How corporate treasurers are taking the lead on ESG
Corporate treasurers are increasingly engaging with the ESG goals of their organisations and turning to green finance products to help achieve their treasury objectives.
By Lachlan Colquhoun
In this Q+A, Westpac’s Nish Dharmaratne, Managing Director, Global Head of Product, Global Transaction Services and Michael Chen, Head of ESG, explain what’s happening and outline what lies ahead for treasurers as ESG expectations increase.
In the wake of the COP26 conference in Glasgow, sustainability is in sharper than ever focus as a vital priority for organisations across the world.
This extends to the finance function as corporate treasurers are increasingly engaging with the ESG goals of their organisations and using green finance products to help achieve them.
According to Bloomberg, the volume of ESG assets under management will reach USD 53 trillion by 2025. Corporate treasurers will need to be involved in issuing, lending, borrowing and managing these funds.
At Westpac, Nish Dharmaratne, Managing Director, Global Head of Product, Global Transaction Services and Michael Chen, Head of ESG, are closely watching the trend. They say the only way is up.
In this Q+A, together they explore how treasurers are engaging with ESG strategies and outline next priorities.
How has the role of treasurer evolved in recent times in terms of ESG?
Michael Chen: If I wind back, to a couple of years ago, sustainability and ESG were typically dealt with at the corporate level.
But over the last few years investors, stakeholders and regulators – and even consumers – have been demanding that organisations embed sustainability and operationalise it more and more.
That’s across everything from green energy sourcing, to how to make their operations less emissions intensive, so how is this operationalised within the treasury and the finance function?
With the boom in sustainable financing, treasurers are engaging with sustainable finance structures, but I think it’s far broader than that. We are seeing finance teams choosing their counterparties, including banks, based on their ESG credentials. So this ESG screening is happening at an entity level and not just at a transactional one.
And beyond funding, there’s the issue of what treasurers do with their cash pool – they are increasingly putting it into green deposits. These are some examples of how ESG is being operationalised into the finance function.
So is there an increasing breadth of sustainable finance products out there?
MC: Absolutely, and that has helped with the boom in sustainable finance products that treasurers can engage with. It’s not just the products themselves, it’s better definitions around what is actually a green activity, a green asset, or a social outcome.
And on sustainable products, such as sustainability linked loans and bonds, that is helped by corporates themselves setting targets, which may not have been the case three, five or ten years ago. So the boom in products is being underpinned by increasingly sophisticated sustainability strategies and targets.
How are treasurers’ roles changing?
Nish Dharmaratne: I feel a treasurer has two roles to play. One is to stay on course with the treasury objectives of managing efficient levels of liquidity & maximum value creation from the working capital of the firm. The second is aligning to the more broader organisational ESG objectives and assessing how that impacts the funding mix, funding cycle, funding duration. The treasurer is expected to seriously consider the impacts of ESG in making working capital management decisions. Key question that cross their mind could be “Am I going to have a lower cost of funding because we have negotiated green funding with the banks ?” Do I need to assess my suppliers and think about new or better payment terms to those who have followed through with better ESG principles?
Banks are ready with green deposits and lending products. ESG principles are more prevalent in the lending space, and there can be more to bring ESG principles to the deposit products. There are few products or solutions built in this market, however this is an area for treasurers to watch out what new ESG based deposit products may come in as off-the-shelf products.
What about the cost of engaging with green and sustainable finance, which initially came at a premium?
MC: In the early days, treasurers were mainly interested in sustainable finance from a pricing differential perspective, and it affected their cost of funding.
If I look at a sustainability linked bond (SLB), they are typically issued a couple of basis points tighter. So treasurers can get a bit of a saving there. But those who don’t meet the KPIs which they set for themselves, might have to pay a coupon step up. There are also transactional costs, such as getting a second-party opinion provider.
Where the conversation is now treasurers are increasingly wanting to do this because it meets their organisational ESG objectives, and not how it affects their cost of funding.
What about supply chains? Organisations are examining their supply chains, auditing their suppliers for ESG. How does that impact on the treasurer?
ND: I think this will have the biggest impact. I believe management of suppliers with ESG score cards will be one of the key areas in managing suppliers going forward.
Most Australian companies rely on global suppliers & as example, we know about the global manufacturing hub in China, and there are other markets in South-east Asia that provide manufacturing capabilities. Its important to understand if these global suppliers are following through with the right labour practices, inclusiveness and fairness which at minimum support the ESG principles. If the Treasurer has specific KPIs on ESG friendly suppliers, then we can expect that companies will make hard decisions, including terminating some suppliers to meet the ESG objectives.
MC: All big corporates will be really focused on supply chains because of Modern Slavery legislation.
Treasurers can engage with supply chain finance to incentivise better ESG performance from their supplier base. However, there is still limited data on how you can measure whether a supplier is performing in terms of their supply chain management.
I think this will improve over time, as more data is available on how companies are managing supply chains in terms of social and environment issues.
Does this mean treasurers have more to do with procurement and compliance than before?
ND: I think so, yes. It can add some complexity to the standard operating rhythm for a treasurer. You have the bank supporting you through the right funding product and investment products with ESG principles in built, however procurement decisions and compliance to ESG takes that to a whole new level. Ultimately treasurers need to ensure all payments to suppliers are well managed and payments terms are met. The treasurer needs to re-think what kind of reports they need if new ESG KPI’s kick into their score cards. If a treasurer is tasked to meet certain ESG requirements for the suppliers, then you need to look at what that supplier mix would look like, what additional checklists, reporting or reconciliation you need and work with procurement teams closely.
What does best practice in this area look like?
ND: Being very clear on the organisational ESG strategy and how serious the organisation is in terms of embedding it into functional areas.
Some organisations just say that ‘it’s only a procurement story. I don’t need to bother the treasurer’ and then some organisations will have a different view. So, you need to make sure you have a very clear view of what your organisational strategy is & what your board direction is.
Then, translating that to very clear KPIs – there are probably just one or two that you need to successfully meet. It could be having the right supplier base with ESG principles or, at minimum, having a certain supplier base provided with preferential terms (like better payment terms) if they meet the criteria. Second part to that is how you operationalise these changes which you need to be clear.
You also need to get your reporting ready, and that is around specific regulation and legislation that impact ESG based decisions, but also accounting standards. In terms of current tools, if you look at the treasury enterprise management system, I don’t think there is a special ESG module, so you need to build your own ways of monitoring and measuring.
What is Westpac doing in this space, both internally and externally?
MC: In the last year we have completed 33 sustainable finance transactions and supported AUD 50 billion in sustainable finance.
To fund the bank, we did a green euro bond earlier last year and that involved the treasury team getting intimately involved in our ESG strategy. We want to issue more and more in the green finance space because that is consistent with our organisational sustainability strategy and there is also the potentially more attractive financial terms.
How fast is this moving?
MC: It’s moving incredibly fast. ESG has really boomed in the last year or two.
Globally, sustainable finance issuance continues to reach all-time highs, with 2021 issuance surpassing US$1.6tn, more than doubling 2020 volumes of US$761bn.
With more corporates setting up their own ESG strategies and how that is operationalised through the treasury team, there’s only one way this is going.
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