates, FX and commodity exposures, and are taking advantage of the low cost of financing to either shore up their balance sheets or invest in their business via digitisation, ESG projects or M&A opportunities.

Similarly, Desiree Pires, Managing Director, Head of Corporate Sales Europe at Standard Chartered, noted how clients continue to review their hedging policies and programmes in response to the market shocks. The crisis has made them question how appropriate their existing policies were and led to a greater appreciation of the value of options, especially when forecasts can be uncertain, she said. “We are seeing an increased use of analytics and back testing tools to develop more dynamic and flexible hedging frameworks.”

M&A activity and proactive strategies to manage inflation are also driving treasury strategy. Although Pires acknowledged the wide differentiation of economic recoveries for different sectors and regions, she predicted consolidation in some sectors and an increase in M&A activity as companies take advantage of cheap, plentiful liquidity. As for inflation, she noticed a spike in corporate concerns. “Treasury’s view of rates has changed from a comfort that rates will continue to be lower for longer to a real concern about inflation,” she said, citing the ensuing treasury risk around input costs and higher interest rates spiking borrowing costs. One response to the latter has seen corporates actively pre-hedging future issuance and increasing fixed exposures through swaps, swaptions and interest rate caps, she said.

Another focus is supply chains. Here companies are structuring shorter, more localised supply chains and increasing digitisation. “Companies are changing supply chain models, reacting to increased red tape driven by COVID, Brexit, and trade wars impacting global trade,” said Keelan.

The focus on digital solutions is also extending to payments, especially cross board payments linked to either trade finance, supply chain solutions, opex or capex. Standard Chartered is working with clients on various digital solutions spanning regulatory documentation platforms and API connectivity. The bank is also partnering with third-party treasury software providers and fintechs to develop solutions that link directly to a corporate’s TMS systems, ensuring ease of connectivity and both reduced admin burdens and IT resource commitments.

Sustainability

Sustainability is another key theme, reaching well beyond green bonds or financing. The bank is discussing new risk management products and helping clients achieve their net zero goals in a process that requires careful management because of the cost of the transition on margins in the medium term. “We’re partnering with clients to manage their financing structures in this regard,” said Pires. “As a bank, we have committed to our Stand on Accelerating to Net Zero to not only manage our own carbon footprint but more importantly that of the clients we’re financing. Given 80% of the world’s carbon emissions come from our footprint markets of Asia, Africa and the Middle East, we believe we can partner with clients to take a stand to achieve net zero carbon by 2050.” she added.

Carbon market

Pires and Keelan discussed how an efficient carbon market is crucial to achieving this goal and the bank is working with peers to try and scale carbon markets. For example, Group Chief Executive, Bill Winters is involved in chairing the Task Force on Scaling Voluntary Carbon Markets. Elsewhere, the bank has launched Climate Impact X (CIX), partnering with DBS, SGX and Temasek to create a global exchange for high quality carbon credits to support clients’ pathway to net zero.

Indeed, Pires and Keelan believe a voluntary carbon market could be one of the most exciting sustainability innovations going forward. At present, companies buy or sell carbon in a regulatory-driven environment for compliance purposes, explained Pires. “Going forward, we expect more demand to offset carbon even if not required to for regulatory reasons.” She said this will require a greater supply of carbon credits than currently exist and is one driver behind initiatives like CIX. “It’s also interesting to consider new industries that may emerge as suppliers of carbon credits,” she said.

Companies are spending an increasing amount of time exploring how to integrate ESG principles into their business via internal company goals and treasury policy, she added. New products from the bank include developing sustainable deposits for clients that allow simple deposit placements to be ESG friendly. Elsewhere, Standard Chartered has transacted ESG linked derivatives in FX, interest rates and commodities, linked to both “use of proceeds” as well as ESG performance.

Keelan concluded that one of the key challenges corporates will face is understanding both what net zero means – and how to measure it. He also noted a widening disparity between markets as Europe takes a lead on policy frameworks, but other markets, often dependent on heavy emitting industries, struggle with how to finance the transition bereft of policy guidance. “At Standard Chartered, we are working to define a methodology, a market standard and be transparent with our stakeholders and stimulate the debate,” he said. “Our Stand of Accelerating to Net Zero is about partnering with clients to address their challenges on the journey to sustainability.”