Published: June 29, 2018
More and more treasurers are getting involved in CSR (corporate social responsibility) initiatives. Not only financing them but also embedding them into treasury processes and spearheading departmental sustainability projects. Nevertheless, CSR is not yet considered ‘business as usual’ (BAU) in many corporate treasury functions. Eleanor Hill, Editor, outlines practical ways in which treasury departments can make CSR part of their DNA, and discovers some powerful incentives for doing so.
Once seen by some as a business obligation or marketing tool, CSR is now widely recognised as an opportunity to innovate, add value, improve risk management, and contribute to long-term growth – by looking after people, processes and the planet. The importance that C-level executives are placing on CSR 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 CSR from the C-suite [1]. This sends a very clear message about the growing need for corporate organisations to think and act responsibly.
One powerful driver of the C-suite’s focus on Corporate Social Responsibility (CSR) is the issuance of global standards and agreements in this space. As an HSBC representative explains: “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 CSR. 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.”
Another concrete driver is the expanding business case for CSR, helped by the emergence of “market analysis showing that embracing ESG* (Environmental, Social, Governance) as part of day-to-day operations actually leads to more sustainable business growth over the long term,” explains Peter Jameson, Co-head of Product Management, Global Transaction Services, EMEA at Bank of America Merrill Lynch (BofAML).
He believes that ESG, “should not be seen as a sacrifice or profitability trade-off the business has to make in order to comply with shifting societal expectations.” Indeed, it is now widely accepted that successful CSR efforts can be profitable and make long-term commercial sense. It is also becoming more commonplace for companies to publicly acknowledge the ‘business’ dimension of CSR, not just the positive impacts within society.
Nevertheless, the societal expectations that Jameson mentioned remain a huge driver of CSR activity. As an HSBC representative observes: “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.” In addition, “As customers, the Gen Y and Gen Z cohorts also often favour companies that support responsible causes and embrace ethical working practices,” he notes. “With this in mind, it could be argued that all 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. Proctor & 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,” explains an HSBC representative.
“Moreover, corporates would do well to pay attention to the buying behaviours of Gen Y and Gen Z since they are the next generation of investors,” he comments. Leonie Schreve, Head of Sustainable Finance, ING, adds that a “rising number of investors are already growing their sustainable mandates and are actively looking for investments that meet the sustainable standards in the market.”
For issuers, this leads to investor diversification, and in some cases to pricing advantages, she says, whilst attracting shareholders with a strong socially responsible investment (SRI) commitment. And appealing to this SRI investor base is yet another driver of current CSR momentum (see Tideway case study later in this article).
*We use the terms CSR and ESG interchangeably in this article, although there are nuances.
With so much attention on CSR at the top of the organisation, it is no surprise treasury is getting more involved. Despite the lack of research quantifying growth in this area, mentions of CSR in the requests for proposal (RFPs) being received by relationship banks offer concrete evidence of this trend.
“In 2017, we noticed rising interest in this topic among treasurers,” says Axelle Vigo-Lovy, Head of Proposal Management Desk, BNP Paribas Cash Management. “Questions about CSR, such as the bank’s level of commitment to the UN SDGs, were appearing more frequently in cash management RFPs – and we therefore decided to create a formal Sustainability mission within the Cash Management business.”
Vigo-Lovy has taken up this mantle herself, integrating it alongside her existing remit. This is a bold move by the bank, but a welcome one, since treasurers can now access the specialist expertise they require around CSR and cash management together.
And, surprising though it may seem to some, this is an increasingly relevant need for today’s treasurer. Not least because “building CSR into treasury activities is an essential part of a robust future-proofing process,” says an HSBC representative. “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.”
Although the treasurer may not directly ‘own’ CSR/ESG within the organisation, Peter Jameson, Co-head of Product Management, Global Transaction Services, EMEA at Bank of America Merrill Lynch, believes that they can certainly be a key influencer – and make a positive contribution to the company’s efforts in this space. In fact, he says that as the ‘banker’ within the company, the treasurer sits at the core of any successful ESG strategy. Furthermore, many CSR projects dovetail neatly with fundamental treasury responsibilities and existing efficiency projects, so even the most time-poor treasurers can get involved.
A particularly relevant way for treasury to support CSR is by “connecting the company’s sustainability activities to the financial markets,” says Leonie Schreve, Head of Sustainable Finance, ING. This can be achieved through a variety of methods, but green bonds are a popular choice (see Figure 1).
Fig 1 - The labelled green bond market is growing rapidly Source: Climate Bonds Initiative |
BNP Paribas Cash Management |
Schreve points out, however, that not all companies are bond issuers, nor can some companies issue green bonds. She therefore recommends approaching every financing opportunity through a ‘green lens’. “Almost all projects can have a sustainability component, whether that entails implementing alternative energy sources, recycling waste or developing green buildings/infrastructure,” she notes.
BNP Paribas’ Vigo-Lovy agrees that “green bonds are certainly one way that treasurers can get involved in CSR, but there are many other products and strategies to consider.” Positive impact loans, she says, are a great example. “These essentially link the financing structure offered by the bank to the achievement of the corporate’s CSR goals, or to a company’s support of the SDGs – depending on the specific solution.”
A handful of banks are active in this space, and ING launched a sustainability improvement loan in 2017, linking the interest rate charged to the company’s ESG score. The better the company performs on ESG, the less interest they pay. But if the company’s ESG score decreases, they pay more interest.
Alongside the loan product, ING has also been instrumental in launching the Green Loan Principles, together with the Loan Market Association (LMA). “And we fully expect the green loan market to grow, now that there is an industry standard. This development should be of particular interest to corporates who are not active on the bond market,” says Schreve.
Financing is far from the only way in which treasurers can participate in sustainability drives, though (see summary box at the end of this article for a quick overview). Many of these opportunities fall neatly into the individual ESG brackets (Environmental, Social, Governance) but some also blur the lines.
Tideway was specifically established to protect the tidal River Thames in London from pollution, so sustainability lies at the heart of everything the company does. Tideway has very ambitious sustainability goals and its Legacy Plan contains 54 sustainability targets.
“These targets have the potential to have important real-world impacts, but they also require significant amounts of financing,” says Darren White, the company’s Head of Environmental Sustainability. “Since we report on these 54 targets to our board, investors, and the UK government, it seemed like a completely natural step to link the company’s financing to these sustainability credentials, through initiatives such as green bond issues.”
As Ines Faden, Tideway’s Treasurer, explains: “We had two objectives in mind when deciding to issue green bonds: the first was to integrate CSR even more deeply into the daily processes of the company, and to connect the treasury team more closely with the rest of the organisation.”
The second objective was to appeal to a new investor base, namely those who are specifically looking for ESG investments. While this may still be a relatively small market, Faden says that the number of investors that have a mandate to invest in sustainable financing is definitely growing.
Every piece of debt that Tideway has issued in the last six months has been a green bond. “We have now issued six green bonds, totalling £775m, and we are the world’s largest corporate issuer of green bonds in sterling,” comments Faden. The issues have taken various forms: public bonds; private placements; nominal rate; CPI-linked bonds; RPI-linked bonds; cash bonds and deferred bonds.
Some companies hold back from issuing green bonds because of the perceived effort. Tideway did not encounter any such challenges, however. “Issuing a green bond was relatively easy for us because we are a ‘pure play’ – everything we do is green, i.e. building the tunnel to clean the tidal river Thames,” Faden explains.
“Companies that aren’t pure plays but want to issue green bonds need to be able to clearly identify the green assets in their business and segregate these. This takes a little bit of time, but generally all of the information already exists within the company; it’s a question of extracting and compiling it to prepare the Green Bond Framework (GBF).”
Elsewhere, Faden says that the changes required to the prospectus are also pretty simple, so this should not put treasurers off from issuing green bonds. “Likewise, the ongoing reporting is not a burden. Most companies actually collect and report this data in one way or another already anyway,” she adds.
For those wondering about the financial impact of going green, Faden says that “In the big scheme of things, the difference in cost between issuing a green bond and a traditional bond was not significant.” For smaller companies, this might be more of a concern, she notes, but for medium and large companies, it should not be a roadblock.
And as much as there may be a little extra work when issuing the first few green bonds, Faden believes that “It’s actually great fun. It’s a new challenge for the treasury team. It also brings different departments in the company together, helping to raise treasury’s profile within the organisation, improving employee wellbeing, and ultimately leading to a more integrated way of executing the business strategy.”
A longer version of this case study will appear in a forthcoming edition of TMI.
Tideway |
An obvious way that treasurers can become more environmentally conscious is by embracing digitisation and ditching paper. Since digitisation is already firmly on the treasury agenda, there is often little additional effort required to garner some serious ESG benefits: research suggests that it takes 253 gallons of petrol to produce one tonne of paper; and making a single sheet of A4 requires 10 litres of water [2].
Moreover, “Going paperless and leveraging automation not only helps to reduce the company’s carbon footprint, but it can also lead to process efficiencies, facilitate more efficient cash management, improve audit trails, and lower costs,” says Jameson.
Treasury teams can take practical steps themselves to go paperless. Tideway, for example, has banned all paper from meetings. Notes and presentations are purely digital. However, the most significant efficiency and environmental wins are likely to come by leveraging bank and vendor technology solutions.
These partners offer a variety of best practice solutions that can help the treasurer to: automate receivables reconciliation; move from paper-based to electronic payments (including instant payments); do away with in-the-field cash collections thereby reducing the use of armoured vehicles; and embrace virtual accounts and virtual cards. These are just a handful of examples. Other paperless solutions include: electronic invoicing; electronic FX trading; electronic tax filing; electronic trade documentation (including blockchain solutions); and electronic signature and digital transaction management services such as DocuSign.
Digital solutions in and of themselves will not necessarily lead to complete success in a paperless project, however. As Vigo-Lovy observes, “We know that reducing paper is a concern. But the success of a paperless project really revolves around one thing: resisting the temptation to print!”
Tideway |
Often, treasury teams will ‘go digital’ but still print off statements and other paperwork – and some countries do require hard copies, she explains. “Having a firm understanding of local regulations and requirements around paperwork, and an online interaction mode with the banks, can therefore improve the success of any paperless project,” she says.
Banks can assist with ensuring a corporate’s local regulatory understanding is up to date. BNP Paribas, for example, runs a ‘paperless stream’ that can help clients to have a “smooth customer journey with regard to their onboarding and daily lifecycle, whilst ensuring compliance with all relevant regulations and the use of optimal payment channels for each geography.”
BofAML’s Jameson also highlights how banks are looking at their own processes to help treasurers cut down on paper. “For example, we have reduced our account opening documents down from 56 pages to just 9 – which is better for the environment and our clients.”
Alongside digitisation, treasury functions can become more environmentally-friendly by embracing cloud computing – many TMS and ERP systems are now cloud-based, for example. Huge amounts of data can also be stored in the cloud. And the potential environmental benefits are not to be scoffed at: a 2018 study found that the Microsoft cloud is as much as 93% more energy efficient, and 98% more carbon efficient, than on-premise solutions [3]. Cloud computing also offers scalability and cost benefits, as well as process and performance efficiencies.
In addition to environmental efforts, the treasurer also has a significant role to play in fulfilling the ‘social’ element of ESG, says an HSBC representative. “For large corporates, this starts with supporting the company’s supply chain by providing financial assistance to smaller suppliers via supply chain finance (SCF) programmes, for example.” Some organisations, he says, are taking this “one step further and embedding ESG criteria into their SCF programmes, offering financial incentives to suppliers who fulfil, and continually improve, their ESG credentials.” Notable examples include Levi Strauss, Nike and Puma.
Luc Vlaminck has succeeded in embedding CSR into treasury’s daily activities. “As much as CSR is a hot topic at the moment, the concept of sustainable development has been part of Rémy Cointreau’s corporate identity for centuries. In fact, CSR is a crucial part of our business strategy and it’s completely integrated into everything we do, including our treasury operations,” he says.
“Within treasury, we naturally finance all of the company’s activities, and that includes everything CSR-related. Part of our role, for example, is to ensure that the company has sufficient funding to buy new products from the wine growers every year. We often guarantee a certain price for the growers, thereby supporting their cash flows. But in return, we promote strict CSR behaviour, such as using as few chemicals as possible in the growing process to respect the Terroir. In order to protect biodiversity, we also promote responsible and sustainable land and forest management, especially for the wood that is used to build our barrels,” he explains.
Vlaminck foresees more CSR-related activity ahead. “We have not yet issued a green bond as our funding tends to take the form of private placements or very limited bond issues. Our investors aren’t currently asking for a green ‘badge’ on our products yet, but the trend is definitely changing. So, I expect that the next big funding round we undertake will be ‘green’ in one way or another,” he predicts.
“Something really innovative that we’re looking at doing is having a bank club deal that carries a green label. This would be a normal RCF, but with a green clause included. The challenge with such a facility is isolating the truly green aspects of our business. Because we age natural products, with no chemicals, you could argue that everything we do is green. But that would be too easy!
“As such, we are looking to find ways to identify the parts of our business that actively support the goals we have set out in our 2020 CSR Plan. Our membership of the SEDEX (Supplier Ethical Data Exchange), where we favour responsible and sustainable purchasing partners, is a good example,” he notes. In 2016/2017, the percentage of the group’s suppliers subscribing to SEDEX increased from 54% to nearly 83%. The target for 2018 is to reach 90% and 100% by 2019/2020.
Another aim outlined in the company’s 2020 CSR plan is to ensure that employees remain motivated through clear CSR objectives and a CSR incentive scheme. “One of the biggest benefits our company has seen as a result of our CSR engagement is employee wellbeing,” he explains. And while that might sound a little ‘airy’ – especially to a treasurer – in reality, it has a very concrete impact.
“Diversity and inclusion are incredibly important values for us, as a family-owned company, and all of our CSR efforts make employees very proud to work here. This is a great help when it comes to talent acquisition and retention; in fact, I’d say it is a competitive differentiator.”
CSR is also directly linked to the financial wellbeing of the company, he explains. “We produce luxury products and our customers pay for the craftmanship of our spirits and the time we take to ‘elaborate’ them as well as the peace of mind that our responsible business attitude brings. The more sustainable we make the product, the more socially-conscious consumers will be prepared to pay for it. It’s a no-brainer.”
Bank of America Merrill Lynch |
Another social aspect where the treasurer can make a difference is employee wellbeing, says an HSBC representative. “Rather than being an HR topic, this is paramount to the success and sustainability (with a small ‘s’) of any organisation. Treasury practitioners tend to operate in demanding, high-stress environments, so it is vital for treasury leaders to openly acknowledge the pressures on their teams, and the impacts these may have on wellbeing and productivity.” He adds that “the ability to offer a sound work-life balance through flexible working hours has become increasingly important – not just from a wellbeing and efficiency perspective, but also from a talent acquisition and retention point of view.”
Charitable giving also falls under the social banner and some banks are helping to make charitable donations part of everyday treasury processes. BNP Paribas’ Cash Management department, for example, can “facilitate charitable giving on payment devices and across all of our electronic platforms,” says Vigo-Lovy. “We will soon offer rounding up of cents, as well as a ‘donation’ button. This idea is proving to be extremely popular and we predict more growth in this area going forward.”
Meanwhile, the ‘governance’ part of ESG relates back to treasury’s role in risk management – including compliance with relevant regulations, policies and procedures, explains an HSBC representative. “Of course, this is already something the treasurer does every day, but with more regulations being issued in the CSR space that tie back to the origins of financial flows within organisations, treasurers will find their compliance workload increasing.” External partners such as relationship banks have a significant role to play in easing that burden, he notes.
Vigo-Lovy agrees on the regulatory point, and highlights one example – namely the French Corporate Duty of Vigilance Law. This requires large French companies to publish and implement a vigilance plan to identify and prevent risks of “serious infringements to human rights and fundamental freedoms, serious bodily injury, health risks or environmental damage, resulting directly and indirectly from a company’s activities and those of its business relations.”
“Treasurers have the power to evaluate their bank counterparties and select partners and products based on specific criteria, including ESG credentials, that have the potential to positively impact the growth of the organisation over the longer term,” says an HSBC representative. Understanding your bank’s commitment to CSR has never been so important, therefore.
Some of the global banks are hugely active in the CSR space and are truly leading by example. To cite just one initiative from just one bank, HSBC is committed to providing USD 100bn of sustainable financing and investment by 2025. Other banks, including those quoted in this article, have made their own impressive commitments too.
Furthermore, BofAML includes ESG information in every RFP response, regardless of whether or not the client has requested it. “This might be details about our own activities, or it could relate more specifically to the RFP and how the client could harness ESG benefits, specific to their business strategy. We also regularly engage with clients around their publicly stated ESG aims and help them better understand how the bank’s solutions and services could assist them in achieving those goals,” says Fernando Vicario, Head of EMEA Corporate Banking.
In Vigo-Lovy’s view, banks’ own CSR activities ought to be of interest to treasurers because “when it comes to truly embracing CSR within treasury, the choice of the right cash management provider is critical. Since these corporate-bank relationships tend to be long-term, any chosen partner should share the company’s vision towards sustainable cash management.” Luc Vlaminck, Group Treasurer, Rémy Cointreau, echoes these thoughts, saying: “I see CSR becoming a more frequent aspect of RFPs, and a standard part of the KYB process.”
Another way to gauge how seriously your bank takes CSR is to understand the consequences of being a company with low responsibility standards. BofAML’s Jameson explains that “As a bank, we have a role to play in demonstrating that we take the ESG credentials of our clients very seriously. As well as continuing to support green finance projects, this means demonstrating that we are prepared to take hard decisions, and ultimately exit clients if they are not living up to their ESG goals or are failing to act responsibly.”
Suppliers can be a source of reputational risk – which can, in turn, impact access to bank credit. “We’ve seen cases where companies are pulled up by the press for having ‘unethical suppliers’ in their supply chains. This is placing an additional focus on supplier screening processes and integrating ESG scoring into payment terms,” says Jameson.
Meanwhile, a corporate treasurer who prefers not to have his company identified comments: “We operate in an industry where some of our competitors have been called out for failures in areas such as ethical work practices. Not having our name associated with any of these failings is a clear economic plus for us.”
Having said that, he believes there should be limits in terms of the degrees of separation. “Frankly, and with the best will in the world, it is just not feasible to do complete investigative research into all the components which go into every part of a large and complex supply chain,” he confesses. Nevertheless, “Once abuses have been uncovered in its supply chain, every company has an obligation to stop them.”
In addition to unethical practices by suppliers, payment terms offered by buyers are another potential source of reputational risk. “The mainstream press has highlighted a number of companies who either pay late or have extended their payment terms beyond what is deemed acceptable business practice,” Jameson notes. “Treating suppliers fairly is therefore a growing area of responsibility for treasury, in collaboration with procurement.”
ING |
Additional governance-related actions relevant to treasury include: “helping in the fight against financial crime; proper handling of politically exposed persons, in particular in relation to bribery and corruption; sanctions screening; and Know Your Bank (KYB) and Know Your Supplier (KYS) initiatives,” says an HSBC representative. Arguably, Know Your Investor could also be added to that list. From a cybersecurity perspective, “securing your treasury systems – and ensuring they are not used to facilitate potential criminal activity – also falls squarely under the governance umbrella,” the representative observes.
With so many opportunities for embracing CSR it does seem that the concept is (gradually) becoming more integrated within the treasury department. Vicario would even argue that “ESG is already BAU for many treasurers – at least for the majority of our clients. Society now expects organisations to act responsibly and leading treasurers recognise that they have a vital role to play in both financing and enacting the company’s ESG plans.”
Likewise, an HSBC representative says that “Forward-thinking treasurers are embedding CSR into their daily processes, rather than seeing it as a standalone initiative.” He also believes that “This trend only looks set to continue as the positive outcomes of CSR programmes receive wider recognition, and as corporates and banks work together to build creative solutions that speak to the company’s growth goals and CSR objectives – in an integrated way.”
Others take a slightly more conservative view of how deeply CSR will impact treasury. “Although I believe that CSR will become, and is to some extent already becoming, integrated into a treasurer’s decision-making and analysis, I do not see it completely changing everyday treasury activities,”comments Vigo-Lovy. “That said, it will undoubtedly enhance the treasurer’s connection with the rest of the business and the world around them.”
Bank of America Merrill Lynch |
And arguably, as that outside world continues to shift towards a more positive economic model, treasury will become more involved in CSR over the longer term, even if fundamental treasury activities do not change per se. Take the transition towards a circular economy, for example. This, she explains, “will inevitably come with new cash flow models as companies move from buying to leasing. Circular business models will also require different forms of capital, and treasurers would do well to explore these before they become a necessity.”
Evolving reporting requirements are another CSR-related consideration coming down the line. “Going forward, corporate reporting will integrate both financial and non-financial reporting,” says Schreve. “The non-financial part will include CSR and sustainability. It is clear to see that the finance function will soon become responsible for this CSR/sustainability reporting – the Financial Stability Board’s Taskforce for Climate-related Financial Disclosures (TCFD) recommendations suggest as much, as does the EU’s Sustainable Finance Action Plan,” she observes.
These integrated reporting initiatives will undoubtedly lead to CSR becoming more embedded in corporate life, and treasury responsibilities. But this alone is not enough to genuinely move the needle on CSR. To make a real difference, greater co-operation between economic actors is needed, as are more targeted regulations and standards.
Rather than thinking solely about CSR becoming BAU for treasury, then, perhaps it is also time to consider how the concept of BAU itself needs to change in order for businesses to execute long-term, sustainable growth strategies and make a genuine difference to society and the environment. Only then will responsible business truly become the new normal.
Here’s a handy summary of the role treasurers can play in helping support and embody their company’s ESG goals:
Source: Fernando Vicario, BofAML
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