Roadmap to ESG in 2025

A Turning Point for Treasury

For environmental, social and governance (ESG) initiatives to become part of the day-to-day activities of the business community, it will take continued strong leadership and guidance. In the final instalment of this three-part series, Bank of America experts use real-world examples to explore the future of sustainable practice, offering insights into how treasury professionals can drive change for good.

As individuals and organisations increasingly realise the importance of taking sustainability seriously, ESG has rapidly evolved to become the issue of our time. Indeed, a recent report by the Intergovernmental Panel on Climate Change (IPCC) flagged how extraordinary efforts are now required to help to stabilise the planet.

Against this backdrop, Melissa Moi, Head of Asia Pacific Environment, Social, Governance, Bank of America, believes we will see ESG “continue to grow in terms of relevance from a business strategy perspective and from a treasury perspective in the months and years ahead”. But how can treasurers prepare – especially when faced with a period of significant global uncertainty?

Melissa Moi
Head of Asia Pacific Environment, Social, Governance, Bank of America

Growing demand

By 2025, when hopefully the world will be in control of the current health crisis, Moi believes that there will continue to be “a massive push from an ESG-related finance perspective”.

From a treasury point of view, it will therefore be essential to look at how sustainable finance can be used as an opportunity. Especially since Bank of America research has shown how the cost of capital goes up when a business fails to be ESG-compliant.

“Treasurers need to be thinking about ESG now, and how they can plan for a more sustainable department by 2025, for example,” says Moi. “This means leveraging ESG financing tools to incentivise more sustainable performance – not only within treasury’s parent company and across subsidiaries, but also across supply chain partners.”

Achieving this will likely require a fresh look at how investments and funding are managed across areas such as CapEx, M&A and R&D, especially where a business is learning to pivot away from carbon-intensive practices. But far from being a separate part of the treasurer’s remit and thinking, the aim is for ESG to be embedded into everyday thoughts and actions.

Moi continues: “ESG is not, and should not be treated as, a standalone business pillar. Rather it is a means through which the whole business can begin to understand the impact of the physical and transition risks posed by being slow to act on climate change and other ESG-related matters. It requires treasurers to fully understand not only what this means in terms of cash management but also how it will affect their outlook across all of their functions, right across the board.”

Making the transition

The aforementioned IPCC 2021 report, issued against the global backdrop of increasingly common cataclysmic weather events such as wildfires and flooding, is a call to action for all business leaders, but especially treasurers, believes Venkat ES, Head of Treasury Product, Asia Pacific, Global Transaction Services, Bank of America.

Venkat ES
Head of Treasury Product, Asia Pacific, Global Transaction Services, Bank of America

With the cost of capital rising and resources management intensifying, it is time for treasury teams to raise their day-to-day standards, he says. “Realistically, there is no reason why treasurers should not be considering an ESG approach to managing liquidity, including deploying surplus into genuine ESG-related instruments. The cash management products available from banks are maturing at such a rapid pace that by 2025, treasurers should have a whole suite of ESG solutions at their fingertips – offering all of the upside and none of the downsides that are often, wrongly, associated with ESG products.”

Of course, notes Venkat, there is a reputational element for the corporate treasurer to consider when engaging in ESG-based finance. If the bulk of debt is ESG-focused, there must necessarily be ESG metrics based on wider corporate objectives and goals. Treasury and the business need to be fully aligned to ensure these are met, says Venkat. “Companies need to be constantly on their toes to ensure a positive outcome. This demands a lot more work on the evaluation journey over the next few years.”

Part of this ‘work’ is to ensure the right key performance indicators (KPIs) are in place, not just in the wider organisation but in treasury too. “It’s a fast-evolving space,” notes Venkat. “In the past few years, we’ve seen exponential growth in the response to ESG issues, and KPIs are becoming an integral part of ensuring compliance with ESG commitments. That said, the precise nature of KPIs adopted may vary from industry to industry and company to company.”

For example, an organisation Venkat works with that is historically a heavy user of fossil fuels and which now wants to move towards renewable energy, is in the process of defining metrics capable of demonstrating progress on what will inevitably be a long journey. Meanwhile, in the world of real estate development in Asia, where Venkat is involved in a project that is seeking to tackle climate and social issues from the outset, appropriate KPIs must be found to demonstrate genuine progress, as opposed to box-ticking.

“KPIs are becoming an integral part of the goals of forward-thinking treasury teams,” he notes. “New pathways are opening up as the message is becoming clearer and stronger, and this is converting into smart goals, with KPIs and metrics now being driven at board level, but also across the finance function and into treasury itself.”

Moi adds that investors increasingly have requirements for boards of directors and leaders of companies to understand specific climate-related risks and opportunities. In turn, she says, this creates a new imperative for treasurers and other functions to keep building KPIs into their practices as they develop their roles in helping company leadership respond to ESG. As she says herself: “There should be understanding, commitment and measurable goals related to ensuring integration and risk management from an ESG perspective is tackled head-on within each role.”

Within treasury, these KPIs might range from the percentage of surplus cash invested in ESG-compliant investments to the percentage of digital versus manual operations. The latter is a pet subject for Venkat. “Given the huge shift towards digital channels, treasurers should be able to move away from paper-based processing of routine payments and receipts within the next few years – if not sooner. Really, I’d like to see the vast majority of treasury processes being completely digital by 2025.”

New insights and responsibilities

Through this transition away from paper towards digital flows, treasurers also have an opportunity to glean insights that could contribute to ESG reporting. For example, treasury teams have a unique overview of spend and cash flow across an entire organisation, from operational financing to supplier payments and client fulfilment, says Moi. “Some of the regulatory reporting requirements around greenhouse gas emissions, for example, oftentimes require it to be traced, measured and aligned with revenues and spend. It’s therefore likely that treasurers could become the central repository for that data; they have access to it and are best trusted to accurately report these metrics.”

Furthermore, Moi believes that treasurers should be at the heart of any team working towards a regulatory or investor-mandated commitment to ESG reporting, and should necessarily be party to related discussions, being well-positioned to translate strategic ESG goals into operational practice.  

The corporate treasury-driven need for suitable ESG tools is also helping to boost innovation in banking, notes Venkat. It’s a welcome challenge, with Bank of America’s sustainability-driven deposit account (a normal deposit account that earmarks the funds for ESG-based lending), setting something of a benchmark as others follow. He comments: “Meeting new demands in this way requires a change of technology and a change of focus for us. But it also means we can offer clients flexibility by taking a normal current account and converting it into an ESG-focused deployment, which seamlessly becomes part of their normal day-to-day operations.”

The bank is also providing sustainability-related flexibility around payment processes. This is especially welcome in Asia where there is still a significant amount of paper usage, notes Venkat. “It’s been challenging to come up with innovative solutions that leverage the latest technologies, like application programming interfaces [APIs] and artificial intelligence [AI], to make sure clients don’t need to generate paper documentation, but one area we have achieved great results is in collections.”

Developed in partnership with a fintech, Bank of America has a system that deploys machine learning (ML) and AI to assist cash application. “With funds arriving from multiple sources, some cross-border, often you know who paid but you don’t know to which invoice it relates,” explains Venkat. “Now we are seeing examples where, by digitising the process, matching percentage rates have increased, from the low 30s to the high 80s.”

In addition, Moi notes that digitisation of supply chain processes, while not new, has an increasingly beneficial role in terms of sustainability. There is an obvious opportunity to remove paper from the chain but it goes deeper than that, she says. “There is increased attention on how companies manage supply chain-related human rights issues, with many taking responsibility for ensuring ESG compliance within their supply chains,” she notes. Digital processes can assist with tracking, tracing, and reporting at every stage.

Social drivers

But with more data and insight, Moi cautions that there may sometimes be rather too much pressure on suppliers to comply. “What we’re hoping is that this is taken as an opportunity for large buyers to engage with their suppliers, incentivising their set-up of ESG governance structures, policies and reporting, and encouraging them to adopt a more sustainable way of thinking,” she says. “Rather than buyers simply no longer working with suppliers that are unable to comply.”

Indeed, in the context of the health crisis, Moi believes that there is an opportunity for corporates to demonstrate support for their trading ecosystems, especially their smaller suppliers. “We’ve seen some companies, despite obvious issues in their ability to continue operations as normal, make commitments to their long-term suppliers. By doing so, they are ensuring the livelihoods of those making the goods or providing services, and their communities are able to stay afloat.”

Looking a little further out, there are opportunities too to explore how best to encourage smaller collectives, such as farming groups, to adopt ESG thinking through concepts such as priority sector lending. Doing so can ensure these businesses are able to work together to provide raw materials, promoting financial inclusion of SMEs (small and medium-sized enterprises) and, with the right technology in place, providing individual participants with better insight into their cash flows. This not only boosts supply chain strength and continuity for buyers, but it also ensures traceability of goods for more accurate ESG reporting.

“When treasurers and their companies take a step back, they can go beyond thinking of ESG as ‘recycling paper’ or ‘turning off all the lights when leaving the office’. Instead, they can begin to truly understand the impact their actions have across all of their assets,” comments Moi. “They can then begin to reveal opportunities for significant change from social and environmental perspectives – with the added benefit of business gains.”

Regulation coming

Taking the right ESG action now may also pre-empt regulatory obligation later, or at least lessen the amount of work that is required to become compliant as we head towards 2025. That said, European regulators have a number of changes in the pipeline, notes Moi. The European Commission has already adopted a proposal for a Corporate Sustainability Reporting Directive (CSRD). This amends existing reporting requirements under its Non-Financial Reporting Directive (NFRD) to include all large companies and all companies listed on regulated markets, and requires all affected to publish regular reports on the social and environmental impacts of their activities.

“I think it’s likely as well, coming out of COP26 [United Nations Climate Change Conference], that we’ll start to see more regulators and governments engaging, given the start of the post-pandemic reset and the ‘Code Red’ of the latest IPCC report,” she comments. “With more regulation will come more reporting.”

Another major trend noted by Moi is the increased will in the investment community to sign up to a net-zero commitment by 2050, both by asset managers and asset owners. These stakeholders are naturally pushing for reporting compliance and an understanding of disclosures from a portfolio perspective. “With this comes a requirement for corporates to be able to report appropriately, in terms of their footprint, their policies and their governmental structures.”

With all of these levers from governments, regulators and investors, corporates will soon need to at least have baseline reporting capabilities and a basic understanding of how they can align with globally recognised standards. “They will also have to work out how they can engage in conversations to help drive those standards from a practical perspective. This will require the development of their own internal processes to ensure they can respond to all these requirements, because soon they will be mandated,” notes Moi.

Shifting times

As all of these factors lead ESG to become more a way of life, Venkat believes transparency in corporate undertakings will become the expected norm, this being built around a clear ESG framework just as accounting standards and principles have defined how financial statements are reported. Many are already on that journey, he says. “Most leading corporates today, including Bank of America, publish annual reports containing a substantial ESG element. The level and quality of content will only improve.”

Indeed, momentum is gathering towards open expressions of corporate goals, KPIs and realisations of vision. The pace of progress is quickening because the opportunities and the benefits that this provides far outweigh the effort demanded to make it the part of the governance structure, notes Venkat.

“With all these elements in place, corporates can effectively address the needs of every external stakeholder, including regulators, investors and customers. Internally too, when working practices are guided by ESG principles, including diversity and inclusion, talent will hopefully feel inspired – and this may also be attractive to prospective employees.”

Within Bank of America, Venkat notes that ESG thinking steers responsible growth “which in turn drives anything and everything that we do internally and with our clients”. From simple current accounts to trade finance and from syndicated loans to project funding it is, he says “for us, a way of life”.

With its $1.5tr. commitment to deploying capital to social and environmental issues, and to reaching net-zero greenhouse gas emissions in its financing activities, operations and supply chain by 2050, Bank of America is taking affirmative action.

For Moi, responsible growth is seen within the bank as being an essential part of how it operates as a business. “We recognise ESG as being important to communities and corporate society, and this is why, as a financial institution, we’re helping our clients to transition,” she says.

The power to make a positive difference places treasurers at the forefront of the corporate response. Acknowledging that “it’s not an easy journey, nor something that can happen overnight”, Moi explains that Bank of America’s work today is focusing on “guiding our clients, supporting them through the transition process, and sharing what we’ve learnt as we go through the same processes”. It is, after all, a shared responsibility to ensure ESG becomes second nature to businesses everywhere.  

_{To learn more about how Bank of America can help drive ESG through treasury operations, please visit https://www.bofaml.com/en-us/content/sustainable-finance-products-solutions-esg.html}