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Integrating ESG metrics in treasury operations


In a time when sustainability is increasingly influencing corporate agendas, the intersection of treasury management with Environmental, Social, and Governance (ESG) practices is becoming increasingly pivotal.

The 2023 EuroFinance International Treasury Management conference brought the issue of ESG into sharp focus, delving into the experiences of two companies: paper-based packaging company, Smurfit Kappa Group and British multinational retailer, Tesco. These companies, renowned for their proactive ESG strategies, offer valuable insights into integrating these practices within the realm of corporate finance.

Sustainable finance in action: Smurfit Kappa’s ESG integration journey

Smurfit Kappa, a global leader in paper-based packaging, and recently acclaimed as one of the top 100 sustainable companies, exemplifies a deep-rooted commitment to sustainability. As a major player in an industry where environmental considerations are paramount, Smurfit Kappa’s journey towards integrating ESG into its treasury functions presents a compelling case study.

Founded in 1934, Smurfit Kappa’s long history has seen diverse types of ownership, being private equity (PE) owned in the early 2000s before returning to the public equity markets in 2007. At the end of 2006, still under PE-ownership, it was leveraged at 5.5x. By the end of 2007 its leverage was 3.2x. Having progressively reduced its leverage target, Smurfit Kappa landed solidly in the BB+ crossover credit rating zone in 2014. In late 2020, Smurfit Kappa completed an equity raise to pre-fund growth capex, reducing leverage to 1.6x at the end of 2020 from 2.1x at the end of 2019. Following the equity raise and deleverage, Smurfit Kappa returned to the investment grade markets. Emer Murnane, group treasurer at Smurfit Kappa Group, highlighted this journey: “It took us nearly two decades to return to investment-grade status, during which we faced volatile markets and had to be agile in our financial strategies.” 

In 2020, Smurfit Kappa incorporated their five key corporate ESG objectives into their financing through converting their €1.35 billion multi-bank RCF into a sustainability linked loan. The margin on the RCF is linked to the achievement of five key performance indicators on Climate Change, Forest, Water, Waste and Health & Safety. “Integrating these five main KPIs into our RCF was a strategic decision. It wasn’t about financial benefits, rather it was to embed our  corporate sustainability ethos into our capital structure,” explained Murnane.

Annualising medium and long term targets can be challenging, acknowledges Murnane. However, the Smurfit Kappa team had the advantage of being able to leverage the robust data collection and assurance processes already in place for their annual Sustainable Development Report.

One striking aspect of Smurfit Kappa’s strategy was its emphasis on circularity – the principle of minimising waste and making the most of resources.  “Circularity has always been a big thing for us, it has been very much in our DNA since the beginning,” Murnane added. 

In 2021, Smurfit Kappa issued its inaugural green bond under its Green Finance Framework. The eligibility criteria span the geographic scope of the Group’s operations and take into account its efforts to produce circular products, using certified sustainable raw materials and implementing circular production processes that are subject to continuous improvement, both in terms of environmental and social metrics. As such, Smurfit Kappa’s approach to sustainable financing also mirrors what the Group is, a global business which places sustainability at the centre of its operating model.

Tesco: setting a standard in sustainable retailing

Tesco, a household name in the European retail sector, has been a frontrunner in the adoption of ESG practices. Their early commitment to a net-zero target back in 2009 set a precedent in the industry. This thinking extends to their treasury operations, where ESG considerations are deeply ingrained.

Natasha Vowles, Head of Treasury – Funding spoke of the significant strides in embedding ESG elements into their financial strategies that Tesco’s treasury department has taken. Recognizing the limitations of traditional use-of-proceeds bonds for their operational structure, the treasury team opted for a more tailored approach with sustainability-linked bonds. This strategic choice was made to better align with the group’s funding methodology, highlighting the company’s adaptability and commitment to ESG principles.

These bonds were tied to specific KPIs (Key Performance Indicators) related to environmental targets, particularly around emission reductions. The decision to tie the cost of their debt to their performance on these ESG metrics was a bold move, reflecting the company’s dedication to real and measurable sustainability goals. 

This integration required extensive collaboration across various departments. The treasury team worked closely with responsible sourcing and product teams, investor relations and the communications team, among others, to ensure a cohesive approach to sustainability. For instance, in setting food waste KPIs, the treasury had to engage with operational teams to understand store-level practices. This cross-departmental engagement not only enhanced the understanding of sustainability practices but also highlighted that these practices were deeply rooted in the company’s operations.

While the company’s journey has been largely successful, it was not without challenges. The process of identifying and agreeing upon suitable KPIs, which would be both impactful and achievable, was complex. It involved balancing the ambition of their sustainability goals with the realities of operational capabilities and market conditions. Additionally, ensuring consistent and transparent reporting on these KPIs to stakeholders, including investors and financial partners, added another layer of complexity.

A unique aspect of Tesco’s approach was the extension of their ESG strategy to include Supply Chain Finance. This initiative allowed them to influence their suppliers, encouraging them to adopt similar emission reduction targets. Furthermore, the company explored green deposits, ensuring that their funds were invested in projects with a positive environmental impact, aligning with specific United Nations Sustainable Development Goals.

Looking ahead, Tesco continues to explore new ways to integrate ESG considerations into their treasury operations. This includes keeping a close eye on evolving sustainability standards and regulatory requirements, and being ready to adapt their strategies accordingly. “We are continuously exploring new methods and keeping abreast of changing sustainability standards and regulations. Our goal is to adapt and refine our strategies to meet these evolving demands,” said Vowles, highlighting Tesco’s proactive approach to sustainable finance.

Challenges in ESG metrics and regulations

The panel discussion highlighted the complexities of ESG metric standardisation across different business operations and sectors. It explored Tesco’s journey in developing relevant and credible ESG targets, emphasising the evolving nature of ESG reporting standards and stakeholder expectations. This underscores a broader challenge where companies like Tesco must continuously adapt their ESG metrics and practices to align with changing global standards and accurately reflect their sustainability performance.

On the other hand, Smurfit Kappa has a long history of reporting on ESG, with key KPIs established since 2007. Their approach suggests a different set of challenges, particularly around navigating the diverse and specific nature of ESG regulation, which can vary significantly across jurisdictions and sectors. 

As the panel discussion vividly illustrated, the integration of ESG into treasury functions is not a static process but a dynamic, evolving journey. With the financial world increasingly recognizing the importance of sustainability, treasury departments will likely face new challenges and opportunities. The experiences of Smurfit Kappa and Tesco serve as a testament to the potential of ESG to reshape corporate finance, driving both innovation and ethical business practices.