ESG – what should treasurers be doing?
ESG and sustainability are a major priority for companies – but what does that mean for treasury and finance? Experts from Nissan, Tesco and bp share how they are furthering their companies’ ESG goals, from engaging with suppliers to achieving transparency in reporting.
Environmental, social and governance (ESG) and sustainability are rising up the corporate agenda, and treasurers increasingly have a role to play in this area. Some companies are further along this journey than others – so what can treasurers learn from early adopters?
One common theme is the need for top-down leadership. Nissan, for example, has a Chief Sustainability Officer, while Tesco has a senior non-executive director who chairs a corporate responsibility committee. And Richard Wheatley, Treasury Vice President Liquidity at BP, notes that the firm’s CEO has played a key role in engaging market participants.
Companies are also paying close attention to the importance of suppliers on the journey to net zero. As well as embedding sustainability into a revolving credit facility and issuing sustainability bonds, Tesco has extended its focus to include supply chain finance, says Alexander Ashby, Head of Treasury – Markets. “We have a climate-based assessment for suppliers, and they are able to achieve lower financing costs if they can demonstrate they are in the top tier,” he told Virtual International delegates, adding that the assessment takes the form of an evidence-based questionnaire, tailored to suppliers of different sizes.
Rakesh Kochhar, Senior Vice President, Group Treasurer and Global Head of Sales Finance at Nissan, says the car manufacturer cannot achieve its carbon neutrality goals unless suppliers also contribute. “We work with them, we train them, we have CSR guidelines for suppliers – they have to follow those guidelines, otherwise they will lose the business,” he says. “We also use a third party to audit suppliers to ensure they are complying with our ESG norms.”
What’s more, Kochhar says that in the not-too-distant future, “banks will need to disclose whether they are funding sustainable activities. This is where suppliers will come into play, and banks will be able to earn some points and pass those onto their clients.”
Data and reporting
Where data and reporting are concerned, the challenges vary for different industries. “The auto industry is highly regulated – we have emissions standards, we have standards to improve fuel efficiency,” says Kochhar. “I think reporting is streamlined because we’ve been doing it for years and years.”
Nevertheless, Wheatley says that data and reporting is a challenge for all participants, including corporations, investors and regulators – not least because methodologies and information providers are continuing to evolve. “Without clear consistency of data, it’s really difficult for investors to make decisions,” he comments. “Some degree of standardisation is needed to help us move forward in a clear and consistent way, rather than debating the merits of one methodology versus another.”
He adds that collaboration between stakeholders can play an important role in improving the quality of data and defining how it should be used. One of BP’s goals is to become a leader in relation to transparency within the industry – “and that’s an area we are focusing on heavily, in terms of increasing the disclosures that we give to investors and the wider community.”
Ashby, likewise, emphasises the importance of reliable data. “When you’re setting a baseline, you live with that for a very long time – so it’s a hard thing to restate,” he says. “You need to be really clear and robust.” In light of this, Tesco has allocated a finance business partner to support data and financial modelling. Ashby notes that initiatives are often commercially led – “So getting someone from finance involved early is really useful, because they can be the one thinking about how to get data audited, and how to disclose things in the annual report.”
Investing surplus cash
Investments are another area in which ESG considerations have a role to play. While liquidity may be the main priority for regular cash investments, Kochhar says that a certain percentage of the firm’s pension assets are allocated to ESG investments. “We want to invest in companies which are environmentally friendly – and there are also certain industries we will not invest in, such as tobacco,” he notes.
At this stage, he says, there is no expectation that 100% of a company’s cash should be invested in ESG-compliant companies – “but maybe there will be more requirements that say a certain percentage of pension assets or excess cash should be allocated to ESG- compliant, environmentally friendly companies.”
Engaging with stakeholders
Finally, treasurers point out that the ESG journey should include close engagement with different types of stakeholders. For one thing, Wheatley says that BP engages very closely with rating agencies, adding that ESG considerations are included in the ratings they provide. As such, he says that rating agencies are one of several key stakeholder groups that need to be kept informed about what the company is doing in this area.
Kochhar adds, “You need a very engaged Investor Relations department, where treasury is bridging the internal company with external stakeholders – whether those are shareholders, debt holders, bankers or suppliers – and explaining your ESG strategy so that they understand what your company is doing.”