Maintaining ESG Momentum at the Heart of Treasury

While sustainability has risen up the corporate agenda at a rapid pace, and many treasurers have taken its practices onboard, there is still more work to be done on both sides of the balance sheet. Two senior executives, drawn from Barclays’ investment and corporate banking arms, explore the challenges and opportunities presented when establishing an ESG-centric treasury.

Environmental, Social, and Corporate Governance (ESG) has arrived in a big way in the treasury space but its influence across organisations is likely to become much stronger. There are two key reasons why this is so, says Susan Barron, Global Head of Sustainable Capital Markets, Barclays Investment Bank.

Susan Barron
Global Head of Sustainable Capital Markets, Barclays Investment Bank

First, she explains, investors are keen to understand how ESG is being incorporated into a broad spectrum of day-to-day decision-making within a business. And second, finance professionals, and corporate treasurers in particular, have found a pressing need to grasp the broad impact of ESG so that they can position their organisation most effectively for financing and capital raising purposes.

Indeed, Barron is clear that the importance of ESG to the wider business requires every part of the organisation to play its part in supporting that agenda, and that treasurers need to be able to offer the best level of support across the board to ensure ESG momentum continues.

Learning curve

One challenge that treasurers may experience is the practicality of fully applying the rather broad scope of ESG to their weekly discussions, notes Helen Kelly, Head of Europe for Barclays Corporate Banking.. “Corporate treasurers are struggling to find the free capacity to cover all boundaries in terms of regulatory needs, but then also trying to cover the commercial space too,” she notes.    

Helen Kelly
Head of Europe, Barclays Corporate Banking

Because of this, and since ESG still has a steep learning curve attached, it’s apparent that some treasurers do not yet see involvement as an opportunity. Acknowledging ESG as a “complicated yet fast-evolving topic”, Barron sympathises with this treasury viewpoint but urges all to seek further understanding as to how a treasury-delivered ESG programme can deliver and provide a range of advantages throughout an organisation.

“Not only does deeper involvement help meet the kind of stakeholder requirements outlined above, but it also hands treasurers the perfect opportunity to engage with other parts of the business with whom they have not previously connected”, suggests Barron.

From high level group sustainability and investor relations conversations to specific product development, she believes that ESG offers an opportunity for closer engagement internally with colleagues in operational, reporting regulatory and other teams. “Externally, it can also facilitate conversations with, for example, ESG rating agencies and dedicated second-party opinion providers that can review individual frameworks or associated capital market financing instruments.”

While Barron accepts that the list of wider engagement opportunities may initially start to feel “quite daunting”, she advises treasurers to take one step at a time. “There’s a lot of benefit to be derived from internal collaboration, which will be valuable for the business overall. But external engagement, with service providers, banks and even other treasurers, really can help reassure treasurers who are yet to consider the ESG space in detail.”

Challenges aside, Barron believes eventually most treasurers who engage with ESG will begin to see it as an opportunity. “From my experience, ESG encourages collaboration both internally and externally, and in particular, for corporate treasurers who are eager to share their experiences, it enables every business seeking connections to share their journey so that all may experience the long-term benefits.”

Expanding opportunities

For many treasurers, often their understanding of ESG can be limited to green bonds; if they have no need for issuance, their engagement is stopped in its tracks. Those treasurers who have pushed harder at the door of ESG will know that there is an increasingly wide spectrum of sustainability-linked instruments that are available in the capital markets space.

While there is recognition that green bonds are the most developed (or “oldest”) of all the ESG asset classes, Barron explains that there is the opportunity for individual companies to seek, create and find an appropriate ESG instrument for their own needs which can also address a wide spectrum of needs, from climate change to social issues.

The expanded, and continually evolving, choice of ESG instrument is an opportunity for treasurers to look across their capital structures. “Different corporates will require different ESG instruments, and a variety of solutions now exist. For example, a public bond may not be the most appropriate option for one business at a point in time, but an ESG-focused private placement may suit,” Barron explains. “Other types of bonds, such as social bonds, may also be more fitting.” Consideration is encouraged to help treasury find the right product for their context.

As ESG moves into other product classes, so the level of activity and opportunity rises. This is certainly true in the loans and trade finance spaces in particular, notes Kelly.

Growth in these product areas has not entirely focused on the green element either, she reports. The ‘S’ and the ‘G’ of ESG are catching up, with broader sustainability-linked solutions coming on stream. “From a solutions standpoint, the product set is also now addressing the other side of the balance sheet, with investments and liquidity opportunities, and while obviously less mature in terms of market depth, they could well meet treasurers’ needs.”

Additional effort

The deployment of ESG instruments may suggest additional effort on the part of the client. “Their use may be no more difficult than regular products, but does require some additional reflection, consideration and preparation,” explains Barron. Initially, it’s necessary to clearly identify the purpose of the instrument chosen. For an investment solution, the objective may be to evidence a move to de-carbonise a portfolio, for example. In the case of financing, a ‘use of proceeds’ approach may be adopted.

Here, consideration of a green, social or sustainability bond requires treasury to identify relevant green and/or social expenditures which the company is seeking to finance or re-finance. It will then need to articulate the ESG story around this aim, explaining to market stakeholders how the funding will deliver the desired results.

Alternatively, sustainability-linked instruments may be deployed to align a specific bond or loan with one or more social or environmental targets. Again, effort is required across a range of departments to identify and build a case for the most material and ambitious corporate level target.

While some treasurers may believe they will have to forge new financial instruments to meet ESG targets, this is not the case, says Kelly. “If they want to apply sustainability metrics to their financing, they only need to look at what they have in place already,” she explains. “Whether the goal is to apply an ESG lens to capital markets issuances, existing loans or RCFs or trade lines that might be nearing renewal, there really is no need to start from scratch.”

Policy update

The market itself is, of course, evolving at pace. This has seen a number of new ESG-compliant investments being made available to treasurers in the past year – and interest blossoming, according to the results of the TMI and Barclays European Benchmarking Study 2021 (see fig.1). With growth still evident, Kelly notes that solutions such as green deposits are enabling funds to be placed with a bank, which will adopt a ‘use of proceeds’ approach to invest outwardly in appropriate ESG activities.

Fig 1:  Over the next 12 months, will ESG criteria become more important when choosing short-term investments?

_{Source: TMI and Barclays European Benchmarking Study 2021}

“Typically, liquidity is still building in these markets so corporates are looking only to place smaller amounts; for larger investments policy may impose restrictions” she muses. “However, the market is maturing and we are seeing more interest, with a number of treasurers now looking to adapt their policies to be able to deposit a greater level of surplus cash into these ESG investment products.”

While Kelly observes that private companies may have been a little slower in embracing ESG, in part due to less onerous regulatory scrutiny than for public entities, she says that even their transition is picking up. This, she comments, is especially so now that those using the private banking sector are seeing a raft of new ESG solutions being offered by their providers.

With policy under scrutiny in some cases, the transition towards embracing ESG investments and financing is under way. But treasurers may still need more clarity over some aspects. For Kelly, there is a simple methodology that can be applied to ease the process of a shift to sustainable finance.

Start with the basics, looking at existing methods of calculating counterparty limits, she advises. “Where previously banks were viewed only through the lens of their credit rating, we are now seeing companies scrutinise institutions via a blend of credit and ESG ratings. But treasurers are also considering a broader look at their investment policies – and building more into the analysis of counterparties and their portfolio of ESG investments.”

“When considering ESG from an investment angle, there are various options for treasurers,” Barron adds. “That’s why we find it can be helpful to use a framework to review what types of investment products are suitable, and the criteria of these eligible products.” This may be considered at an issuer or product level, but she says that in both cases the aim is to reveal the quality of ESG adherence.

Adopting a deeper analytical and collaborative approach introduces a level of rigour that can also be helpful in terms of complementing future issuances, Barron adds. “This is true both in terms of solidifying internal thinking about ESG, and externally by offering formal – and easily standardised – data and documentation that alerts stakeholders to the existence within the business of a well-defined investment policy and sustainability strategy.”

Specialist help

Collaboration around the funding or investment space is demonstrably a good thing. When sustainability experts within an institution are part of the process, Barron believes it not only brings a deeper understanding of the sustainability risks of that institution, but also how those risks are being managed.

This can form the basis of a discussion that helps streamline the ESG financing process and avoid potential pitfalls. For Barron: “It also provides an additional level of understanding that can better define, locate, capture and provide the information needed to create the most effective individual financing instrument and its associated disclosure.”

Of course, using a framework that is the result of collaboration with valued advisors and partners also lessens the risk of inadvertently greenwashing a financing programme, comments Kelly.  Barron adds: “There’s growing acknowledgement that work with appropriate counterparties and second-party opinion providers should be informed by industry framework guidelines, such as those offered by the Loan Market Association (LMA) or the International Capital Market Association (ICMA). We’re also seeing the development of the regulatory landscape as a means of providing definitions.”

The combination of these green ‘failsafe’ measures is helping treasurers to produce the most effective and transparent explanation of what their organisation is trying to achieve, both through its financing and investments and the processes that underpin these. Kelly believes that most businesses with a genuine desire to do the right thing will already be adopting such measures. With the rules becoming ever tighter, superior diligence around ESG will, she feels, soon become common practice.

First steps

For corporates currently contemplating a shift towards ESG-centric treasury, embarking on the journey can seem daunting. Indeed, with myriad facets to each element of ESG, it can risk becoming a somewhat vague notion, especially where in-house expertise and resources are not readily available.

For Kelly, the first step should always be to map out what the components of ESG really mean to the business. From here, she says it becomes easier to develop those ideas into achievable goals which in turn can be built upon.

To help take those formative steps, Kelly focuses her advice on the need for treasury to work closely with group sustainability teams. Being steered ultimately by group ESG ambitions and strategy is, she feels, the only way for treasury to achieve optimal value for the organisation at a financial level.

Barron takes a similar position, reiterating her view that ESG is an opportunity. This may be driven by formal or informal engagement with stakeholders across the organisation, as an external move to engage more with providers who can enhance the journey, or indeed, both.

Whichever way it is approached, there can be little doubt now that treasurers have an important role to play in bringing ESG sensibilities to their respective organisations. By forming a strong partnership with a bank that has the resources and expertise, and which can itself be seen to be taking positive steps in the same direction, what can and will be achieved by treasury is really for the benefit of all stakeholders.  

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