Treasury Practice

Question Answered: COP26 expectations and priorities

Published: Nov 2021

“What will be the most important implications for treasury teams to come out of COP26 in Glasgow; what would you like to see and how should corporate treasury prepare?”

Green trees surrounding glass building
Portrait of Silke Goldberg, Partner, Herbert Smith Freehills

Silke Goldberg

Partner
Herbert Smith Freehills

I am expecting COP26 to address the carbon markets, loss and damage, and nature-based solutions to absorb CO2, at a more technical level. There is huge public interest in the conference, and I’m hopeful for progress.

One of the tricky issues is Article 6 of the Paris Agreement, the stepping-stone to international emissions trading. Article 6 currently provides a loose framework for countries and companies on how to achieve a carbon price, and how trading of carbon credits could happen in the future. Carbon trading and emissions has a potential impact on treasury, particularly corporate investment decisions. For example, if a business is subject to carbon pricing, it may view energy intensive investments differently, factor in a carbon price or seek a different type of financing.

The UK, Europe, and China – as of last July – have emissions trading. There is now a proposal in the EU for a Carbon Border Adjustment Mechanism (CBAM), which is related to the impact of the EU’s emission trading system and which will have treasury implications. For example, a company needing steel and importing Australian steel (where there is no carbon price on steel) into the EU will have an advantage over an EU business using EU steel that is subject to a carbon price.

There is now a proposal about how to address this with a tax on imported goods so that the delta on the price applied in, say, Australia, versus the carbon price in the EU is then applied to the import. From a treasury perspective, this is important. I expect to see noise and discussion here with treasury teams needing to price in what the CBAM will do to the price of imports, exports and set money aside. The CBAM requires a degree of internal due diligence, especially for companies in energy intensive industries like steel, plastic, and cement. Imports into the EU will likely to be subject to additional carbon pricing. And of course, this all foreshadows a global carbon price and how it might work. People are watching this space closely.

COP26 will also focus on nature-based solutions and there are treasury implications here. Companies that are not subject to carbon pricing often offset their emissions by investing in woodland and other carbon sinks. The rules here are likely to be debated with new technical provisions, given the wide range of varying standards for offsets and the fact that nature- based solutions may offset but in and of themselves do not lower emissions.

COP will also debate the loss and damage side of climate change, essentially the extent to which industrialised nations should pay more for climate change than developing countries because they have polluted more. It could involve a mitigation mechanism and technology transfer that acknowledges industrialised nations’ larger contribution that could have treasury implications. Nationally Determined Contributions (NDCs) may result in a local climate tax or levy on business that treasury will have to manage, this will however depend on the climate change strategy of each individual government.

Portrait of Parvaiz Dalal, Global Head Supply Chain Finance, Treasury and Trade Solutions, Citi

Parvaiz Dalal

Global Head Supply Chain Finance, Treasury and Trade Solutions
Citi

Five years ago, we only had a handful of conversations a year with our clients about sustainable supply chain finance. Now it is one of the first things they want to talk to us about, and COP26 will accelerate the conversation. I expect more, large corporations will come out with statements about reducing emissions and hitting further ESG goals embedded in their supply chain, triggering a waterfall effect. If world leaders signal support for stronger reporting requirements on indirect emissions it will lead to corporates introducing reduction targets across their value chain, including identifying suppliers which are helping them to deliver their ESG goals, creating a bigger role for supply chain finance by offering better terms linked to cutting emissions to their suppliers.

In regards to visible banking solutions linked to sustainability, transaction bankers have started playing a critical role embedding sustainable standards in working capital solutions. Now, rather than only prioritising large, strategic investments or capital markets deals, I would say treasury’s focus is on how to embed ESG into day-to-day operations in their working capital flows. Companies want to embed sustainability not only into how they buy and sell their goods but across their entire working capital flows and more so when they are sourcing inventory – like reducing electricity usage. COVID has further shaken up operations and turned the focus on sustainable supply chain flows. The just-in-time supply chain and cost is no more the top priority that it used to be. Getting goods on time and sustainability in supply chains have risen to the top of the priority list.

Companies are linking financing tools to sustainability, and deciding their counterparties based on sustainable parameters. One of our aims is to incentivise our clients’ suppliers to conform to ESG standards of certification by offering a lower level of financing, like we did in August, working with McCormick & Company, a global leader in food flavours, and the IFC providing suppliers of McCormick’s herbs and spices with financial incentives linked to ESG improvements. Suppliers qualify for discounted rates on short-term working capital financing when they meet sustainability standards accepted by McCormick – the higher the suppliers’ performance level in meeting these standards, the more they save. We are witnessing multiple requirements by many clients asking us to deliver better terms to suppliers which are compliant to their sustainable goals which are linked to Paris Accords or the UN’s SDGs.

At this stage, companies are not being forced to do this, it is not punitive. Although this could begin to change if COP policymakers encourage the introduction of legislation to make businesses more accountable not only for their own direct emissions, but also their counterparties.

Portrait of Marcelo Bacci, Chief Financial and Investor Relations Officer, Suzano

Marcelo Bacci

Chief Financial and Investor Relations Officer
Suzano

I have high expectations about COP26. If we want to leave a better world for current and future generations, we can no longer delay defining bold, coordinated and effective measures for change. Above all, COP26 must agree on the implementation of an international regulated carbon market linked to the Paris Agreement, establishing an economic instrument that is capable of driving concrete action to remove carbon from the atmosphere on a global scale.

Joining the global Cap and Trade model (which Suzano strongly advocates) will offer a viable alternative for reversing the carbon emissions curve. It will also facilitate a mechanism to honour public commitments, or Nationally Determined Contributions (NDCs), and accelerate the decarbonisation of the global economy. At the same time, it will help drive an agenda of global investments in decarbonisation, with significant implications for sustainable social development worldwide.

At Suzano we hope COP brings immediate action and progress on a carbon market before we reach a point of no return for the environment. The capture of carbon dioxide by trees is part of this equation, and Suzano, as a natural capital company, understands the important role it plays in protecting and generating value from trees. The company also has potential to generate carbon credits and is climate positive – meaning that besides offsetting greenhouse gas emissions from its own operations and its value chain, the company removes more carbon than it emits.

The adoption of an international carbon market could generate diverse opportunities for low-carbon assets and products. It could turn Brazil into a champion in this market, generating income, attracting investments for preservation efforts and creating sustainable development alternatives for local communities, including the people living in the Amazon region.

The expansion of our forest bases, whether for planting or for conserving native forests, plays an important role in the company’s ability to increase carbon sequestration from the atmosphere. At the same time, we are committed to reducing our equivalent emissions: the more Suzano produces, the higher its positive impact on the world will be.

Will COP help change corporate behaviour? I would argue consumers are changing corporate behaviour. Society is increasingly concerned about its role in building a more sustainable future and this is driving changes in corporate behaviour. People are concerned about consuming products from renewable sources, especially recyclable and biodegradable materials which cause less impact on the planet and this is mobilising companies, governments, investors and society as a whole.

Suzano is on the right side of the equation since our products are developed from trees planted for this purpose. In other words, a raw material derived from renewable resources that can replace fossil-based products. We want to offer ten million tons of products from renewable origin by 2030 to help replace petroleum-based products. We are also constantly pursuing new avenues for developing products from planted trees, including textile fibres as alternatives to cotton.

Next question:

“What does China's money market fund landscape look like today, and what developments are likely in 2022?”

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