ESG: Time to Decide

Published  7 MIN READ

The pressure to comply with ESG initiatives is being felt by corporates like never before, with new research from Economist Impact suggesting that becoming ESG-compliant was the most common concern among treasury departments in Q4 2021. TMI talks to Lavinia Bauerochse, Global Head of ESG Corporate Bank, Deutsche Bank, and a member of its Corporate Bank Executive Committee, about treasury’s next vital decision.

An Economist Impact global survey of senior corporate treasurers reveals that 36% of respondents cite growing ESG requirements as the top trend impacting the treasury function in Q4 2021, up from 21% in the third quarter. For Bauerochse, the progression to sustainable finance, in all its forms, is now a matter of extreme importance, and one that demands close inspection by treasurers. 

“Meeting the growing number of ESG requirements has become a huge, but worthwhile and necessary, undertaking for companies – one that involves weighing up a host of different priorities ranging from regulatory compliance and attracting sufficient capital, to minimising costs and meeting consumer demands to securing the future and competitiveness of the company,” says Bauerochse.

Despite the urgency of action, the playing field is unequal, with certain regions responding to the call of sustainable finance more readily than others. Indeed, the aforementioned survey reveals that the trend is strongest in North America, with 52% of participants indicating that meeting ESG requirements is a top concern. This percentage is much lower – but still significant – in EMEA (26%) and APAC (30%).

The picture painted by the study is one of an obvious need to progress that is being constrained by emerging challenges. While there is almost across-the-board familiarity with the idea that treasury can play a significant role in promoting adoption of sustainable finance, Bauerochse notes a need to balance this with the challenges created by local and regional regulatory divergence.

Indeed, while there are impacts all treasurers are facing as their organisations transition to more ESG-friendly operating models, 60% of North American treasurers cite “evolving regulation and uncertainty surrounding ESG compliance” as a major hurdle to progress. At a global level, the regulatory uncertainty figure is 44%. “We need a global regulatory framework and global co-operation among regulators to create a level playing field for the real and financial economies,” says Bauerochse.

Fortunately, there is ongoing effort to try to evolve joined-up thinking on this matter. In Europe, the EU taxonomy is making inroads into clarifying its position on climate change activities; an EU social taxonomy has also now been proposed, aiming to provide further harmonised guidance.

In the US, Bauerochse notes that financially based social measures are evolving (including the emergence of minority depository institutions and diverse-led community development financial institutions). Meanwhile, increasingly extreme weather events across North America have put corporate treasurers on notice that “new forms of climate-related risk management” are required. In APAC, she believes that supply chain sustainability has been a major area of focus, with corporate buyers seeking a greater understanding of how their suppliers can be best incentivised to optimise their approach to ESG.

As treasury engagement with ESG rises, so the financial solutions being offered have “come a long way”, says Bauerochse. She remarks that Deutsche Bank (DB) is now offering its corporate treasury suite of products in an ESG-compliant format, covering lending, trade flow products such as guarantees and supply chain finance (SCF) programmes, structured export finance, and cash and FX.

As treasury engagement with ESG rises, so the financial solutions being offered have “come a long way”, says Bauerochse. She remarks that Deutsche Bank (DB) is now offering its corporate treasury suite of products in an ESG-compliant format, covering lending, trade flow products such as guarantees and supply chain finance (SCF) programmes, structured export finance, and cash and FX.

Suitable framework

The key to greater adoption of ESG-based products is the emergence and implementation of a global regulatory framework. However, Bauerochse notes that data collection and reporting is another key concern treasurers need to bear in mind. Indeed, this is cited in the Economist Impact survey by 28% of European treasurers as their biggest concern in managing the transition to sustainability.

To be effective, ESG-enabled products require relevant treasury KPIs to be aligned with corporate strategy. ESG elements must therefore be measurable, which implies strong data management. For many companies, data is clearly not as accessible as it needs to be.

The development of suitable reporting frameworks and KPIs is a work in progress, with banks often being relied upon to guide corporate clients in the appropriate direction. With regulatory reporting requirements becoming more stringent, the pressure is on to bring all stakeholders up to speed.

In the EU, the Sustainable Finance Disclosure Regulation (SFDR) came into force in March 2021. It requires mandatory reporting on a range of ESG factors, including carbon emissions, fossil fuel exposure and waste levels, gender diversity and due diligence over human rights, and exposure to corruption, bribery, and other scandals.

It’s an exacting requirement, but by standardising sustainability disclosures it should help investors compare the sustainability characteristics of related funds. The demand for and provision of related data means ESG-linked products become more understandable and therefore accessible, explains Bauerochse.

To help get over the line, there is a need for banks and other FIs to step up their efforts to help their corporate clients embrace ESG across the board. Banks such as DB that have a large global footprint should be able to support ESG products and client understanding at both a global and local level. This means that solutions can be tailored by local experts to fit local nuances, says Bauerochse. “It’s important for the growth of industry to be able to engage clients in strategic dialogue around their global and local transition strategies, discussing their targets, and exploring how we as banks can help them on their journey.”

But the financial industry also needs to step up with the money to make this work. As a founding member of the industry-led, UN-convened Net-Zero Banking Alliance, DB will be working with banking colleagues over the coming years to explore credible transition pathways for clients across nine industry workstreams. The most carbon-intensive industries will be the initial area of focus.

Unilateral action is being taken too. DB invited clients and investors to attend its May 2021 exploratory Sustainability Deep Dive virtual event, and simultaneously announced that it has brought forward by two years, to 2023, its target of facilitating at least €200bn of sustainable finance. Christian Sewing, CEO, DB, has stated that the DB’s “ambition is to make ESG the new normal”.

In addition to these efforts and the work of the Net-Zero Banking Alliance, the activities of the wider financial community are being guided by bodies such as Glasgow Financial Alliance for Net Zero (GFANZ), formed prior to the 2021 COP26 last November. And in DB’s home territory of Germany, Bauerochse is an active committee member of the Green and Sustainable Finance Cluster, which is helping to establish effective financial market infrastructures among different financial products (such as trade and SCF) in support of the transition to a sustainable global economic system.

“There is a lot of discussion going on now, which is helpful because the concept of sustainable finance continues to evolve,” Bauerochse comments. “The EU taxonomy alone is generating a considerable volume of documentation, but there are additional elements on which clarity is still being sought by clients because not every aspect is yet fully detailed.” Indeed, she adds, the greatest need is to pursue common standards, ideally globally, “to create a level playing field, and to eliminate potential problems where strong regional differences have emerged”.

Practical solutions

With the outcome of a key event such as COP26 being very publicly dissected, expectations may not have been met for all. However, the attention generated shone a critical light on how the various pledges will now be actualised. For COP26 to be recorded as a success, Bauerochse believes all stakeholders will now be required to work together. This means politicians, regulators, financial institutions, companies, and society in general, engaging in constructive dialogue and finding workable solutions.

The widening discussion is also highlighting the interconnectedness of elements previously seen as independent, such as climate change and biodiversity. With COP27 taking place in Egypt in 2022, Bauerochse suggests that the emphasis will likely shift to the effects of climate change on Africa, and notably issues of food security. The issues are complex but for the banking sector, finding alignment on related solutions for individual regions, countries and businesses will be critical, she says.

Without the banks on board, issues of sustainability cannot progress anywhere in the world. But banks do now recognise their role, and most are fully engaged, so the industry is ready to talk, listen and act.

Of course, while some treasurers started their journey to sustainability several years ago, the moment has come for the rest of the community to decide when they want to start helping to deliver the results we all need. As Bauerochse declares, “anytime is the right time to start, as long as it’s soon!”