In today’s rapidly evolving business landscape, environmental, social, and governance (ESG) factors have stepped into the spotlight as fundamental aspects of corporate strategy – and rightfully so. With higher global standards, increasing regulation, and the understanding that integrating ESG practices into everyday business operations may lead to more sustainable growth over time, treasurers – often behind-the-scenes financial wizards – face an exhilarating challenge: seamlessly weaving ESG principles into their treasury strategies and policies.
But, while the eagerness is palpable, the market is still in its early stages of evolution. This can make navigating the world of ESG feel like a journey through uncharted territory, with a web of conflicting views, standards, and frameworks to tackle and try to incorporate. In this blog, we’ll explore some possible approaches and considerations to integrating ESG into your company’s treasury and investment policy while keeping in mind the cornerstones of security, liquidity, and yield.
1. Synchronising for success: Align with your company’s ESG objectives
Syncing your treasury policy with your company’s broader ESG goals is a crucial step for treasurers. In fact, our 2022 ESG survey conducted with the London Stock Exchange and ICD, revealed that 78% of treasurers see corporate social responsibility as the driving force behind their organisation’s ESG initiatives. By infusing ESG principles into treasury operations, treasurers have the opportunity to contribute to their company’s larger mission, creating a comprehensive approach that influences financial decisions, risk management strategies, and investment choices.
2. Tailoring for triumph: Crafting a bespoke ESG approach
Crafting ESG objectives for your treasury that fit like a tailor-made suit isn’t just a fashion statement—it’s smart business. Matching your treasury’s ESG goals to your company’s unique identity and circumstances can lead to more impactful outcomes for the organisation, its stakeholders, and society as a whole. For instance, a company involved in manufacturing might choose to focus on improving supplier ESG performance by promoting greener practices across the supply chain. Others might choose to address ESG primarily through investing or issuing sustainable financial instruments.
3. Investing and borrowing with impact: Unleash the power of cash
This leads us to the area where treasurers can have the largest direct impact and create broader value for the entire organisation – cash investing and financing. In addition to contributing to positive change, incorporating ESG factors into the investment and financing decision making can make tangible improvements to their reputation, financing costs, and security. The growing relevance of ESG-compliant investing and financing is also captured through our survey results; almost 90% of treasurers who completed the survey considered ESG investing either ‘very’ or ‘somewhat’ important to them. At the same time, more than half of those surveyed said that including an ESG component in their next financing is on their radar.
Despite the clear demand for ESG solutions in capital markets, care is required when exploring the options at hand, specifically in terms of the green credentials applied to a product and the potential hazards posed by greenwashing. The same goes for looking at ESG data, for example. Correlation between ESG rating providers in some cases has been found to be as low as 7% and in stark contrast to the 90%+ correlation seen among the three main credit rating agencies (CFA Institute, 2021).
4. The cherry on top: regulations and reporting
Staying informed about the latest regulations and standards may be important for treasurers to keep on top of ever-changing industry developments and safeguard their organisations from compliance pitfalls, whilst also seizing opportunities to align strategies with evolving ESG expectations. Navigating the alphabet soup posed by the growing list of acronyms – SFDR, CSRD and ISSB to name a few – can feel like deciphering a cryptic crossword at times. A good place to start to get a quick handle on it can be the Principles for Responsible Investment’s latest regulation database (see here) and, for the nerdier among us (certainly including myself), its collection of academic ESG data (see here).
Each step taken, no matter how small, propels us in the right direction; these efforts compounded over time, and across a wide range of organisations, have the potential to lead to more sustainable outcomes. For a deeper dive into the state of the sustainable finance market and practical tips on ESG investing and borrowing, check out our recently published guide to sustainable finance featuring interviews with Julia Hoggett (CEO of the London Stock Exchange), Caroline Stockmann (Outgoing CEO of the Association of Corporate Treasurers) and Francois Masquelier (Chair of the European Association of Corporate Treasurers).