ESG in Corporate Treasuries
- Let's include ESG in the Treasury Policy
Author: Federico Bellanti
March 18, 2024
Rethinking Treasury with ESG at the Core
In the modern corporate world, the integration of Environmental, Social, and Governance (ESG) principles into business operations has become a critical element of strategic planning. This trend is increasingly evident in the realm of corporate treasury functions, where ESG considerations are shaping policies and practices in ways that reflect a company's commitment to sustainable and responsible business operations.
The adoption of ESG principles in treasury operations marks a transformative shift towards more sustainable and ethical financial management practices. This change is not just a mere matter of Compliance: it concerns the alignment of financial activities with broader corporate values and with a widespread sense of social responsibility. Integrating ESG objectives into treasury activities involves a complete review and, where necessary, reform of policies and processes in many key areas:
- Liquidity and Investment Management: companies today pay much more attention to the selection of their financial partners, selecting investment opportunities based on ESG criteria, favoring those organizations that demonstrate strong sustainability practices. This could involve the adoption of specific objectives in terms of the percentage of funds held ESG-savvy banks / fund managers or the investment in green bonds and other financial instruments officially recognized as sustainable.
- Sources of Funding: there is growing interest in evaluating forms of financing linked to ESG mechanisms. This could include Revolving Credit Facilities, medium-long term financing, Commercial Papers but also public bond issuances linked to sustainability objectives, thus incentivizing businesses to meet predefined ESG milestones.
- Risk Management: ESG principles are increasingly being incorporated into risk management strategies, particularly in managing market risks such as foreign exchange and interest rate fluctuations. Companies are exploring the use of ESG-compliant derivatives, which link financial instruments to ESG performance indicators, offering a way to hedge against risk while reinforcing commitment to sustainability goals.
Yes, but how long is the journey for those who are starting now?
Incorporating ESG principles into treasury operations undoubtedly presents obstacles but it also offers opportunities. The first reason for complexity is found in the definition of ESG criteria, which must be sufficiently clear; then in measuring performance with respect to these criteria; finally, and I would say that it is the truly fundamental thing, with the adoption of all those measures suitable to guarantee that treasury activities are truly aligned with the objectives we have set ourselves.
This process requires careful consideration of various factors, starting with deciding how many and which criteria we want to adopt (you might want to start with the so-called "few but good ones"), and following with the selection of banking and financial partners up to the design of investment and financing strategies that support sustainable business practices.
The Role of ESG-linked Derivatives
A notable innovation in this space is the development and use of ESG-compliant derivatives. These financial tools represent a sophisticated approach to intertwining corporate financial strategies with ESG objectives, offering companies solutions to manage financial risks while simultaneously driving progress towards sustainability goals.
In my next post I will address the topic of ESG-linked derivatives in detail, highlighting their characteristics, documentary aspects, examples of use and the opportunities that open up for companies intending to explore this field.
How do we select KPIs relevant to Treasury?
The choice is truly wide, because so much can be done to make one's contribution, no matter how big.
Below I illustrate some examples, keeping in mind that sometimes there may be overlaps: for example, adopting a Code of Conduct for Suppliers can fall into both the S area of Social and the G area of Governance. Some of these objectives are suitable for inclusion directly in the Treasury Policy, while others are more suitable for inclusion in the procedures that document the desk's activity.
Energy consumption
Percentage of paper-less processes
Combined use of resources (for ex. recycled paper)
Remote Working vs In-Office proportion
Safety and healthiness of working environments
Diversity&Inclusion metrics
Staff turnover
Social and Community Responsible initiatives (for ex. training)
Transparency of information and publication of reliable data
ESG-linked remuneration criteria
Diversity in the Management Team
Selection of banking partners
Selection of financial products
A call for sustainable treasury practices
Integrating ESG principles into treasury operations is not an ephemeral trend: it is an essential component of modern business strategy that reflects a commitment to sustainability, social responsibility and governance excellence. By embracing ESG-focused policies and practices, companies can not only improve their financial performance, but also contribute to the broader social goal of sustainable development.
We are witnessing a rapidly evolving landscape that offers an opportunity for companies to lead by example, demonstrating that financial success and responsible business practices are not mutually exclusive, but can be mutually reinforcing. Looking ahead, the strategic integration of ESG principles into treasury operations will continue to be a hallmark of innovative, forward-thinking companies eager to leave a positive footprint on our planet.