Role of Treasury in ESG

 

Role of Treasury in ESG

 

Photo courtesy of Freepik, for illustration purposes only

 

Introduction

Sustainable Finance is widely known as the consideration of environmental, social and governance (ESG) factors into financing (including investing) and decision making processes. For the financial sector, ESG factors, which are broad in scope, have not been traditionally part of standard financial analysis. However, now, more than ever, ESG integration into financial analysis has not only become relevant, but critical.

 

The difficult first step

Regardless of sector or region of operations, ESG integration into business model has always been a challenge. Unfortunately, for treasure, this is even harder. This is because treasury is partly tied to the organisation’s policies which means ESG integration into the treasury functions are not 100% control by treasury directly.

However, there are a few key initial steps that worth to be taken; and it can start with an acknowledged framework that maps the potential contributions of treasury to ESG factors and guides its integration, and this can be based on a few established frameworks that can meet the above objective.

But, there hurdle here is; what framework to adopt as the regulations and standards are still unaligned globally. One of the ways to approach this is to adopt the common and most widely accepted framework such as the United Nations Sustainable Development Goals (SDGs). This shall enable clear linkages to the goals that contribute to each and/or combined elements of ESG. Another option is the green, social, and sustainable bond principle frameworks of the Climate Bond Initiative (CBI).

By adopting these frameworks, it provides guidance and directions to evaluate ESG eligible project financing.

Contributions of treasury to ESG

Green financing is not the only way corporate treasury can contribute towards supporting sustainability. In terms of its operations, sustainability can be achieved through digitalisation in its processes, record management and bank statement management. Innovative technologies like robotic process automation, blockchain, and artificial intelligence should also be implemented to increase efficiency in an ESG friendly ways. These initiatives will cover the environment impact of sustainability. In terms of social, corporate treasury should encourage diversity, equity and inclusion by providing equal opportunities for everyone and creating an inclusive working environment.

On top of that, the role of treasury can be further more extensive. Firstly, treasury can set ESG-related requirements to be met by new business partners. Secondly, for existing business partners, treasury can create advocacy and awareness for them towards complying with these requirements. Treasury can also build credible relationship with credit rating agencies focusing on the areas of ESG.

A structured model should be established and implemented to ensure an effective integration of ESG in treasury. This model should include a clear overview of potential treasury contributions to ESG factors, once they have been selected, and the building blocks needed to achieve those contributions.

 

Monitor and Measure

It is important that the progress of ESG integration in treasury is monitored and tracked in a structured manner and also using credible metrics and benchmarks. However, we need to acknowledge that development of metrics and benchmarks for ESG integration tracking is still in the nascent stage and it comes with some complexities, in terms of identification of types of indicators, as well as standardization. Nonetheless, it still can be done effectively with consideration of a few key approaches.

First and foremost, it must be made clear on the mapping of each treasury contribution, and this should be done separately. From here, metrics and benchmarks need to be developed separately for each contribution based on materiality to the company and stakeholders. Apart from that, the metrics and benchmarks should always be updated as the ESG integration matures so there will be efforts towards improvements.

Examples of product offerings and operational metrics and corresponding benchmarks are:

·         Assessing external review of Sustainable Financing framework to measure the perceived the ESG elements of financing

·         Tracking digital workflows, through a digitalised form processing and records ratio

·         Measuring  the increase in output of a processes in place to monitor the effectiveness of technological innovation

 

Conclusion

ESG as a whole is constantly evolving, and so is the role of treasury in ESG. It is important for the treasury team to keep up to date with the latest development of ESG, particularly on Sustainable Finance as well as how operations c

 

All views and opinions expressed on this site are by the author and do not represent any particular entity or organisation