There is no doubt that ESG has become a hot topic in corporate treasury circles in recent years. Treasurers have moved from considering ESG as not part of their core responsibilities to the current realisation that it lies at the heart of their credit and equity story in conversations with investors, banks and other stakeholders, including regulators. The wider impact of ESG on consumer behaviours and sentiment, as well as reputational risk, is also increasingly on treasurers’ minds.

According to Dr Arthur Krebbers, Head of Corporate Climate & ESG Capital Markets: “This recent shift has led to numerous change programmes and new ESG initiatives within treasury functions. While these used to be relatively focused on a specific product, such as a green bond issuance, today more advanced treasury teams prefer to focus on how sustainability can apply across their treasury function.”

Indeed, it is now quite common for treasury functions to be assigned the responsibility for various ESG and sustainable finance topics. In doing so, treasurers are often required to collaborate close with other teams within the company, such as sustainability, compliance, legal and procurement.

“ESG is also manifesting in a much more two-way interaction between treasury functions and their investors and banks,” adds Krebbers. “Rather than simply being on the receiving end of sustainability-related requests and demands from investors, treasurers are increasingly driving the conversation with their financial partners through surveys and roadshows. In doing so, they are helping expand the range of ESG investment and financial solutions available. An example here is the growth of cash management products with sustainability features.”

In addition to growing board-level interest, which now often includes sustainability-linked remuneration targets, much of the thrust behind ESG action within corporate organisations actually comes from employees and customers. As a result, change within the organisation is increasingly being driven from the bottom up, as Caroline Haas, Managing Director, Head of Climate and ESG Capital Markets, explains.

“There has been a tremendous amount of impetus coming from employees wanting to mobilise around the topic of sustainability as people become more concerned about climate change,” she says. “This starts with simple initiatives, like reducing the use of plastics and paper in the office. It has certainly filtered upwards, with treasurers examining supply chains and where the materials for their products are coming from. Firms are starting to see how they can ensure that their footprints – both environmental and social – are considered when sourcing suppliers.”

As an example, sustainable supply chain finance (SCF) programmes can be configured to prioritise, and offer preferential financing rates to, suppliers that have low carbon footprints or those that operate according to the highest social and ethical standards. Diversity, equity, and inclusion factors can also come into play, as well as initiatives to support minority- and women-owned suppliers.

Treasurers are uniquely positioned to play a pivotal role in driving ESG-related projects, thanks to their daily direct relationships with a range of capital providers.

Gustavo Brianza, Managing Director, Debt and Financing Solutions, outlines the impact of this exposure. “The likes of banks, investors, and suppliers have their own ESG targets and demands that they will require of their counterparties. Treasurers are exposed to that interaction in myriad ways, adding to the ongoing drive to bring ESG requirements forward in their organisation.”

Another crucial innovation here is the fact that capital providers are now offering various financing and risk management solutions that can link to specific sustainability targets to the pricing and economics of the instrument. Companies can identify their targets concerning, for example, decarbonisation (see box for more information) and achieving net zero, as well as certain social and/or governance goals.

“Corporates can then use that to structure financial incentives that motivate the achievement of those targets,” continues Brianza. “Many financing products can do that, including loans, private placements, investments, deposits, and, as mentioned earlier, SCF. The important thing here is to ensure that those products are robust and adhere to strict sustainability standards – with clear ESG targets, as well as the usual regulations around financial products.”

What Brianza is alluding to here is the need to closely tie ESG products to tangible achievements and KPIs, to avoid the accusation of greenwashing by providing measurable outcomes and responsibilities, as well as a clear audit trail.

“Companies often report on ESG, either through their annual reports or separate sustainability reports. But it’s not as if every single ESG element in the report can be used to support or justify sustainable finance – they have to be very specific, tangible targets that any ESG financing is linked to,” adds Brianza. “This guarantees a decent level of robustness and puts treasurers in the driving seat when it comes to keeping greenwashing at bay.”

A growing area of ESG activity aimed at supporting corporates in decarbonising are the voluntary carbon markets. According to the World Bank, carbon markets are a vital tool to reach global climate goals, particularly in the short and medium term.[1]

The voluntary carbon market helps to either remove CO2 from the atmosphere or avoid it going into the atmosphere in the first place. Projects (technology or nature-based) with the sole purpose of removing CO2 receive a Carbon Credit Certificate verified by an independent verification entity such as Verra, Gold Standard, or the American Carbon Registry and Climate Action Reserve. This certificate can then be sold to organisations, corporations and individuals that have voluntarily implemented a climate strategy. The carbon credit holder can then apply the credit against their existing residual emissions.

“It’s been fascinating to watch the carbon markets recently, particularly the voluntary market,” says Haas. “Obviously, the governmental market has been going for quite some time, and it has a fair amount of traction, but we still need greater volumes to better assess the carbon price.”

Article 6 of the Paris Agreement provides a framework for how carbon markets can play a role in the global co-operation required to reduce emissions. Still, it wasn’t until 2021’s UN Climate Change Conference in Glasgow – COP26 – that the Paris Rulebook was finalised, detailing how the implementation of the 2015 Paris Agreement will move forward.

“What this means is that carbon credits do have a significant role to play in the shift to net zero,” affirms Haas. “Of course, nobody wants carbon credits to be the 100% solution, but they do have a role.” In fact, many companies have used carbon offsets or carbon credits for their operational footprints for some time.

NatWest, for example, has been using carbon credits since 2014 for its operational footprint. Additionally, in conjunction to the carbon market, the bank initially partnered with three other banks to establish the settlement platform Carbonplace.

“While we were one of the four founders, there are now nine banks that have joined the initiative,” says Haas. “There is great global diversification across the carbon credits market and also across the customers who are interested in these types of products – it’s great to see the growing uptake. Now even stock exchanges are becoming interested, which should create more liquidity and transparency as this market evolves.”

To find out more about the voluntary carbon markets and their role in helping companies decarbonise, read NatWest’s Carbonomics 101 series.

[1] The World Bank: What You Need to Know About Article 6 of the Paris Agreement

Treasury teams can also steer the wheel around ESG innovation, in partnership with their banks. Already we are seeing the market for sustainability solutions in the cash and liquidity management space expanding – with offerings growing from green bonds and loans to now incorporate sustainable deposits, social bonds, ESG-compliant MMFs and more.

“We’ve seen a rapid expansion of ESG-related instruments across the yield curve,” reveals Haas. “Recently, there has also been a great deal of sustainability-related activity in the commercial paper market. And many MMFs are also looking to incorporate ESG into their mandates, so the more high-quality investible assets available in the sustainability space, the better.”

Another area of promise is liability management, on both the corporate and the bank side, with participants actively looking to buy back outstanding conventional bonds. “As businesses make the transition towards green business models, they will be able to finance this with their use of proceeds around either the green projects or the green assets that they’re putting on their balance sheet,” notes Haas. “In Europe, about 35% of new primary issuance in a typical week is now in an ‘ESG’ structured format. That’s significant and it is inspiring to see that shift in the percentage of green liabilities versus conventional ones.”

Elsewhere, ESG solutions are also emerging in one of the most talked-about areas of finance today – interest rates. With central banks worldwide hiking rates after an extended period of low and/or negative rates in a bid to curb inflation, treasurers are looking for risk management tools to limit the financial impact. Now, there are ways to embed ESG factors within these instruments – a development that ISDA has already been providing guidance on.

Brianza outlines: “Rates products are very much in focus right now, particularly where rate hedging product derivatives can be linked to KPI achievements around ESG. This is a great way to incentivise a company to achieve its sustainability targets. Given current levels of volatility, the inverted yield curve, and the difficulties in navigating an increasingly complex interest rate environment for companies, this is an exciting product development. Other types of derivatives, such as FX forwards, can also be linked to ESG targets and I anticipate more innovation in this area.”

Another noteworthy ESG trend revolves around companies moving sustainability initiatives beyond their own four walls. Sustainable SCF is a prime example, with the ability to positively impact the entire value chain in terms of reduced carbon footprint.

Dynamic benchmarking is another example of companies looking outwards as they consider their ESG approach. “Corporates are becoming more sophisticated in understanding and tracking how their ESG metrics compare with their peers,” continues Brianza. “They are also sourcing direct feedback on their ESG initiatives through regular surveys of investors, banks and other stakeholders.” As such, it increasingly falls on the treasurer to focus on those areas of ESG that are most relevant to their stakeholders, and how they compare with their peer group in these activities.

While significant progress has been made regarding ESG in business, and more specifically in treasury, there are still some barriers to overcome. Challenges include a lack of standardised ESG ratings, self-certification around sustainability within SCF programmes, and a lack of maturity in certain ESG products and solutions.

“Another obvious challenge that people call out is data — not a lack of data, but rather the clarity and the accuracy of the ESG data being provided to them,” comments Haas. “As an industry, we need to make ESG data utilitarian, and standardised, so that everyone can trust it and benefit from it.”

But there are whispers in some areas of the market that ESG data may be under threat. Given greenwashing scandals and the regulatory requirements around ESG, there is a concern that firms may become less open in their reporting. This will make it harder for all in the financial industry share learnings.

“This isn’t a competitive game, it is about how can we accelerate ESG data standards as quickly as possible to get to the next level,” highlights Haas. “Sharing ESG data is vitally important, and where in-house capabilities are not sufficient to support proper handling of ESG data, it is important to seek help from third parties.”

In the fast-evolving, vast space that is ESG, it can sometimes be tricky for treasurers to know where to focus. Rather than trying to do everything at once and ending up doing nothing satisfactorily, a more successful approach could be to focus on a specific and relevant area of ESG and build from there.

“ESG is something for treasurers to chisel away at it – look at one part, understand that and feel comfortable with it, and then move onto the next,” advises Haas. “Take it step by step and keep communicating internally so that people know this is a marathon, not a sprint.”

The more treasurers learn and engage with ESG, the more knowledge they will generate to build business cases for future ESG-linked projects. Key to a successful presentation, however, is the ability to pitch a vision of the future to fellow stakeholders.

Krebbers notes: “As treasurers, it can be comforting to focus on the numbers. It’s the same with ESG. It is natural for treasurers to focus on quantitative factors and metrics. But it’s critical to realise that stakeholders also need qualitative information: a narrative and examples to contextualise those numbers.”

Finally, treasurers must be prepared to step up and really become ambassadors for their company’s ESG strategy and departmental sustainability targets. In doing so, they should remain open to guidance. Krebbers believes that treasurers can play an important role in identifying areas of ESG focus that are most meaningful to a company’s financial stakeholders – such as banks and investors. This can help a company further define and evolve its sustainability strategy.

Brianza echoes this, concluding: “Of course, external advice can be extremely valuable. As banks, we can provide insightful information by highlighting trends and specific needs we are seeing in the ESG market, for example. We can also collaborate on innovation around ESG products to help meet client’s evolving requirements. But ultimately it is the treasury team that will deliver the project every step of the way, and it is up to the treasurer to carve out an ESG path that will lead the company to long-term success.”

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