Corporate Treasury ESG Practical Approaches

Two years ago, when we last discussed this, the main takeaways were:

• Treasurers were interested in green bonds and financing, but very wary of the lack of clear standards
• Treasury has a role to play, for example in selecting banks with good green credentials – but this needs to be part of an enterprise-wide approach, which was often lacking.
• The “E” part of the equation tends to receive more focus than the “S” and “G”.

This time, the discussion was very different. The reporting issues and the need for standards has received a lot of media attention recently – but our participants have mostly moved on. Interest in these products has waned: one participant said that, if investors consider the company to be green, the bonds will be priced accordingly, while another found it too hard to prove that the proceeds were being used in a green way. Green investments generally presented many issues, including tracking environmental credentials, and the need for unacceptably long tenors.

Instead, a picture emerged where:

• All the companies represented have a real commitment to improving sustainability
• Treasurers are finding it easier to collaborate with other functions for reporting, as ESG goals are becoming more central to corporate strategies. Though one participant finds the US focuses more on “S” and “G” than Europe.
• From an “E” perspective, European banks were seen as being more proactive than their US counterparts with BNP Paribas, Scandinavian and Dutch banks name checked as thought leaders.
• Many companies are using VPPAs (Virtual Power Purchase Agreements) to help improve their carbon footprint. This tool, also known in the US as a REC (Renewable Energy Certificate) has not been covered much in the press: it involves signing a fixed price electricity purchase agreement for a period, usually ten years. The power supplier can then use this to raise the funding needed to invest in solar or wind power. Even if the company does not use the green energy itself, it receives a carbon credit for its sustainability score.
• One participant is looking to extend the same approach to other areas, specifically heat. It was noted that banks can play a matchmaking role by introducing the clean energy provider needing funding to the client with clean energy needs.
• One participant had extensive discussions with auditors regarding accounting issues: they are technically derivatives, and the auditors wanted to mark them to market. All agreed it was important for treasury to be involved in the negotiation phase to help structure the agreements, and confirm hedge accounting up front.
• The Importance of putting a floor price in these contracts was highlighted, to reduce the impact of extreme market fluctuations: renewable energy has been known to get into negative pricing.
• The role of banks in bringing ideas to the table was noted by some. For example, as a result of a bank seminar, one company has moved away from shipping its products on wooden pallets to using thin plastic mats, made from plastic waste removed from the ocean. These increase shipping efficiency, and avoid the problem of discarded wooden pallets, as they can be easily returned and re-used.
• Sustainability pricing: in principle, treasurers have no issue with differential pricing according to environmental credentials. Some make ESG performance a criterion in evaluating partners for their supply chain financing programme. However, it is a problem making it work. Are the banks increasing the pricing of credit so they can apply an ESG discount to bring it back to where it was before? And, for the supply chain financing, it is the same issue: the company would have to raise the price so they can lower it again. This may work over time, but implementation is a problem.
• All participants feel their companies are fully committed to improving ESG performance, even if the level of implementation varies. Potential reputational damage is an increasing factor – but one participant reported pressure from the board as a key motivator.
• Every participant’s company has public goals for emissions reductions, and management is committed to achieving them. In any case, all our participants are personally committed to ESG initiatives, and are actively pushing their companies in this direction.

Bottom line: this call was quite uplifting. There is a real sense of corporate commitment to improving ESG performance – especially the environmental side. There is less interest than before in green bonds and investments – but this is because treasurers are working on initiatives they find to be more concrete, such as VPPAs.

There is much to be done – but attitudes, like the times, are a-changing.