Risk Management

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Head2Head: Ethical Treasury Increasingly, performance is measured not only in absolute terms, but also in how a company does business. How best can treasurers balance day-to-day demands and obligations with being a socially responsible organisation?

Head2Head: Ethical Treasury

by Bruce Meuli, Global Business Solutions executive, and Jonathon Traer-Clark, Head of Strategy, Global Transaction Services, Bank of America Merrill Lynch

Jonathon Traer-ClarkJTC
Today more than ever, treasurers engage with, and therefore need to consider the motivations and objectives of multiple stakeholders – teammates, support functions, management, board, investors, bankers, lawyers and so on. At the same time, they have to operate within a defined risk framework and adhere to strict policies and processes. An additional, related dimension to treasurers’ decision-making is how to incorporate the demands and obligations associated with being a socially responsible organisation that considers the long-term impact of its actions and investments. So how can treasurers achieve this balance, particularly on occasions where these diverse objectives may appear to conflict?

Bruce MeuliBM Well, let’s look at investments, specifically those that are considered ethical. One of the early advocates of socially responsible investing was John Wesley, founder of Methodism, who advocated the basic tenet of “Look after your neighbour through appropriate business practises”. Today, there are a variety of investments geared to climate projects, medical facilities and many other social, cultural or environmental objectives. 

JTC Indeed, the appetite certainly seems to be there and today, many firms have dedicated research departments that explore and evaluate investments. Key to note too is that in the US you can now add ESG (Environment, Social & Governance) funds to 401k plans. But how exactly does a treasurer assess these investment alternatives?

I would suggest the first consideration has to be price – make sure the fees are compatible with fee benchmarks outlined in your treasury policy. This leads to the second point – balancing risk and return. Treasurers need to ensure sufficient diversification and high quality credit in their portfolio, whether this comprises ‘conventional’ or socially responsible investments. Indices can be useful for directional indicators, but the time base for analysis should be carefully considered too. As with conventional investments, the performance of SRI can vary considerably, so balancing risk and return remains vital.

Ah ha! Yes – you are right, but you also hint at something else. Your baseline for assessment of these investments isn’t just financial. As we discussed earlier, stakeholders in the business have a variety of motivations and objectives, both qualitative versus quantitative. Or, to put it another way, what is my return, and crucially, how am I achieving it? This doesn’t just apply to investments either: with whom does the company work, i.e., suppliers, vendors, partners and of course customers, and how?

I call that the ‘extended enterprise’. In this context, it’s about ensuring that your practices as a business are sustainable and are based on the principle that what is good for my partners across the extended enterprise, is good for me. We have seen situations where some large corporates have unilaterally extended payment terms either selectively or across their supplier base. For some, this has had ‘undesired consequences’ and caused reputation issues, and even an unwinding of the increased terms. An alternative is the opportunity to implement financial solutions and internal operational improvements that will benefit all partners. There are some corporates who are evaluating options to reinvest in their extended physical and financial supply chains, looking for win-win outcomes. 

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