ESG: How Treasurers Can Help Save the World — and the Bottom Line
25 May 2022 |
The C2FO Team
Treasury teams play a critical role in making ESG initiatives successful.
In recent years, ESG – environmental, social and governance — has taken on new importance for corporates as both policymakers and customers have heightened their scrutiny of how businesses affect the world around them.
“If you’re not taking ESG seriously, capital will become more difficult and expensive to secure,” said Matt McQuillan, C2FO’s managing director for the UK, Ireland, Denmark and Norway. “Banks, investors, insurers and ratings agencies are all going to judge you by your ESG performance.”
According to a recent survey by Herbert Smith Freehills, more than 70% of surveyed UK corporates said they plan to seek some kind of ESG-related financing, whether that was loans or bonds with associated ESG-based KPIs or “green” bonds that would be used to fund sustainability projects.
At C2FO, McQuillan works with CFOs, Treasurers and CPOs at Global 1000 companies to optimise their supply chains, using C2FO’s working capital platform as an enabler. In this Q&A, he explains why Treasury has a central role to play in ESG strategy and how your team specifically can make a difference.
What are treasurers saying about ESG today?
It’s a hot topic for treasurers. I regularly speak with Treasury teams at the world’s largest corporations, and almost every conversation about corporate debt finance includes discussion about ESG.
Today, treasurers can qualify for the financing they want simply by having a sustainability framework in place, but that’s changing. Lenders and investors are increasing their level of scrutiny. Going forward, companies will have to show tangible results from their ESG efforts, or access to capital will start drying up. Nobody wants to be accused of greenwashing, which is when a company purports to be environmentally conscious for marketing purposes but actually isn't making any notable sustainability efforts.
Most treasurers understand this. They also realize that, to be effective, ESG has to be supported by an organisation as a whole. Unfortunately, it’s not always obvious how the Treasury team can directly influence ESG performance outside its department.
It turns out Treasury has a significant role to play in the form of supplier financing. Take something like Scope 3 emissions — corporates need their suppliers to adopt new sustainability measures, but those suppliers may lack the funds. This is a perfect opportunity for Treasury to provide a solution.
What are Scope 3 emissions?
For most corporates, the greatest impact they have on emissions and society is not from their own sites, logistics and operations but instead from those of their suppliers — their Scope 3 emissions. As McKinsey & Co. notes, more than 80% of a corporation's carbon footprint is typically from their supply chain.
The Treasury team can have a far greater impact here than you might expect. In fact, you’ll be saving the day for your colleagues in Procurement.
Many Procurement teams have suddenly found themselves on the hook for tracking the Scope 3 emissions of every one of their suppliers. That’s a lot to take on when standards are so complex and suppliers are so varied, for example, how do you measure the carbon footprint of a consultancy versus a clothing manufacturer?
They’re also expected to compel their suppliers to follow those standards by investing in clean energy, shifting to sustainable packaging, paying a fair wage, or any of the other changes suppliers may be required to make. But these are investments that some suppliers are struggling to make, especially in a high-inflation environment like today.
In many cases, all Procurement can do is use the real or implied threat that it will stop working with suppliers that don’t comply. That’s a pretty severe stick to wield, and the cost and disruption of actually changing suppliers can be significant.
So how can Treasury help in a situation like this?
Treasury can empower ESG programmes by providing suppliers with an attractive financial incentive to make improvements.
Perhaps your company agrees to pay your invoices significantly earlier at a preferred rate for suppliers who reach required emissions targets. I’ve also seen companies provide financing at extremely low rates for a defined period of time to suppliers who use those funds to make specific improvements, like re-tooling to use plastic instead of paper packaging.
Incentives are a very effective way to encourage compliance. It shifts the tone of the relationship to one of collaboration and respect versus opposition and threat, strengthening ties for the long term.
And even better, it actually leads to action that benefits the environment. When you provide financial support for sustainability efforts, your suppliers actually have the resources to make those changes.
Which companies are doing a good job of executing on ESG?
A great example of a company that has evolved their approach is Philips, who are rightly winning awards for their innovative approach and have moved from being the ESG Police to ESG Doctors. During the pandemic, Philips used C2FO’s platform to provide rapid access to working capital to manufacturers of critical components used in their medical equipment, such as ventilators, that were in very high demand.
You’ve mostly talked about the E in ESG. What about the S — social impact?
An uncomfortable truth is that even in this day and age women- or minority-owned businesses, especially small businesses, find it far harder to access liquidity than their peers. According to research from Bank of America, 60% of women business owners say they lack the same access to capital as their male counterparts. Almost 25% believe women will never have equal access to capital.
Treasurers can help here, too, simply by providing equal access to liquidity at preferred terms. C2FO regularly creates such programmes for our customers to help their suppliers survive and thrive, and the data we see is fascinating. For example, women-owned SMEs use the platform to access liquidity 2.5 times more than their comparable male-owned peers.
Are these programmes expensive to run?
Quite the opposite. With the right platform in place, these programmes actually create savings for the customer because, in order to receive early payment, most suppliers give a small discount. That’s true whether the customer is making early payments to suppliers using short-term cash or whether they have their preferred banks pay early on their behalf. It works because enabling customers and their suppliers to collaborate more directly and digitally eliminates much of the financial cost leakage in today’s supply chain relationships.
Ultimately, ESG fits neatly with Treasury’s traditional responsibilities to protect the organisation’s overall financial position as well as benefitting the bottom line.