Integration of ESG in treasury
Responsible investing is widely known as the integration of environmental, social and governance (ESG) factors into investment processes and decision-making. ESG factors cover a wide spectrum of topics that traditionally are not part of financial analysis yet may have financial relevance. Environmental factors relate to a company’s role in climate change, its use of natural resources, its pollution and waste, and the environmental opportunities it pursues. Social factors cover topics concerning human capital, product liability, stakeholder opposition and social opportunities. Governance factors include aspects regarding the corporate governance and behavior of a company.
Directives for evaluating project eligibility
The adoption and integration of ESG in organizations is a challenge. For treasury, this might be even harder, as the drive towards ESG adoption in treasury is partly bound to the company’s policy and ESG involves factors that cannot be controlled by treasury directly.
Although it might be challenging to fully integrate ESG in treasury, it is certainly possible to at least implement a number of ESG related elements. The most effective approach starts with an acknowledged framework that maps the potential contributions of treasury to ESG factors and guides its integration. While adoption of ESG principles is at an early stage, where regulations and standards are unaligned, there are already some leading frameworks that possess the qualities presented above. The most important and widely accepted framework is the United Nations Sustainable Development Goals (SDGs). By selecting SDGs, treasury can effectively link their qualities to goals that contribute to ESG. In addition to the SDGs framework are the green, social, and sustainable bond principle frameworks of the Climate Bond Initiative (CBI). These frameworks provide directives for evaluating project eligibility of ESG financing. By matching the SDGs framework with the green, social and sustainable bond principle frameworks, a solid structure can be set to achieve high ESG performance supported by ESG financing. This method is widely used in practice, by the likes of Citigroup, ING, and Vodafone, to name a few.
Treasury’s contribution to ESG
When discussing ESG in corporate treasury, green financing is often mentioned as one of the main instruments to support ESG goals. However, treasury can contribute to ESG in many other ways, such as through digital workflows, which include fully digitalized form processes, record management and bank statement management. Corporate treasuries can also use their ‘leverage’ with banking partners to try to abolish paper-based documents as much as possible. In addition, diversity and inclusion should be encouraged within treasury, by providing equal opportunities for everyone and creating a pleasant working environment. Moreover, it would drive ESG adoption through the full chain, to embed ESG into the selection and maintenance of external relations. This can be done in multiple ways. First, by setting ESG requirements that new business partners need to satisfy. Second, by stimulating existing business partners to comply with these requirements. Finally, by the joint development of ESG methodology with business partners, like the SDI Asset Owner Platform of Dutch pension funds APG and PGGM.
Besides embedding ESG into external relationships, it would be beneficial if treasury held a strong relationship with credit rating agencies are well informed when it comes to ESG, to keep the company up to date regarding ESG best practices. Furthermore, treasury could contribute by setting up a supply chain finance program that incentivizes suppliers to contribute to ESG factors. Innovative technologies like robotic process automation, blockchain, and artificial intelligence should also be implemented to increase productivity in an ESG friendly manner.
To ensure an effective integration of ESG in treasury, a structured model should be used. 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. An example of such a model is the Zanders Treasury and Risk Maturity Model, which could be used in any organization.
Tracking ESG progress
Once the integration of ESG in treasury is set in motion, it is important that the progress of the integration is tracked using metrics and benchmarks. When we discussed this topic with a treasurer of a Fortune 500 company, he argued that ESG is about ‘doing the right thing’, covering awareness and culture, which is hard to measure through metrics and benchmarks. In addition, he stated that although it might be hard for treasury to improve a company’s ESG performance, treasury could benefit considerably from it.
Because the development of metrics and benchmarks for tracking progress of ESG integration is still in its infancy, it is hard to do. The best way to develop metrics and benchmarks that effectively track the progress of ESG integration is by executing the following steps. First, each treasury contribution must be mapped separately. Second, metrics and benchmarks should be developed for each contribution, based on existing knowledge and your own ideas. Third, as ESG integration is an ongoing process, metrics and benchmarks should be altered periodically to make sure ESG performance keeps improving. Some examples of metrics and corresponding benchmarks are:
Measuring the effectiveness of technological innovation, through tracking the increase in output of a certain process while making use of the same input. The benchmark for this would be that new technologies enhance productivity.
Measuring digital workflows, through a digitalized form processing and records ratio. Depending on the current state, the benchmark should be set on a certain percentage, and ultimately go towards fully digitalized form processes and records.
Measuring the perceived sustainability of ESG financing, through using the external review of the ESG financing framework as a measure. The benchmark should be the approval of the framework by an acknowledged institution.
As the development of ESG in treasury continues at a rapid pace, it is important for treasurers to stay informed on the latest developments, and to find out if the goal is to make finance sustainable, or to finance sustainability.