Positive returns: ESG for treasurers

The link between doing good and financial returns has grown in recent years, and treasurers are embedding ESG in everything they do.

As part of its International Treasury Week, the Association of Corporate Treasurers (ACT) ran a session looking at the impact of ESG on the treasurer’s outlook. The panel of speakers considered many of the challenges and opportunities facing those in the profession as well as how investors, NGOs and policymakers are pushing the agenda forward.

Encouragingly, a poll of the session’s audience revealed that only one in five treasurers admitted to only rarely or never considering ESG factors, underlining the extent to which treasurers are now factoring in ESG at various points in their work – and not just to boost companies’ green credentials.

A clear link

Panellist Paul LaCoursiere, global head of ESG research at Aviva Investors, told the audience that the debate wasn’t simply about ‘doing the right thing’. “Even if you imagine an individual who has zero altruism, they need to think about ESG because it impacts investment performance and it impacts securities issuance,” he said.

To better understand (and demonstrate) the clear link, Aviva recently conducted research that looked at 10 years’ worth of financial market data to evaluate the relationship between ESG metric performance and investment returns.

“We found a couple of important things,” LaCoursiere said. “First, we found a significant positive relationship between ESG performance and financial performance; in other words, the better the firm is doing on sustainability, the better their returns were.”

That’s a huge shift, he believes. “Ten years ago, sustainability-led or impact investing would have been viewed as a trade-off: if you were prioritising that, you were forgoing financial returns.”

Now, however, the nature of the relationship is changing and the magnitude growing, meaning that ESG is becoming more important in financial returns. The Aviva research also revealed that ESG was playing an important role in expanding the types of securities that investors can buy.

“A sell-side report showed that ESG bond issuance is up 300% year on year,” LaCoursiere explained, with some bonds having sustainability criteria attached to the use of the proceeds while others will have coupon payments or yields that are contingent on the issuer’s performance on sustainability.

“So that’s expanding the flexibility of the products on offer, which has to be a good thing for the diversity of the bond market.”

Beyond the rules

Despite the steadily growing volume of regulation on the subject, companies that embed sustainability will expand their opportunities for cost savings, as well as helping to drive innovation, said panellist Jessica Fries, executive chairman of Accounting for Sustainability. “Treasurers should be looking at ways in which they can take advantage of the new opportunities that a focus on ESG brings,” she said.

“It’s also a great chance to engage with employees, customers and suppliers. And these factors are definitely driving better performance. Focusing on the things that really matter has to be a great opportunity to improve resilience, and that links in strongly with the ESG angle.”

For the treasurer, Fries argued, the main focus at a time like this should be on developing a sustainable finance framework. “We issued a guide last year looking at debt finance and how treasury teams can embed ESG in all their activities,” she added, explaining that treasurers need to understand what interest there is in the market. This includes social and green bonds as well as how companies are putting ESG right at the heart of everything they do.

Treasurers should be looking at ways in which they can take advantage of the new opportunities that a focus on ESG brings. It’s a great chance to engage with employees, customers and suppliers

Jessica Fries, executive chairman, Accounting for Sustainability

And it’s not just investors’ NGOs that are working on helping companies both understand and embed ESG into their operations. There is growing support at government level, with the recent publication of the EU’s taxonomy on sustainable finance, which is designed to “create a common language that investors can use everywhere when investing in projects and economic activities that have a substantial positive impact on the climate and the environment”.

Businesses of all kinds will need to familiarise themselves with the new framework, which sets out the requirements for classification as an “environmentally sustainable economic activity”. In order to qualify, activities must provide a substantial contribution to at least one of six environmental objectives set out in the taxonomy; do “no significant harm” to any of the other environmental objectives; comply with robust and science-based technical screening criteria; and demonstrate compliance with minimum social and governance safeguards.

Spirit of the law

Clearly, there is a widespread recognition that some regulation is needed. And the rise in the popularity of ESG scores and certification has led to accusations that companies have used it to carry out ‘greenwashing’, where claims are made to a sustainable approach that aren’t supported by reality.

And this is where many believe sensitive and robust regulation can make a real difference. As LaCoursiere pointed out, although investors like Aviva and others can wield considerable influence over boards through either divestment or voting against management in an equity play, “we mustn’t underestimate the critical role that regulators can play here – in theory they could impose a draconian carbon tax, for instance. So while I can be pretty convincing, as investors you have to accept that regulators have a bigger stick and they can use it.”

As a former regulator himself, Mark Carney, former governor of the Bank of England and now an influential voice in the green finance movement, also addressed attendees: “Achieving net-zero emissions will require a whole economy transition – every company, every bank, every insurer and investor will have to adjust their business models,” he said. “This could turn an existential risk into the greatest commercial opportunity of our time.”

Carney said he believed a combination of carrot and stick was needed to ensure businesses take ESG seriously, and that changing ingrained practices must go beyond simply “funding only deep green activities or blacklisting dark brown ones”. He added: “We need 50 shades of green to catalyse and support all companies toward net zero.”

Fries agreed there needed to be collective action to achieve real change: “I think the current [coronavirus] crisis demonstrates we’re all in this together,” she said, “and we have to work together to tackle the financial consequences but also the social impacts, and respond to those we know are coming down the line.”

“We try to remind chief executives that when we get to the other side of this crisis, the market will definitely view companies favourably if they haven’t dropped the ball on their sustainability initiatives,” concluded LaCoursiere. “That is simply because if they do then their exposure to controversy risk will increase, and as investors we watch that very carefully.”

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