Treasury Practice

Sustainability in treasury

Published: Nov 2017

Sustainability is a topic which incorporates a number of different areas, but in the context of business the focus tends to be on environmental and social concerns. “A sustainable business is a business that looks at the environmental, social or governance (ESG) risks that may have a significant impact on a company’s bottom line,” explains Loic Dujardin, Research Director at Sustainalytics.

This topic has become increasingly important to corporates in Asia over the last couple of years. “Broadly speaking, the topic of ESG started out in Europe, where it is pretty familiar to corporates and investors and has been for over a decade,” says Beijia Ma, a strategist on the Thematic Investing team at Bank of America Merrill Lynch in London. “In the last 18-24 months, there has been an explosion of interest among corporates and investors in Asia Pacific.”

This is particularly the case in China. While CO2 emissions have increased rapidly over the last few decades, China has committed to a number of actions under the Paris climate agreement, including peaking the country’s carbon emissions by 2030 while increasing the use of non-fossil fuels to account for 20% of China’s energy consumption. Indeed, China is the world’s foremost investor in renewable energy, accounting for 45% of the world’s new solar installations last year. “There is an increasing awareness from corporates in Asia that they should be focusing on their own sustainability, and that this is something investors are increasingly asking for,” comments Ma.

Dujardin notes that in Asia, ESG risks such as water pollution, climate change and corruption may have a profound effect on company’s operations and profitability. “The ability of a company to manage ESG risks is key for its long-term success,” he adds. “Consumers in Asia are becoming more aware and concerned about the sustainability issues that impact their health and well-being, such as air pollution and food safety. Workers are also in a stronger position to demand better treatment.” As a result, Dujardin says that corporates which stay ahead of these changing expectations can differentiate themselves from their competitors.

Attracting corporate focus

For companies, these topics are becoming a higher priority. “I have no doubt that corporations as a whole are realising that being environmentally irresponsible just doesn’t work anymore,” says Damian Glendinning, Treasurer at Lenovo. “Even in the US, the polluting industries which stand to benefit from the relaxation of environmental protection laws have made it clear they do not want to be associated with relaxed environmental controls. Everyone wants to have a good public image when it comes to the environment.”

Indeed, Lenovo recently demonstrated its own commitment to this topic by inventing a new process which lowers the temperatures used for soldering components. This consumes significantly less electricity, and therefore has considerable environmental benefits. “Instead of trying to profit financially from the invention, we are making it available free of charge to the whole industry, on the grounds that we feel the environment comes first,” says Glendinning.

Lenovo is far from the only company in the region focusing on this topic. “Sustainability is important for corporates in Asia for a number of reasons,” says Paul Davies, Partner at Latham & Watkins LLP. “In order to attract international investment and business, Asian companies increasingly have to demonstrate corporate sustainability and responsibility. This is because multinationals risk reputational damage, legal action, and investor pressure if they fail to consider sustainability.”

Davies says that companies may increasingly find it necessary for brand-building and growth potential to prioritise sustainable development, corporate social responsibility and an overall awareness of environmental, social and governance (ESG) factors that could impact a company. “Moreover, regulations relating to sustainability are becoming increasingly strict in many Asian countries, giving companies that take early action an advantage in complying with such regulations,” he adds.

What does sustainability mean for treasurers?

Sustainability may not be a core component of the treasurer’s role, but there are a number of reasons why treasurers should pay attention to this topic. “For corporate treasures, the implications are interconnected across green financing, managing supply chains and creating positive social and economic benefits in this region,” explains Cynthia Tchikoltsoff, Head of Supply Chain for Asia Pacific at BNP Paribas.

Treasurers also need to be aware of the risks that can arise in relation to this topic. “Some ESG risks may impact the company’s liquidity,” says Dujardin. “For example, pollution from a company’s operation may trigger fines or litigation costs. A product safety issue may impact a company’s reputation. This, in turn, could potentially prevent the company from generating revenues or restrain its ability to access funds from banks.” Consequently, Dujardin says that treasurers need to have a good understanding of the ESG risks a company is facing, and of their effect on the company’s liquidity.

As well as understanding the risks, corporate treasurers can also play a role in supporting companies’ ESG goals in some key areas. These include replacing paper with digital workflows – and thereby helping to reduce their organisations’ CO2 footprints – as well as incorporating sustainability into their funding strategies by taking advantage of the growing green bonds market.

Replacing paper with digital workflows

Companies have many reasons for digitising their paper workflows: digital workflows bring greater efficiency and visibility and can therefore enable the treasury to operate at a higher level than would otherwise be possible. Beyond these benefits, digitisation can also bring considerable sustainability benefits.

“There are several large companies who already have extensive programmes towards sustainability and replacing paper with digital work flows is one way corporates can enhance efficiency in a green way,” explains Rakshith Kundha, Managing Director, Trade and Supply Chain Finance, India and South East Asia at Bank of America Merrill Lynch. “Currently, much of the paper is digitised by parties in the work flow. As such, it would be more effective for companies to receive information and data in a digital rather than paper format.”

As Kundha explains, going paperless is an efficient option for companies to streamline processes and increase efficiency, while also reducing their costs and their carbon footprints. Information reporting and transaction initiation are two areas which can offer opportunities for improvement. Kundha points out that corporate treasurers can initiate transactions and view statements via electronic channels, including mobile, which are directly integrated into their ERP systems. This enables companies to save time and manpower spent on reconciliation and updating while increasing efficiency and visibility.

“For example, millions of sheets of paper were used for printing client statements annually in Asia Pacific,” he says. “We have since implemented digital statements, thereby reducing paper consumption while enhancing the overall client experience. This is just one example of how digitisation of work flows can make a material difference. And for our firm, it is also part of our broader efforts to manage our environmental impact – including reducing paper waste, energy use and greenhouse gas emissions.”

Nevertheless, Kundha says there are some areas where it is more challenging to replace paper with digital workflows due to regulations. “For example, regulations may require that the paper document is provided, checked or retained,” he says – although he adds that with governments looking to digitise workflows, these areas are likely to become less challenging in the future.

Green bonds

As well as building sustainability goals into treasury processes, treasurers may also have an opportunity to tap into the green bond market. As the name implies, a green bond is a bond which is used to fund projects with environmental or other green benefits. The market for green bonds has grown rapidly in the last decade: the sixth annual State of the Market report commissioned by HSBC identified “a universe of US$895bn climate-aligned bonds outstanding which is made up of 3,493 bonds from 1,128 issuers across seven climate themes” – including US$221bn of labelled green bonds. According to the report, China was the largest source of issuance in 2017.

“Since the beginning of last year, we have seen a dramatic increase in Chinese issuance,” comments Ma. “This is likewise the case with places like India, Japan, South Korea and several other East Asian countries as well. We have seen quite a few new countries issuing for the first time this year.”

Corporate issuers can benefit from green financing in a number of ways. Ma notes that corporates are often attracted to green financing “because you tend to tap into higher quality types of investor. Some of the major investors in green bonds are traditional ESG investors, who tend to hold onto those bonds a bit longer”.

Driving adoption

With a growing focus on sustainability at a global level, issuers and investors have much to gain by investigating this area. “Investors are increasingly aware that sustainability, and the commitments the international community has made to improving it – such as the adoption of the Sustainable Development Goals by UN Member States, including China and India – brings with it a host of opportunities across sectors and regions,” says Davies.

Davies points out that many Asian countries have ambitious renewables targets, and are seeking to bring in the required investment through green financing. “The use of green bond proceeds for carbon reduction energy projects, for instance, is important for many Asian countries as a step towards meeting the Paris COP21 Agreement climate change targets,” he says.

Principles and guidelines

While the Asia market follows the ICMA Green Bond Principles (GBP), local guidelines are also beginning to be adopted. In December 2015 and January 2016, green bond guidelines were published by the People’s Bank of China and by the National Development and Reform Commission. These are largely aligned with international practice as set out by the GBP when it comes to defining what constitutes a green project, although there are some differences.

“It’s generally pretty clear what constitutes a green bond and what type of project qualifies,” says Ma. “This might include renewables, energy efficient buildings, clean transport, clean waste and clean water. Even R&D in a specific area could qualify as well. The major difference in Asia versus the broader market is that countries like China are looking at more controversial areas like clean coal.”

Across the region, a number of similar initiatives are under way. The Securities and Exchange Board of India has developed a set of rules for the issuance and listing of green bonds. In Japan, the Ministry of the Environment issued a set of Green Bond Guidelines earlier this year in order to encourage issuance and investment. Meanwhile the ASEAN Capital Markets Forum is introducing green bond standards, based on the GBP, in order to support sustainable growth and meet investor interest in green investments.

Innovation in the market

There’s more to green financing than green bonds alone. This is a rapidly evolving market, and Davies notes that there has been a good deal of supply-side innovation in the last couple of years.

“The green finance market has increasingly seen products other than normal bonds, including securitisation of cash flows from green product contracts and credit facilities with margins linked to the use of the borrowings or the sustainability rating of the borrower,” he explains. “Green bond indices enable investors to benchmark performance and promote liquidity. Green bond-linked exchange-traded funds have helped to stimulate broad-based demand by offering investors access to the investment grade green bond market.”

Using green bonds

While the market for green financing is growing rapidly, this is still a nascent market – and consequently, there are a few pitfalls to look out for. For one thing, companies should be aware of the possible costs of issuance. “Historically, companies have tended to incur incremental costs of around US$15,000 – US$40,000 in order to issue a green bond, due to the additional reporting requirements,” says Ma. “It shouldn’t break the bank – but it’s worth noting that for repeat issuers, the incremental costs for further issuance would be much less.”

“In time, we may see a greater number of corporate green bond issuances from companies that are not traditionally considered green.”

Paul Davies, Partner, Latham & Watkins LLP

When using green financing, Davies says treasurers should bear in mind that although green financing may lack pervasive and enforceable legal standards to be classed as a ‘green bond’ by international investing standards, “the projects for which the proceeds will be used must be carefully demarcated in light of prevailing international and local standards. If this is not the case, certain investors may decline to add the company’s debt to their investment portfolios”.

On the other hand, he says that if a treasurer can build sustainable financing with thoughtful engagement on the company’s sustainability performance, “there is the potential to attract new investors and potentially improve commercial terms”.


Sustainability has become an increasingly important topic for corporates in Asia – and this is likely to continue in the years ahead. As such, treasurers should consider what they can do to support their organisations in this respect, whether this means issuing green bonds, building greater sustainability into the supply chain or digitising paper flows.

Where green financing is concerned, it will be interesting to see how the market develops in the next couple of years. “In time, we may see a greater number of corporate green bond issuances from companies that are not traditionally considered green,” says Davies. “Green bonds and sustainable finance have great potential as tools to finance not just renewable energy companies, for example, but also companies transitioning and improving their sustainability performance.”

Likewise, technology will continue to provide new opportunities for companies to eliminate paper from their workflows. As BNP Paribas’ Tchikoltsoff concludes, “The most important thing for treasurers to bear in mind when it comes to this space is that the cost of doing nothing far exceeds the benefits and rewards of acting.”

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