A New Framework for ESG

Global Transaction Banking Leads the Charge

Corporate treasurers are at the tiller as they help their companies navigate the increasing ESG challenges. While global standardisation around ESG is still a work in progress, a recent innovative framework developed by Societe Generale can help to increase transparency and credibility in this space.

ESG has become increasingly important for corporate organisations in recent years, with regulatory necessities placing it firmly on the board-level agenda. As a result, the topic has also risen up the priority list of the corporate treasury function, particularly given the growth of cash and debt products that carry an ESG badge. Treasurers can now avail of green and sustainable bonds and loans, for example. Green deposits and ESG-focused MMFs are also growing in popularity alongside sustainable SCF programmes and ESG-linked FX derivatives.

Marie-Gabrielle De Drouas, Head of ESG within Societe Generale’s Global Transaction Banking department, remarks: “In many ways, treasurers are integral in ESG because they’re often in the driving seat of interactions with all the counterparties such as regulators, investors, banking partners, rating agencies, the company’s clients, export credit agencies, and their senior management.”

This pivotal position means that treasurers can influence the business to integrate ESG goals and improve the firm’s positive impact on the environment and society. Equally, treasurers can help allocate capital away from activities that generate negative impacts.

“Actions related to ESG that used to be voluntary are now compulsory, such as through the European Union’s corporate sustainability reporting directive,” notes De Drouas. Companies are having to demonstrate the commitments they have taken, how they have put them in place and how they perform against the targets that they set for themselves.”

The regulatory challenge applies to all corporates but poses treasurers with certain additional complexities. For example, reporting of financials and ESG used to be separate, but now companies have to report both together, outlines De Drouas. “It’s interactive – CapEx and OpEx aligned to the EU Taxonomy must be monitored and reported, so corporates need to put both concepts together. Treasurers are one of the lead actors that can help with this.”

A further consideration is the green transition. Initiatives such as the European Green Deal, Europe’s new growth strategy, calls for corporates and other stakeholders to participate in a shift towards economically sustainable growth and an economy that is not based on fossil fuels and overconsumption of natural resources. However, this needs financing. Treasurers, together with Chief Financial Officers, play a pivotal role in considering ESG topics and integrating them in investment decisions. This could be through R&D on transition technologies, for example, or by prioritising investments that have a stronger positive impact on the environment and not simply looking for short-term returns.

“If a business has two possible projects under consideration and can only finance one of them, companies are now trying to ensure that they choose the one that has the higher positive impact,” comments De Drouas.

The quest for standardisation

While the prioritisation of ESG within corporations has taken off, treasurers’ experience with their banking partners can sometimes be inconsistent. Although the more mature markets on the green bond and loan side know what investors expect from these products, the picture can be more complicated when it comes to transaction banking.

“A treasurer will be liaising with different banks, but the banks are not talking among themselves to align their requirements and approaches to sustainable global transaction banking,” reflects De Drouas. “That is why having standards to which every bank and treasurer can refer is critical. It provides transparency and helps to align the requirements.”

Certain initiatives in the market are pushing for sustainable transaction banking standards. For example, the International Chamber of Commerce (ICC) is currently working on defining sustainable trade finance standards. Societe Generale is one of the 10 banks that was part of the pilot that tested the first wave of the standards. Elsewhere, the International Capital Market Association has developed the Green Bond Principles (GBP), which in turn the Loan Market Association used as inspiration for the Green Loan Principles (GLP). Crucially, these initiatives are evolving and becoming applicable to further areas of finance.

“We were pleased that the Green Loan Principles now also cover trade finance facilities,” enthuses De Drouas. “While the principles do not cover factoring or one-off trade finance transactions, they do at least cover other parts of global transaction banking.”

Most of these significant attempts to drive standardisation for ESG in finance have come from Europe. Indeed, the previously mentioned EU Taxonomy gives European banks a shared direction of travel. Globally, however, ESG standardisation has a long way to go.

“When it comes to markets outside Europe, particularly in places such as the US and Asia, every region is pushing for something somewhat different,” reveals de Drouas. “We need to ensure that there is at least some consistency from a geographical perspective.”

Then there is the more granular financial level, where transaction banking faces specific standardisation challenges due to its short-term and confidential nature, as De Drouas explains.

“When it comes to transaction banking, the information on the underlying goods of the transaction is not necessarily available,” she comments. “Without that information, it’s complicated to trace back and find reliable information to demonstrate the ESG impact.”

Having the data to demonstrate the impact is a cornerstone of ESG-related financing. A 10-year financing will generate data enabling corporates and their banking partners to claim some influence regarding metrics, such as CO2 emissions avoided. However, the shorter-term nature of transaction banking means that it can be challenging to demonstrably prove the impact.

“We have had discussions regarding factoring and pointed out that, while it looks like short-term finance, those lines are really used all year,” says De Drouas. Even if the cash is reimbursed and reused, the bank’s exposure is still significant. “Banks want this effort in supporting the liquidity of corporate clients for the green transition to be taken into account, even when it’s short-term finance,” adds De Drouas.

The complexity of corporate supply chains is another ESG-related challenge facing banks and treasurers. If a bank provides trade guarantees for a client that is a counterparty to a project to finance the production of solar panels, it is relatively straightforward to understand the impact. However, it quickly becomes more complicated if the transport, the supplier and the end-user also have to be assessed.

“We always look at the final usage of the goods,” outlines De Drouas. “If it can be demonstrated that the final usage will be generating a positive impact, that will be taken into account. But this must be formalised with us by the client.”

A framework for a brighter future

While decisive global standards on ESG financing are still an industry aspiration, some banks have taken the initiative to make ESG definitions clear and transparent for themselves and their clients. As such, Societe Generale recently established its Sustainable Global Transaction Banking Framework to achieve precisely that.

“We decided it was essential to increase the transparency and the recognition by external stakeholders, including our clients, of the reliability of our approach,” enthuses De Drouas. This drove us to look for a third-party review of our Framework, to confirm from an independent external perspective that our internal requirements are up to market standards.”

For the external review of the Framework, Societe Generale worked with data and analytics advisory firm ISS-Corporate for many months. The company has a particular track record in reviewing corporate frameworks for green bonds, but the work it engaged in with the bank was disruptive and beneficial to both parties.

“Despite ISS-Corporate’s experience in the corporate bond space, they are less used to transaction banking,” explains De Drouas. “ISS-Corporate had to adapt its methodology because while the framework of a bond issuance requires thought about the types of transparency that should be provided to the investors, in transaction banking, we want to be transparent with our clients.”

Through the discussions between the two parties, the bank was able to demonstrate that the shorter-term world of global transaction banking can play a vital role in making a difference with ESG.

One benefit of the external review for Societe Generale’s Sustainable Global Transaction Banking Framework is confirmation that the bank has developed a reliable approach in order to prevent the risk of greenwashing. It also protects its clients against the risk of greenwashing when they receive a label from the bank confirming that a transaction is sustainable. “It really increases the credibility of this offer,” affirms De Drouas.

Additionally, when it comes to challenges about ESG claims attached to transaction banking instruments from counterparts such as auditors, the Framework offers a level of confidence relating to the whole approach and traceability of the checks that have been carried out.

“We wanted to be transparent with our clients and show them that before providing them with a green label, we are taking all these steps,” emphasises De Drouas. “This demonstrates that they can rely on our approach and that we are recognised for complying with market standards.”

The Framework has been inspired by initiatives including the GLP and GBP, and while it remains a proprietary tool that offers the bank a competitive advantage, Societe Generale is closely following the evolution of market practice in this area. “We are looking to integrate where we see future standards coming in as much as possible,” adds De Drouas.

The bank has compared its approach and Framework, which are primarily based on the GLP, with the ICC, which examines some different components. “The ICC is looking at the seller, the buyer, the goods, but also the transporters,” notes De Drouas. “In our global approach, we also cover checks on the buyer and seller sides and on the goods, for example. We hope that everyone will have the same requirements and that future standards have the same expectations.”

Helping treasury teams prosper

For treasurers, meanwhile, the bank’s Framework is helpful because it clarifies what can be considered green or social, covering everything that has a positive impact.

“We go into great detail specifying the applicable activities and the criteria that we’re looking at,” explains De Drouas. “It’s in the spirit of the EU Taxonomy, with a technical screening criteria. This makes it much easier for a treasurer to know if a specific activity meets the eligibility criteria or not.”

The bank is also transparent in terms of what it expects from corporates regarding traceability and impact reporting. “Once a client has claimed an impact, they have to demonstrate that they can measure and report on this,” highlights De Drouas. “This helps all treasurers to see how they can measure the impact they might be having through their transaction banking activities.”

The requirements defined in the Sustainable Global Transaction Banking Framework apply at both client and transaction levels, meaning that clients are not systematically eligible for instruments with an ESG label.

“Even before proposing ESG products to a corporate client, we have internal discussions and checks – looking at areas such as reputation and alignment with our commitments,” reveals De Drouas. “Then we look at the transaction to check that this is also eligible.”

Once an ESG label has been provided, the bank also has a mechanism in place that can respond to new information. For example, a label could relate to a wind farm when the project was accepted, only for it later to transpire that there is a biodiversity impact that was not initially apparent. The contract contains a clause for this and similar events, meaning the label may be rescinded.

“For some green solutions we ask for an annual impact report to verify and demonstrate the impact,” emphasises De Drouas. “With the sustainability-linked mechanism, the client has to annually demonstrate their performance against the targets that we agreed on. This could be a CO2 emission reduction or the percentage of women in management, for example.”

Supporting the key actors

With ESG’s prominence on the corporate treasurer’s agenda, De Drouas encourages them to discuss with their banks where they might enable a stronger focus on ESG in transaction banking.

“Understanding a company’s business and objectives helps us identify opportunities for ESG transaction banking with the treasurer,” she states. “Depending on the client’s objective, the chances we see, and the panel of ESG global transaction banking products that we offer, we can find a way to help build a strong relationship and help our client transition.”

Traditionally, discussions regarding sustainable loans and bonds took place between banks and the CFO at the corporate client. The treasurer, the head of trade, and even purchasing departments within the organisation used to be less involved in linking financial and non-financial strategies. But that is no longer the case today.

“We’ve reached a point where the treasurer is a key actor in the corporate’s ESG strategy,” concludes De Drouas. “Through our new Framework and ongoing expertise, we can help support them in this role and with realising the company’s ESG ambitions.”