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A QUICK GUIDE TO…..ESG & the Treasurer

ESG

First coined as a phrase in 2005 in conjunction with the Kyoto Climate Pact – it formed the basis of the visionary “Who Cares Wins” UN Conference where global political and business leaders combined the principles of Environmental Impact, Social Responsibility and Governance as the critical strategy for future global sustainable economic development. This has evolved in the intervening years driven by progressive movements and thought leadership.

So ….What is does ESG mean to business today?

ESG should form strategic and structured focus on 3 core pillars that are broken out into multiple categories and subcategories. It is of itself diverse, complex and all-encompassing presenting both risks and opportunities



Effective adoption and development of ESG as a successful sustainable business driver requires key the following key elements:


TREASURY and ESG

The COP 26 Environmental Conference in Glasgow identified Finance and Treasury as a main conduit of accelerating the adoption of Sustainable principles and driving business behaviour across all business and economic sectors. The Financial Services sector has for a number of years focused modest product development efforts around Sustainable Finance but in the past year these efforts have ramped up whereby Banks and Financial Service companies now have a broad range of product offering focused on certain core areas:

ESG Investment Product
  • Green Deposits
  • Sustainability Bonds
  • Green Project Bonds
  • Social Impact Securities
  • ESG Funds
  • Sustainability Separately Managed Accounts
ESG Finance
  • ESG Project Lending
  • ESG Bond Issuance (Project linked or KPI Linked)
  • Green Loans

Note that while welcome this is very much at an early stage in terms of its evolution which presents some challenges:

  1. This is sustainability with a capital E – which is not to be criticised but does somewhat neglect the other pillars
  2. The lack of global standardisation or certification means that the products are defined based on the interpretation and principles of the individual service providers.
  3. The concept or perception of “Greenwashing” is not helped by this lack of independent oversight

Metrics and Measures

Treasurers love analysis and ESG has seen an explosion of Metrics and Ratings agencies in order to assess the relative “Sustainability Risk” of a company benchmarked against its peers.  This should be viewed as being similar in nature to the assessment of the creditworthiness of a company but in many ways is far more complex due to the broad nature and reach of ESG.


Challenges:

Early Days – lack of standardisation:

  • 100 Different ratings agencies and data services
  • Banks also provide bespoke analysis
  • Unregulated

Methodologies

  • Complex, detailed and varied data sets across the 3 pillars
  • Pillar weightings vary from agency to agency
  • Mixture of objective data analysis, machine learning and subjective judgement

Lack of Consensus

  • ESG rating correlation 0.32 versus 0.9 for Credit ratings (1.0 being perfect correlation)

Regulation:

The ESG business landscape is being shaped and slowly standardised by regulation across many critical business areas. This regulation broadly homes in on the areas of Disclosure and Certification (or Labelling). The next 1-3 years will see the impacts and influence of regulation manifest on non-Financial corporates in a very tangible way.

Treasurers along with all other business functions will find themselves impacted by regulation like the Corporate Sustainability Reporting Directive that is far reaching and focusses on reporting of non-financial KPIs across the ESG spectrum ranging from Environmental Impacts to Gender Diversity in leadership.

This will require all business functions to engage in:

Preparation:

  • Align ESG Knowledge and Understanding across all stakeholders in form of a coordinated enterprise framework
  • Build agile review processes to align the framework with the evolving compliance environment

Integration:

  • Integrate the ESG framework into strategy and develop data gathering and control systems.
  • Set deliverables and define robust measurements and controls.

Reporting:

  • Regularise and standardise reporting output against the standards required by the regulations


What the Treasurer should be thinking of…….

Relationships:

Service provider relationships are a critical part of the Treasury function. The evolution of ESG throws a new dynamic into the management of those key relationships that are deemed essential to operations. The analysis of the ESG risk profile of core business relationships will form a key part of the evolving sustainable business landscape. Metrics and measures (and the current challenges they pose) will be critical to this analysis. In the context of Treasury this will focus on Financial Service Providers and the nature of their performance in terms of ESG ratings. It will be a factor in any due diligence process in determining where business is assigned or awarded.

This also means that the Treasurer as client can influence service provider performance with regard to ESG if it is highlighted as a key component in awarding business – setting minimum acceptable standards and linking levels of business to performance outcomes in the ESG space.

Bear in mind that this can work both ways – especially in the case of Banks where we are already seeing the phenomena of banks seeking to actively move their banking activities toward cleaner, greener companies and industries. This could find some businesses challenged in negotiating lines of credit and finance in the form of “Brown Listing”.

Ethical investment is also gaining traction and a companies issuance performance can be impacted by relative reputation in terms of ESG performance.

Pricing – carrot and stick:

A clear view is that ultimately sustainable companies and industries will become the norm driven by the momentum of ESG. This is reflected in current practice where ESG friendly products command not some pricing advantages over other product types. However, this pricing impact will manifest more effectively in a form of pricing linked to ESG performance in the same way as credit risk is currently priced.

Treasurers should analyse this closely as a very tangible cost factor to the business as a means of leading and driving ESG strategic development in the company.

Standardisation and Product Development:

Corporate Treasurers can drive product and service development by leveraging engagement with Regulators (through EACT) and Financial Service Providers (through client business) and providing feedback on the kind of ESG based products they are looking for and also the standard of that product offering. A key focus of this should be on independent certification of ESG products – given the challenge presented of self-certification by banks.

Commitment and Reputation:

ESG is a full commitment – this needs to be understood fully. So any decision to engage the ESG market place in active way requires an understanding that the company understands fully the implications of this decision and has implemented an enterprise strategy embracing the concept fully.

If a company is considering the issuance on an ESG Linked bond and is only focussed on the price advantage that this may assign is missing the bigger picture. It is important that such corporate activity commits the company to a particular path in terms of sustainability and it also opens up the company to total scrutiny in terms of its performance in this regard.

From a Treasurers perspective a full understanding of the dynamics and conditionality of the ESG market place is an essential.

People and Skills:

It’s not a clich√© to state that people are the most valuable resource to any Treasurer. ESG can and will play a critical role in attracting and retaining talent. Increasingly career choices are focussed on sense of mission as much as is driven by the bottom line. Companies and teams with a strong message and track record around sustainability will attract the best talent.

ESG also presents a fresh and developing skill set that can guide professional development in a Treasury team as  an enterprise business skill of real consequence and personal impact. This can see the evolution of knowledge and actions in this area driven from the bottom up as well as championed by the organisations leadership. That total investment across the team can only lead to a successful ESG strategy yielding real business benefits.

Thought Leadership:

Treasurers can influence the evolution of ESG in terms of expertise and knowledge developed with exposure and experience of the Finance aspects of ESG policy, product and market development. In addition it can be reasonable argued that the management and analysis of ESG risk falls within the remit of the Treasurer. In that regard the Treasurer should be a prominent voice at the table when formulating enterprise ESG strategy and can be a positive and pragmatic influence on roll our and adoption.

In conclusion:

Sustainability will be at the heart of transformation across business and broader society. Treasury and Finance will be part of this welcome development in terms of business culture, behaviour and impact. This places the Treasurer and the unique skillset of the Treasury profession at the forefront of how the corporate world evolves. Treasurers should embrace this opportunity to take a lead role in their organisations to drive what will ultimately be a significant and necessary shift in corporate and business practice and principles.

Interested to learn more about ESG?

Useful Articles

https://treasury-management.com/esg-guide/

https://www.eurofinance.com/news/esg-what-should-treasurers-be-doing/

https://www.treasurers.org/hub/technical/hot-topics/esg-sustainable-finance

https://www.jpmorgan.com/solutions/treasury-payments/insights/how-treasury-can-show-ESG-leadership

https://www.citibank.com/tts/insights/articles/article128.html

ACT ESG Discussion:

ACT ESG Discussion









USEFUL LINKS 

European Association of Corporate Treasurers (EACT) https://eact.eu/

International Group of Treasury Associations (IGTA) http://igta.org

CONTACTS

info@treasurers.ie
+353 1 610 8574 
Address: PO Box 10104, Lucan, Co Dublin

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