There’s been encouraging progress so far in the way treasurers have brought ESG elements into their operations, but so much more is yet to come. What is the key to unlocking new sustainable ideas and approaches by businesses and banks? Baris Kalay, Head of Corporate Sales, Global Transaction Services, EMEA, Bank of America, shares his views.
The volume of conversation around sustainability as a corporate objective might suggest that the corporate and banking worlds are speaking with one voice on this most pressing of topics. However, it remains a rather nuanced matter, and when digging into the realms of individual sectors and businesses, it becomes apparent that ‘the voice’ is far from singular, having many different tones or accents out of necessity, notes Kalay.
A bottling company will focus on reduction of water consumption in its production processes. A logistics company will be seeking to convert its fleet of vehicles to electric motive power. A major food company will be most concerned with sourcing fair trade commodities.
In itself, the diversity of approaches to sustainability is not a challenge; individual needs require an individual response. The fact that there is a more or less unified commercial voice for acceptance of ESG at a broad conceptual level is also a positive thing; some good should be derived from the actions of business partners.
But because a business or sector can only tackle its own set of impacting issues (saving water, moving to electric vehicles, sourcing fair trade commodities, and so on), the way in which responses are being formed is making it increasingly difficult to assess, report, and understand the outcomes and next steps. It’s why Kalay believes that there is room for improvement, and that this starts with better data management.
Beyond the everyday
Sustainability is now part of the day-to-day discussions between banks and their corporate clients, with few RFPs, if any, not making reference to ESG requirements, says Kalay. “Companies want to work with financial institutions that are aligned with their CSR, ESG and sustainability thinking.”
But as this is still an evolving area, both parties are learning from each other, and quick wins are often favoured to lay the ESG groundwork. It’s why, in the transaction banking space, some products and solutions are notably more mature than others, says Kalay. SCF, for example, is ahead of the curve in terms of uptake, with an increasing number of deals based on ESG criteria, especially where favourable working capital finance is provided to support or encourage sustainable practices among smaller suppliers.
With most larger corporate clients well aware of the benefits and the structures of these programmes – it being among the easiest wins for all stakeholders – Kalay now believes that it’s time to start unlocking the advantages that enhanced data management will bring to the delivery of ESG programmes.
The complexity of corporate sustainability needs and approaches demands that data be gathered and deployed in a more intelligent way. “Only this will help businesses make better ESG-related decisions”, states Kalay. “For instance, companies that can extract sufficient and timely data from their payment files or invoices, and then combine this with ERP-derived data, can begin to better understand how their counterparties are responding to ESG criteria.”
Invoice data could be analysed to offer a breakdown of spend with ESG-compliant suppliers, sectors, and even countries, explains Kalay. Decisions could then be taken to help support certain suppliers moves towards ESG compliance through an SCF programme, or to find a way to move away from certain non-compliant sectors through funding new production techniques. “It’s about finding ways to track payables and receivables from a sustainability angle, and using that data to inform your own progress.”
While data accessibility is currently the missing key for many, Kalay believes that as banks and their corporate clients begin to leverage appropriate technology, so new understandings will emerge of how ESG can be incorporated into everyday practice. “We’re not there yet. We’re still seeing whole industries relying on paper invoices, which make it harder to extract key data. But as the transformation to electronic payment mechanisms becomes more widespread, more data points will be extractable, and the decisions they are based upon will improve.”
When thinking about the future of ESG, it’s important to remember that it consists of three components. While at a strategic level distinction is rarely made between them, at a practical level the environmental (E) aspect often overshadows the social (S) and governance (G) constituents.
“The S and the G will evolve and we will see a balance in the future, but for now they are harder to quantify and assess than the E,” Kalay notes. While none of factors may be directly translated into KPIs such as earnings growth (although McKinsey has suggested that ESG-focused firms report a host of financial boosts), it’s clear that measuring tangible activities such as carbon emissions is easier than quantifying non-physical assets such as fostering company culture.
“It’s why transaction banking started with the environmental, and its why it’s so important to consider how we can incorporate trade and treasury solutions and data to ensure a balanced approach where it makes sense,” explains Kalay.
As the data element of sustainability gains in importance and sophistication, so the ESG landscape will further evolve and the depth of understanding of each aspect will increase. It will inevitably attract even closer regulatory attention, continues Kalay. “It means both banks and corporates must become more aware of the dynamics between E, S and G. Banks must work closer with their clients, listening more attentively to them and understanding what is most important for each, and clients need to be open about what’s needed to achieve these goals.”
The regulatory effect will serve to bring greater standardisation of data as it relates to sustainability, just as the mandatory shift to ISO 20022 payments messaging on SWIFT will ensure enriched payments data can be captured and integrated into an ESG response.
This is not going to happen overnight, admits Kalay. But with banks and corporates investing considerable resources into bringing about digitalisation too, it will help reduce the frustration and waste created by paper documentation, and it will enable stakeholders to collect and process more data. This, he concludes, “will unlock a number of opportunities and set us on a path to achieve our collective and individual ESG goals much quicker”.