The Rise of ESG: Business Drivers and Treasury Imperatives

More and more treasurers are getting involved in environmental, social and governance (ESG) initiatives. Not only financing them but also embedding them into treasury processes and spearheading departmental sustainability projects. 

ESG is now widely recognised as an opportunity to innovate, add value, improve risk management, and contribute to long-term growth. The importance that C-level executives is placing on ESG reflects this evolving outlook.

Research from the Boston College Centre for Corporate Citizenship (BCCCC) found that, compared to five years ago, nearly 75% more companies are now directing corporate social responsibility (CSR) from the C-Suite [1]. This sends a very clear message about the growing need for corporate organisations to think and act responsibly.

Momentum is growing

One powerful driver of the C-suite’s focus on ESG is the issuance of global standards and agreements in this space. Since the UN issued its 17 Sustainable Development Goals (SDGs) in 2015 and the Paris Climate Agreement was negotiated in December 2015, many large corporations have started to make a stand on ESG. And at HSBC, the SDGs set the context for our long-term ambition, aligning our values, conduct and 
business activity [2].

In addition, legal and regulatory initiatives, such as the UK Gender Gap reporting guidance, are contributing to a growing focus on being a responsible company. At HSBC, we are confident in our approach to pay and if we identify any pay differences between men and women in similar roles, which cannot be explained by reasons such as performance/behaviour rating or experience, we make appropriate adjustments [3].

A new generation

Away from standards and regulations, demographics and shifting societal expectations are also driving the ESG agenda.  Increasing numbers of millennials (Gen Y) and centennials (Gen Z) are coming into the workforce, bringing with them an expectation that their employers should act responsibly. 

What’s more, as customers, the Gen Y and Gen Z cohorts often favour companies that support responsible causes and embrace ethical working practices. With this in mind, it could be argued that many companies need to rethink the way they do business, and their role in the world around them, to continue on a growth path.

There have been numerous high-profile instances of such strategic ‘rethinks’ in recent years. Procter & Gamble, for example, famously sold off its most profitable brand, Pringles, in order to demonstrate its commitment to tackling obesity. This is highly relevant for treasurers, since significant changes in business strategies will naturally impact revenues and supply chains, so relate directly back to treasury.

Moreover, corporates may wish to pay closer attention to the buying behaviours of Gen Y and Gen Z since they are the next generations of investors.

Treasury’s involvement

Building ESG into treasury activities is also an essential part of a robust future-proofing process. It’s about understanding how to adapt to the changing operating environment, and supporting the company’s growth ambitions, whilst positively contributing to social and environmental change.

There are many ways in which treasurers can get involved in ESG. For example, they have the power to evaluate their bank counterparties and select partners and products based on specific criteria, including Environmental, Social and Governance (ESG) credentials, that have the potential to positively impact the growth of the organisation over the longer term. Treasurers can also embark on their own ESG projects, as outlined on page 14 of this supplement. 

In addition, there is a cash and liquidity management link to ESG. Key aspects of the treasurer’s role, such as how the company’s operations are financed, and where any excess cash is invested, can have a significant impact on the corporate’s reputation – either positive or negative depending on the situation. At the same time, reputational factors can reduce or increase the availability of bank credit, as well as impacting cash flows. Clearly, then, there is a strong link between ESG, the external perception of the organisation, and fundamental treasury responsibilities.

ESG becomes business as usual

Against this backdrop, it is no surprise that treasury functions are becoming increasingly involved with their company’s ESG efforts in a hands-on way. In fact, forward-thinking treasurers are now embedding ESG into their daily processes, rather than seeing it as a standalone initiative. 

This trend only looks set to continue as the positive outcomes of ESG programmes receive wider recognition, and as corporates and banks work together to build creative solutions that speak to the company’s growth goals and ESG objectives – in an integrated way.  

Notes
[1]  https://www.globalgiving.org/learn/2018-csr-trends/
[2] https://www.hsbc.com/our-approach/measuring-our-impact - April 2018 update
[3] https://www.hsbc.com/-/media/hsbc-com/our.../uk-gender-pay-gapmarch-2018.pdf