It’s time for treasurers to take environmental, social and governance activities every bit as seriously as other business risks and opportunities. Brian Delahunty explains why.

Key performance indicators (KPIs) are designed to drive an organisation towards its goals and strive to ‘do better’ each year, which in many ways is also the aim of environmental, social and governance (ESG) initiatives.

While treasurers are used to setting and achieving KPIs, ranging from forecast accuracy to retrospective hedge effectiveness, ESG-specific KPIs (often called ‘sustainability performance targets’ or SPTs) are a new concept for many treasury professionals.

In fact, according to the TMI and Barclays’ European Corporate Treasury Survey 2021, a mere 25 percent of European treasury functions currently have SPTs in place, and only 33 percent of the 225 respondents were planning to include ESG measures in their treasury objectives.

Driving ESG KPIs

Over the past 12 months, ESG has become a true boardroom imperative. Looking back to 2020, ESG was a theme lingering on the fringes of the board’s attention – but the COVID-19 pandemic catalysed an intense focus on communities and social challenges, as well as global supply chains and supplier relationships and values.

As such, ESG is now front and centre for boards, and this trend is set to accelerate as we head into 2023.

With this renewed focus on ESG and the treasury’s growing role as a strategic advisor to the board, treasury teams can no longer leave matters to the sustainability department and must lend support themselves.

There are many ways in which they can achieve this support. In the early days of ESG, green bonds and loans were the only options open to treasurers, making ESG appropriate for only a handful of treasuries.

Today, however, they have access to a growing set of ESG solutions at their fingertips, such as green trade and working capital solutions like green loans, supply chain finance, and green bill of exchange and promissory note discounting, as well as ESG-compliant investments.

In addition, traditional green bonds and green revolving credit facilities remain popular and, of course, treasuries can exert influence through talent selection and choice of business partner.

Setting the right targets

Sustainability works best when there is a specific ESG policy for the treasury team, built in conjunction with the rest of the organisation. This enables treasury to play its part and be on the same page as the c-suite. Having a standardised approach across geographies and treasury centres is also critical.

When developing ESG KPIs and targets, treasuries may wish to consider the:

• percentage of financing that is ESG-linked;
• percentage of short-term investments held in ESG-compliant vehicles;
• carbon footprint of the treasury team;
• percentage of paperless workflows (and meetings);
• percentage of women on the treasury team; and
• percentage of ethnic minorities on the treasury team.

Treasurers must collaborate with internal and external partners to set the right goals that adhere to industry best practices and guidelines while also using rigorous and measurable targets to mitigate the risk of ‘greenwashing.’

Disclosures and sustainability reporting

While non-financial reporting might appear outside the treasurer’s traditional remit, they can play a vital role in communicating sustainability-related information to stakeholders and the market. Learning about initiatives happening in the market can give treasurers an edge. Important frameworks, standards, and directives to be aware of include:

• The European Commission’s (EC) Non-Financial Reporting Directive;
• The EU Taxonomy and Sustainable Finance Disclosure Regulation;
• The Global Reporting Initiative (GRI); and
• The prototype climate-related financial disclosure standard from the CDP, Climate Disclosure Standards Board, GRI, International Integrated Reporting Framework and Sustainability Accounting Standards Board.

With progress still to be made among standard-setters and regulators, it is worth having early conversations with corporate banking partners, vendors, and third-party sustainability experts about treasury’s proactive participation in sustainability reporting.

Next steps

It may seem as though treasury has a long to-do list regarding ESG. While there are areas that will require attention from treasury leaders, many of the solutions are relatively simple to implement, and the potential benefits are not to be scoffed at.

Arguably, the most significant ESG risk is failing to understand how critical sustainability is to the future of business – and failing to build it into the heart of the treasury function. Companies may find themselves disadvantaged as buyers or suppliers if they no longer satisfy their counterparties’ ESG requirements.

Likewise, support from banking partners, vendors, and consumers may fall away if ESG criteria are not met.

It’s time for businesses, and treasurers, to start taking ESG as seriously as they do other business risks and opportunities. The potential downsides of not doing so can seriously impact people, profits, and the planet.