Boards and regulators driving sustainability push in treasury

17 January 2019 Consultancy.eu

Treasury professionals are increasingly embracing sustainability. To a large extent to satisfy growing business calls for greening financial operations, but also because the development down the line provides financial and strategic opportunities.

Over the past 15 years, sustainability has developed into a keystone topic for most of the boardrooms. In the trend’s slipstream, treasury departments are now more involved as well. This is reflected in a study by Enigma Consulting and Dutch banking firm Rabobank, which found that around half (49%) of treasury professionals at large organisations believe sustainability is a key business goal.

Conducted among organisations with between 100 and 500 finance staff, the survey also uncovered that professionals still view regulation as the main driver for this need for sustainability. When asked if environmental requirements/regulations have had an effect on their treasury activities in the last 3 years, 62% responded with a yes, of which 53% said to an extent, and 9% said a lot. Usually this feedback originated from banks, regulators and shareholders.

Asked which areas of business that sustainability is impacting, 38% of respondents said relationship management, or how organisations are interacting with their customers. At one end, organisations are using sustainability as a key means of differentiation in a crowded market. On the other side of the table, customers are demanding more in terms of sustainability from firms, so it also relates to tapping into changing demand.Impact of environmental requirements / regulations on treasury

Green financing

In other areas, treasurers also highlighted how the topic is impacting the way strategies are devised, processes are run and governance is managed. This included 26% of project/customer finance departments, 25% in cash & liquidity management, and 21% in credit risk insurance.

One of the top ways in which treasury can contribute to sustainability is through facilitating green financing deals. In simple terms, green finance is a financial instrument that combines investable returns with environmentally positive outcomes. Examples include positive incentive loans, or environmental, social and governance (ESG) linked loans, green/sustainability loans and carbon neutral investments. According to recent KPMG analysis, only 1% of fiduciary management professionals had taken bespoke action in terms of engaging on ESG, making it a prime area for potential growth.

In the Enigma Consulting and Rabobank report, the authors discovered that 45% of treasurers have considered the issue of a green financing instrument, and many have in recent years in fact followed up and translated their words into deeds. Globally, the green bond market saw about $175 billion of issues in 2017, and many market watchers believe the green loan market could become bigger than the green bond market.

Sustainability strategy

For corporates, green loans are a way of communicating their sustainability strategies and engaging in a conversation on sustainable finance. 51% of respondents said green financing supports their company’s sustainability. One example cited by the research saw Dutch health company Royal DSM take a €1 billion loan, with the interest on its revolving credit facility (RCF) depending on the following three elements: improving its cumulative greenhouse gas (GHG) efficiency, improving its score according to an 'energy efficiency index' that measures energy intensity, and the amount of its electricity sourced from renewables.

Bruné Singh, group treasurer at Royal DSM, said, "We concluded this revolving credit facility to underline our commitment to tackling climate change specifically. We also see this transaction as an opportunity to collaborate with our banking partners and lead the conversation on sustainability and climate change, and influence mindsets.”

Global sustainable debt annual issuance

Another example came from Dutch engineering consultancy VolkerWessels. In June 2018, the company switched its revolving credit facility from traditional form to ‘green’ or sustainable form, a move which is now linked to the year-on-year improvement and performance of five sustainability performance indicators. Three indicators already existed in the sustainability policy and two were added for this RCF’s purpose. The five indicators are injury/incidents frequency; social return (PSO score); CO2 emissions of the lease car fleet; waste recycling percentage; and the proportion of newly built zero-energy-bill homes.

Bas Spelbos, Group Treasurer at VolkerWessels, remarked, “Our sustainability commitments are monitored during the lifetime of the RCF. It is interesting to see that many of these sustainable criteria are also requirements of clients in tenders such as municipalities. As a consequence, it also generates commercial opportunities.”

Broader financers base

One of the foremost benefits of the fledgling green and sustainability loan market is its potential to appeal to 'non-bank investors' who are being driven by a green or sustainability mandate to diversify the assets to which they allocate their capital. The study found that 21% of respondents highlighted the advantages of using green financing instruments to that end, as they enable a broader finance base. 

10% of survey respondents also highlighted the possibility of more competitive pricing. In the case of green loans, the interest rate is often variable according to defined sustainability factors, in order to encourage some form of improvement in the sustainability performance of the borrower. For the lender, it can justify a slightly lower borrowing cost based on the premise that by improving its sustainability rating, the lender is at lower risk of default.

In conclusion, Bas Kolenburg from Enigma Consulting said, “Sustainability is clearly very much on the radar of corporate treasurers. And although many treasurers still seek better understanding of the process of issuing a green financing instrument, the list of 2018 “green” issuers is already quite substantial.”

Related: Treasury departments are being challenged to raise their bar.


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