Article: Francois Masquelier (ATEL): Finance Sustainability and ESG

About Francois Masquelier About ATEL

Francois Masquelier, Chairman of the Luxembourg Association of Corporate Treasurers (ATEL) and CEO of SimplyTreasury shares his views on how ESG is reshaping the work of Treasurers.

CFO as creator of ESG value

The CFO’s play an important role in creating value and that is now much more than traditional financial value – it is about sustainability and creating impact. There is pressure on companies to demonstrate their sustainability credentials and technologies are becoming an increasingly relevant to the work of CFO. The technologies will ultimately make measuring and managing the ESG easier. With unprecedented amounts of data being generated, the application of AI and data analytics, we are now able to produce accurate evaluations of corporation’s environmental, social and governance (i.e., ESG) performances than it was previously possible. IT technology is an enabler for ESG better reporting. There is pressure on CFO’s to be able to understand and assess properly ESG-related risks and opportunities. Improving financial position of the company may be an incentive. For example, debt financing can get preferential conditions if they choose green or sustainability bonds or loans. More investors want to build portfolios that contain companies addressing such issues as human rights, diversity, climate change, carbon footprint reduction, etc.…

It means that CFO’s must understand how to use technologies and data to show their company’s ESG performances and communicate them. The regulators impose more and more to disclose more information on climate risks. We can also mention the “European Green Deal” and many other local projects. “Decarbonisation” is a major objective for all of us. Initially, the objective was to disclose benefits for the environment and society. Now, it is to measure the impact on the company performance. As any other investment, money spent on technologies must provide the company with decent return on investment. And on top of investing in technologies, CFO’s must also invest in talents and new required skills to manage those data. The former “classic” CFO focusing only on profitability and maximizing the value for shareholders has vanished to favor a role focusing on a broader stakeholder model focused on establishing a sustainable economy. It is a cultural digital shift, sometimes complicate to achieve for CFO’s.

“When discussing ESG in corporate treasury, green financing is often mentioned as one of the main instruments (if not “the” ESG instrument) to support social responsibility objectives.”

Financing a sustainable future

Responsible investing is widely known as the integration of environmental, social and governance (ESG) factors into investment processes and decision-making. ESG factors cover a wide spectrum of topics that traditionally are not part of financial analysis yet may have financial relevance. Environmental factors relate to a company’s role in climate change, its use of natural resources, its pollution and waste, and the environmental opportunities it pursues. Social factors cover topics concerning human capital, product liability, stakeholder opposition and social opportunities. Governance factors include aspects regarding the corporate governance and behavior of a company.

Treasury’s contribution to ESG

When discussing ESG in corporate treasury, green financing is often mentioned as one of the main instruments (if not “the” ESG instrument) to support social responsibility objectives. Nevertheless, treasury can contribute to ESG in many other ways. For example, it can contribute by a through digital workflows, including fully digitalized form processes, record management, (e) payments and bank statement management. Corporate treasurers can also use their leverage with banking partners to try to abolish paper-based documents as much as possible. On top of these ideas, diversity and inclusion should be encouraged within treasury, by providing equal opportunities for everyone and creating a pleasant working environment. This could drive ESG adoption through the full chain, with the goal of embedding ESG into the selection and maintenance of external relations. Another example can be the rating agencies. It would be beneficial to hold a strong relationship with credit rating agencies to make sure they are well informed when it comes to ESG, to keep the company up to date regarding social responsibility best practices. Furthermore, treasury could contribute by setting up supply chain finance programs to incentivize suppliers to contribute to ESG factors. By implementing disruptive new technologies like RPA, blockchain derived technologies, data analytics and AI, a treasurer could increase productivity in an ESG friendly environment. However, as for all ESG initiatives, he/she needs to track and benchmark achievements in terms of ESG, by using consistently predefined metrics (even if it is often a question of culture and mindset to inoculate to the teams more than figures to achieve). It can be translated into objectives (e.g., paperless payment processes, cost of funding based on green rating, enhanced productivity by volume of operations per capita, by diversity criteria, days saved in the finance supply chain, by selecting ESG compliant MMF’s, etc.…). The treasurer, as any citizen, must stay informed of last ESG developments and standards to evidence his/her performances.

Role of Finance and Treasury in ESG

In a rapidly changing world and especially after health crisis, there are opportunities for value creation. Because of the current climate of global disruption (maybe the worst in decades) some MNC’s try to re-assess and revalue their business models and strategic priorities. According to number of analysis, forward-thinking companies, adopting sustainable practices would be attractive. It seems they would be generally more resilient to crisis, more financially robust and present a better long-term growth potential. Environmental, Social & Governance (ESG) agendas and proven results become a way to demonstrate the company’s value and future potential. In this period of major changes, new challenges and post-crisis problems, treasury departments should embrace the opportunity to play a more strategic ESG role in participating to initiatives and in playing its role. For example, the acceleration of digitization projects, often required / boosted by COVID, creates a favorable environment for ESG deployment. The objective is to prove an impact on financial performance of the company. When we think about ESG for treasury, we immediately think about green finance and sustainable investments. However, beside green loans or bonds, treasury may be “sustainable” and adopt a holistic approach of ESG for the department. I guess that treasurers can be part of the solution and help empower treasury to become an ESG champion. It is obvious that treasury’s core responsibilities typically remain centered on liquidity, funding, and risk management. Nevertheless, business models, competitive landscape and crisis have changed treasury’s role. It evolved towards an advisory and collaborative role intersecting with functions such as sales, procurement, and technology. Trade finance seems to be a great case study. In managing company’s supply chain more efficiently, in incentivizing suppliers to adopt more sustainable practices, in automating and removing paper-based processes, he/she has a significant impact. Any mean to reduce friction and transaction costs help enhancing ESG. Advanced technologies may be the best friend of the ESG-focused treasurer. All efforts to automate and reduce costs (e.g., digitalized letters of credit, virtual cards, authentication secured processes, etc..) somehow help improving ESG goals. All API’s initiatives, by enabling transparency, faster reconciliation, consolidated views, tracking and preventing illicit or wrong payments and frauds, also contribute to a stronger ESG strategy. Any initiatives to reinforce internal controls save time, money, risks, and resources for the benefit of the whole community. However, it remains a long journey requiring constant efforts. For example, to stay informed of new initiatives such as the EU taxonomy (e.g. EU reg 12th July 2020, Non-Financial Reporting Directive disclosures - NFRD) for sustainable activities aimed at building policies on disclosure of sustainability practices and integration of sustainability risks in the decision-making process of corporates. ESG compliance also implies ad hoc reporting and capacity to produce it automatically.

Is treasury correctly aligned to the company overall ESG strategy?

Sustainability is not just about financing wind farms but ensuring that treasury is well aligned to the overall company ESG strategy. Treasurers are not ESG drivers. They are only bound to the company’s policy and their role is limited, although key. It would be too ambitious or impossible to fully integrate ESG in treasury. Nevertheless, it is possible to implement number of ESG related elements. The company must start by selecting an acknowledged framework that maps the potential contributions of treasury and guides its integration. One of the most important and widely accepted framework is the United Nations Sustainable Development Goals (SDG’s) and One Report. By selecting such standards, treasury can link and measure according to expectations from stakeholders. Right now, we suffer from a lack of standardization in an alphabet soup of metrics and frameworks. Even IASB should include ESG disclosures into its standards. Being in ESG indices or having solid rating, like MSCI on ESG risks, SUSTAINALYTICS, VIGEO EIRIS, etc.., can only help attracting capital or simply ensuring support from stakeholders. But the absence of clear standardization does not prevent from reporting. We are still in the infancy of financial ESG; but we cannot wait and see. Standards will be aligned sooner or later and rationalized, although it may take some time. At the end of the day, you do not buy a bond because it is green but because the company (and I hope its treasury department) is. It remains a mind-set and a cultural feature we must, as treasurers, adopt and demonstrate.