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 

 

 

 

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Sustainable Finance – It is here to stay. Here’s why.

 Photo courtesy of Freepik, for illustration purposes only

Introduction

Back then, it is known that investors focus mainly on financial returns, regardless the impact their investments have on society and the environment. Now, it is a different story. Environmental and social issues continue to be the main highlights of today’s news globally and there is a significant rise of interests made from stakeholders including the investors. 

Apart from that, in many case studies, sustainable funds are observed to be outperforming conventional funds, such as during the covid-19 pandemic period. So, this creates a win-win opportunities situation for investors to reap financial return and at the same time do good for the society and environment.

 

What is Sustainable Finance?

The short definition of sustainable finance is investment or financing that considers environmental, social and governance (ESG) factors into account on top of financial returns. Terms such as green financing and also social impact financing also constitute the sustainable finance spectrum; the former is related to finance activities that stimulate economic growth while simultaneously reduce environmental risks and impacts, and the latter is related to the positive impact created in regards to specifics group of the society.

 

Why is it a big deal?

The struggle to combat climate change impacts varies from ecosystem and biodiversity restoration as well as how we manage natural resources. But this is not enough. Sustainable finance can be the answer to get the win over climate change impacts. Globally, the economy requires up to USD800 billion each year to mitigate the climate crisis by 2030. This is a huge amount. Thus, private entities and public entities around the world have to collaborate on the sustainable finance agenda.

Financial institutions are the key players when it comes to sustainable finance through capital allocations towards sustainable projects and programmes. Financial institutions can provide critical financial support for companies towards sustainable investments and operations.

The role of financial institutions in sustainable finance has been on the rise. On top of that, there is a growing trend for companies to come up with business strategies and commitments that are linked to sustainability i.e.to create positive impact on the environment and society. This results in rising demand for investment through sustainable finance.

Though financial institutions have a vital role to play, sustainable finance initiatives also depend on the involvement of non-profit organisations (NGOs), regulators, investors and governments. Innovation for sustainable finance product offerings depend highly on the alliance of all these entities.

 

Companies are getting serious with sustainable finance

Sustainability in general, brings significant values for companies. Furthermore, there has been greater expectations from employees, to investors, clients, and regulators towards the integration of ESG factors into business model.

Employees demand for a more sustainable business working environment and operations, especially the younger workforce where sustainable values on top of attractive packages are core for them to stay with a company. On top of that, employees also want to affiliate working with companies that invest in projects and programmes through the funding from sustainable finance.

Investors and clients also want to move towards ‘greener’ portfolios where financial returns would also come with positive environmental impact. They want that ‘added’ value so they know they are making a difference in this world.

Regulators all around the world are becoming more and more aggressive in setting their expectations across all sectors to adopt sustainable business.

All of this means that, there is both opportunities and risks elements of sustainability integration for companies which indicates that sustainable finance is important for key and external stakeholders for a company.

That is why, sustainable finance is here to stay.

 

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

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COVID-19 and ESG – Why it is Important for Asset Managers

Photo courtesy of Pexels, for illustration purposes only

Introduction

Financial sustainability is the central focus for all businesses and individuals in light of the COVID-19 pandemic. This has also required the Wealth and Asset Management industry to stringently scrutinise the Environmental. Social and Governance (ESG) agenda in the current and future investment strategy. Many companies believe that the attention towards ESG integration can be delayed amid to the current crisis, but experts would disagree because they view that the pandemic is the catalyst to push businesses to dissect their business model and values like never before.

 

ESG is Profitable during COVID-19 Crisis

Recently, the European Union has hired BlackRock which is one of the largest investors in the world with over $7tn in assets under management on 31 December 2019 prominently in the financial services and fossil fuel companies to conduct a research on the ways partnerships and alliances could encourage the integration of ESG issues into its banking supervision. The biggest percentage of assets under BlackRock’s management are in products that track equity and bond indices; hence they control large stakes in many of the world’s biggest companies. This means that verdicts made by European banking regulators on ESG issues will pay a substantial impact on significant number of companies under BlackRock’s portfolio.

In March this year, records have shown that responsible or sustainable investments outperformed other conventional investments up to 5.7% when markets are heavily impacted by the current pandemic. Asset managers should now start making important decisions pertaining ESG. What asset managers should learn from this is that ESG integration is not only vital to ensure long-term sustainable business resilient, but also provides great opportunities during volatile periods. ESG integration would open up doors to more innovation, and targeted solutions that are meaningful and purposeful when conventional investments would not.

 

What is Expected from Asset Managers?

Asset managers that are advanced in incorporating ESG into the investment portfolio are in the advantage in identifying companies that will outshine others during and after the COVID-19 pandemic. Asset managers would need to dig deep on how companies embed ESG into their business models, including in supply chain management, to evaluate better of the imminent effect of the current pandemic crisis and eventually predict the long-term impact on the companies. According to a paper by J.P. Morgan Asset Management (JPMAM) and BNP Paribas Asset Management that studied on the evaluation of the importance of ESG integration in companies operations, apart from better financial performance, companies that have invested in human capital management prior the COVID-19 crisis have showcased greater resilient during the pandemic compared to its peers.

There is a high possibility that asset managers that are not equipped with ESG expertise and guidance will be left behind.  From the investors’ perspective, it is much likely that from now on they will reevaluate the affiliation with the companies they invest in. ESG issues and its impacts to all stakeholders in the long run will be further considered and not just focusing just on short-term financial returns. Though that ESG is relatively ‘new’ in the current overall investment trend, it has certainly getting traction each year and coupled with COVID-19 pandemic (and other ESG issues), this will eventually be the new norm in the market. In his opening keynote speech, the State Street Global Advisors CEO, Cyrus Taraporevala had confirmed this. He also predicts that in the next decade, ESG integration in the investment market would be seen as the mainstream strategy rather than an alternative.

Another lesson we could take from COVID-19 crisis is that digitalisation is key for the future. Advanced technological infrastructures have now been pushed to a greater extent as means of engagements. The pace of sustainable investment would demand in robust ESG data and analytics to be a vital part of asset managers’ tools and investment decisions.

Asset managers should examine the alignment of ESG of the overall corporate goals of companies. According to the World Economic Forum survey, 61% from 20,000 emerging leaders view business models must only be pursued if it creates positive financial as well as societal impacts.

Asset managers must start (if they have not yet) looking at companies’ ESG ratings or social index scores on their financial performance and credit rating. This should form one of the compulsory components in investment decisions. Asset managers should evolve to be a well-rounded ESG expert that furnish their portfolio with ESG risks and opportunities.

Though the world is focused on COVID-19 issues, this certainly does not mean that asset managers should swift their attention away from other pressing ESG issues; climate change in particular. The impact from climate change should be as or if not, more severe compared to the COVID-19 pandemic. Hence, asset managers should keep up and equipped themselves on their positive and negative screening skills to ensure the vision to invest in companies that would persevere or even be in the advantage when climate change has extended its impact to businesses worldwide. They need to be able to identify the companies that embrace low carbon economy, circular economy and renewables and should be able to distinguish with those that are currently and are very much likely to be under ESG scrutiny.

This being said, asset managers should also anticipate to engage or be engaged with various unfamiliar groups of stakeholder as well as fresh capital allocation issues. Asset managers will be expected to cater their investment from specific ESG issues that are unique to the companies, industries as well as regional presence.

Conclusion

Asset managers of the future would function similar to the present; to achieve maximum profit and generating long-term fruitful returns. However, the only difference is that they would need to incorporate ESG not merely to remain resilient, but as the new norm to create sustainable long-term value.

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

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