Sustainable Finance Framework – A tool To Align Financial Decision-Making and Sustainability

06-02-2023 | Anastasia Kuznetsova | treasuryXL | LinkedIn |

The recent increase in ESG awareness among consumers and investors, along with regulatory pressure, has prompted companies around the world to incorporate ESG aspects into their business models in order to become sustainable.

However, a transition to more sustainable operations is not possible without new financing. Thus, Corporate Treasurers can significantly help companies to achieve their ESG goals by raising funds for the company’s sustainable initiatives. This can be done through the creation of a sustainable finance framework, which has gained popularity among companies in recent years.

Sustainable Finance Framework and its Components

A sustainable finance framework aims to align financial decision-making with the principles of sustainable development. The framework outlines how a company uses environmental, social, and governance (ESG) factors in its financing, refinancing, and investment processes. As a starting point, corporations typically establish a sustainable finance framework to arrange debt financing for a certain group of projects with positive environmental or social benefits. Many organizations set up their sustainable finance framework in accordance with international guidelines such as the Green Bond Principles (GBP) or Social Bond Principles (SBP), which support the issuance of ESG-related debt.

A well-defined sustainable finance framework will typically contain five components:

  1. Use of Proceeds Clause and Eligible Projects

The use of Proceeds clause defines categories of projects for which a company can use debt proceeds that were raised under its sustainable finance framework. For instance, the Framework of a property developer may cover the issuance of green and social bonds for three project categories:

  • acquisition/development of low-carbon buildings
  • wastewater management
  • affordable housing.

Each project category will also have specific ESG criteria that will help to identify truly sustainable investment opportunities eligible for sustainable financing. For example, a project category “acquisition/development of low carbon buildings” may only allow spending debt proceeds on the acquisition of buildings with an energy efficiency rating of A. Projects that do not fall under eligible project categories, or projects that do not satisfy the established ESG criteria within each project category, will not receive sustainable financing and, thus, will not be undertaken by the company.

  1. Process for Project Evaluation and Selection

Another crucial component of a sustainable finance framework is project evaluation and selection. Corporate Treasurers should establish a method for determining whether new projects available for the company fit eligible project categories and, therefore, can be adopted. All selected projects included in a sustainable finance framework should be reviewed on a periodic basis and before new financing is raised. As a rule, a full list of eligible projects is examined and approved by the CFO to confirm that they meet the ESG criteria of the Framework and, thus, can receive financing.

  1. Management of Proceeds

After the sustainable financing is raised, Treasurers should ensure that funds are properly allocated and used in accordance with the “use of proceeds” clause. Thus, the sustainable finance framework should specify how a company will track the disbursements and allocation of debt proceeds among eligible projects.

  1. Funds Allocation Disclosure & Impact Reporting

The fourth component of the sustainable finance framework is the periodic disclosure of debt-related and project-related information. As long as a company has some outstanding debt raised within its sustainable finance framework, it should disclose, at least annually, the total amount of ESG debt raised, the remaining outstanding proceeds and the allocation of the proceeds across eligible projects. Such disclosures will help the company’s debtholders to understand how and to what extent their capital has been deployed by the organization.

Companies should also evaluate the environmental/social impact of funded projects via verifiable Key Performance Indicators (KPIs). For instance, a property developer can measure the environmental impact of projects under the “acquisition/development of low carbon buildings” category by energy consumption (kWh) and/or energy intensity (kWh/m2) KPIs. Impact reporting is crucial to assess whether the projects that received sustainable financing have achieved the expected positive environmental/social benefits.

  1. Assurance

The last attribute of the sustainable finance framework is independent external assurance. This step is needed to confirm the credibility of the established Framework as well as attest the compliance of the debt issuance process with the principles of international guidelines adopted by the company as a foundation for its sustainable finance framework.

The Enhancement of the Sustainable Finance Framework

The ultimate objective of a sustainable finance framework is to drive the financing of all corporate activities that align with the company’s sustainability goals. As such, Treasurers should gradually broaden the Framework by incorporating other sustainable finance instruments, such as convertible green bonds or sustainability-linked revolving credit facilities, to finance a diverse range of sustainable initiatives that support a company’s transition towards more sustainable operations. Over time, the Framework should be continuously expanded to include the development of new products/services and other sustainable business activities, instead of being limited to the financing of specific project categories that were initially defined in the use of proceeds clause.

 

Sustainable Finance Framework

Core Benefits of the Sustainable Finance Framework

The implementation of the sustainable finance framework can potentially result in the following benefits for the company.

  1. Improved Risk Management

By inclusion of ESG factors in the financial decision-making process, the Framework ultimately forces companies to consider environmental and social risks as well as their interdependences when evaluating investment opportunities. This enables businesses to receive a more complete picture of their risk exposures and, therefore, timely put in place adequate risk management tools that are required to keep company’s exposure to risks at an acceptable level.

The improved risk management that accounts for ESG-related risks is also likely to increase the confidence of capital providers in the company’s ability to survive in the long-term and remain profitable during challenging times. This, in turn, might improve a company’s credit rating, decrease the cost of capital, and enable businesses to obtain new financing on more favourable terms.

  1. Increased Access to Capital

Sustainable finance has gained significant momentum in recent years. Therefore, companies that are perceived as environmentally and socially responsible are more likely to receive investment from impact-oriented investors and financial institutions. Thus, the implementation of the sustainable finance framework can increase a company’s access to capital and provide new source of financing in the face of ESG-oriented investors.

  1. Enhanced Reputation & Credibility

The implementation of a sustainable finance framework also demonstrates a company’s commitment to sustainability, which can lead to a better reputation among stakeholders, and enhance the company’s credibility and trust. This may translate into a wider pool of investment options and stronger relationships with suppliers, customers, and other stakeholders.

Key Takeaways of the Sustainable Finance Framework

  • The sustainable finance framework is an effective tool that can be used by Corporate Treasurers to connect a company’s ESG strategy and financial decision-making.
  • The Framework helps organizations to raise financing for corporate initiatives that support a company’s sustainability goals and have a positive environmental/social impact.
  • By adopting a sustainable finance framework, companies can show their commitment to sustainable development, improve risk management practices and receive greater access to capital. Given this, Corporate Treasurers should consider an opportunity for the development and implementation of a sustainable finance framework within their organizations.

Thank you for reading!

 

 

Anastasia Kuznetsova

 

 

 

How to get into FinTech? A Career Guide for 2024

19-01-2023 | Pieter de Kiewit | treasuryXL | LinkedIn | If you are interested in learning about FinTech and how to get into the industry, there are a few things you may want to consider. With my focus on corporate treasury, we are in close contact with various Fintech companies who ask us on a regular basis to support them in their recruitment. We learned these companies have specific requirements.

Read more

Live Expert-Led Session | Your Currency Management Toolkit for 2023

17-01-2023 | treasuryXL | LinkedIn | Join Kantox and treasuryXL in this expert-led conversation on the future of currency management as we uncover the key treasury priorities and opportunities for the new year.

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Who should “give a push”​ and work on APIs?

12-01-2023 | treasuryXL | LinkedIn |

A new year, a new edition in which we discuss the latest treasuryXL poll results. It is encouraging that once again many treasurers participated in the vote. We examined the voting patterns of treasurers and gathered the perspectives of experts Jack Gielen and Konstantin Khorev on the topic of APIs in treasury.

Source

Who should “give a push”​ and work on APIs?

It is commonly understood that APIs are prevalent in today’s digital landscape. However, corporate treasurers can also reap benefits from API technology and its advantages. If you are unsure about the importance of APIs in Treasury or need more information, you should definitely watch the recording of the joint webinar together with Cobase on the future of APIs. It is encouraging that once again many treasurers participated in the vote. The current treasuryXL poll remains open and we encourage you to continue to have your voice heard! You can cast your vote on this link.

Question: Who should “give a push”​ and work on APIs?

First observation

That looks quite straightforward: partners should join forces. Do the treasuryXL experts agree, or what is their view on this?

View of treasuryXL experts

Jack Gielen (Cobase)

Jack voted for the option that partners should join forces.

Geen alternatieve tekst opgegeven voor deze afbeelding

 

“APIs and the benefits are clearly on the map but there is also an understanding that there is still work to be done before those benefits will really be realised”

It is good to see that regarding the results of this poll, the market agrees that the success of corporate APIs and OpenBanking requires cooperation and cannot be dictated by 1 party. This means Treasurers clearly understand the complexity of the playing field. At the moment, although there are many initiatives by individual parties, there is a need to create a good partnership where the whole eco-system works together

The main benefits that APIs could realise if banks and companies were to work together are:

  • Better integration of banking services into customers’ own internal systems,
  • Easier connection to new banks and expansion of banking services
  • Better and more real-time data that can be converted into actionable information

These benefits translate into being able to use the systems the treasurer has chosen more efficiently and better, more up-to-date insight into status, exposures and required actions.

Recently, Cobase set up the webinar “The Future of APIs” in collaboration with treasuryXL to discuss this topic. I was particularly impressed by the level of knowledge Treasurers have gained over the past year which was also reflected in the questions. APIs and the benefits are clearly on the map but there is also an understanding that there is still work to be done before those benefits will really be realised. Ultimately, the priority with the end customer, the treasurer, will determine how quickly other market players act.

Konstantin Khorev

Konstantin voted for the option that partners should join forces.

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“By working together, we can achieve a more efficient and effective treasury management system.”

I agree with the majority view that the implementation of APIs in the treasury field should be a collaborative effort. Banks will play a key role in implementing these changes, but it is also crucial for corporates and TMS providers to set and specify the requirements. This ensures that the solutions being implemented align with the unique needs and goals of each individual corporate, and TMS providers can develop the tools and services necessary to support these needs. By working together, we can achieve a more efficient and effective treasury management system.

Recently, my latest article on this topic was published on treasuryXL. In it, I try to make it plain that APIs are a nice and easy solution, although they come with some limitations and challenges. At the same time, I believe that the future of bank connectivity lies in API technology. What do you think?

APIs for Corporate Treasury: Not only efficient but also easy

10-01-2023 | Konstantin Khorev | treasuryXL | LinkedIn | APIs, or application programming interfaces, have revolutionized the way that corporate treasury departments operate. Getting timely information about cash balances and transactions running through your bank accounts is crucial not only for treasury but also for other corporate functions: A/R, A/P, business operations and other departments

Read more

Interview | 7 questions for Adesola Orimalade, Seasoned Treasury Professional

09-01-2023 | treasuryXL | Adesola Orimalade | LinkedIn |

 

Meet our newest expert for the treasuryXL community, Adesola Orimalade

Adesola is one of the few Treasury professionals around who has worked in both banking and corporate treasury, across various industries and in both Africa and Europe.

Since walking into his first role over a decade ago, he has built his competence in many areas of treasury including cash management, treasury operations and operational/liquidity risk management.

Aside from his professional background Adesola is passionate about using his professional knowledge and expertise to support voluntary organisations that operate within his areas of interest (homelessness, poverty, climate change etc). He currently serves on the board of a U.K. charity.

 

We asked Adesola 7 questions, let’s go!

INTERVIEW

 

 

1. How did your treasury journey start?

 

Having obtained a diploma in Town and Country planning and a first degree in Estate Management, my desired career path was to work for any of the regional or multilateral agencies devoted to development finance, urban renewal, housing etc. Growing up I had seen the slums in cities like Nairobi, Johannesburg and even Lagos. I wanted to make a difference.

Life however had a different plan for me, I started working in international banking operations at Citibank purely by accident.

It was during my time in international banking that I was first introduced to Treasury. Trade Finance as you know has a lot of opportunity to interface with Treasury and whether that’s in terms of arranging FX for importers to enable them to pay for machinery or raw materials purchased from abroad or issuing an advance payment guarantee on behalf of a contractor.

Later on I joined Standard Chartered Bank as the pioneer head of trade finance in Nigeria and as it was a small team I also served as back up to the treasury operations manager whenever she was away. It broadened my exposure to banking treasury as I got involved with managing risk across the front, middle and back office functions including taking responsibility for the confirmation and settlement of deals, position reporting and so on.

It wasn’t until 2005 however that I got into the corporate treasury which was again purely by accident. A large telecommunication service provider was seeking to enhance their corporate treasury and someone recommended me to the CFO. I was offered the deputy head of treasury role and was promoted into the Treasury Manager shortly thereafter.

That role was to fuel my passion for Treasury and although I had enjoyed my career in international trade, I wanted to build my future career path within the Treasury space.

 

2. What do you like about working in Treasury?

 

As biased as this may sound, I believe that Treasury sits at the center of an organization, and we are therefore a significant player in many of the major decisions required especially those with financial implication.

That importance of Treasury and the ability to make a positive impact within the organization is what I really like about Treasury.

In addition, I also enjoy the fact that Treasury interfaces with a lot of internal and external stakeholders. Building and nurturing those relationships is also something I enjoy about working in Treasury.

Finally the treasury is impacted by a lot of socio-economic issues external to an organization. I enjoy being informed. I enjoy current affairs. I enjoy reading and understanding the world from an economic, social, environmental and political perspective. It is great to be in a career where my passion can relate with my day to day activities.

 

3. What is your Treasury Expertise and what expertise gives you a boost of energy?

 

I view myself as a Treasury Generalist given that I have worked in both banking and corporate treasury. I have had the opportunity of working in organisations where I had responsibility for the typical front, middle and back office treasury functions.

The areas that give me a big boost however are Cash/Liquidity Management and building cash forecast models/tools, Working Capital Optimisation/Management, building greenfield treasury teams and/or functions as well as developing existing treasury teams and/or process re-engineering.

 

4. What has been your best experience in your treasury career until today?

 

When I left Nigeria to relocate to the United Kingdom, I wanted to continue building my career in Treasury but the response from my looking for roles was ‘you lack U.K. Treasury experience’.
I was excited when I got my first role in Corporate Treasury and when I look back now my best experience is that I have been able to build my career twice in a lifetime on two different continents.
Very few people can say that .

 

5. What has been your biggest challenge in treasury?

 

Successfully managing the treasury function for an online travel company during the recent covid pandemic comes easily to mind. This is bearing in mind that the travel/airline industry was one of those that was significantly affected by the local and cross border restrictions that were introduced globally.

 

6. What developments do you expect in corporate treasury in the near and further future?

 

I think the recent experience from the pandemic means that businesses would continue to focus on cash visibility, liquidity and financial risk management and how technology can be used to achieve better cash forecasting.

 

7. Is there anything that you would like to share with our treasury followers that they must know from you?

 

Over the last couple of years I have been trying to get more young people involved in treasury; especially young people from ethnic minorities in the U.K and across Europe.

On one level treasury professionals can come across as being all technical and number crunchers so the idea is to show that the profession is all inclusive.

I have been to take that message to various institutions within Europe, sharing with them “What a day looks like in the life of a treasurer”. I ran workshops for that purpose at the University of Nottingham Business School and Cologne Business School.

 

Want to connect with Adesola? Click here

 

Thanks for reading!

 

 

Kendra Keydeniers

Director Community & Partners, treasuryXL

Recording Webinar: How to be headhunted as a treasurer?

21-12-2022 | treasuryXL | Treasurer Search | LinkedIn |

A few weeks back, the webinar together with Treasurer Search ‘How to be headhunted as a treasurer’ took place, in which some key points regarding the current treasury market had been discussed.

  • How is the Treasury market doing now?
  • How can 𝐘𝐎𝐔 be seen and noticed by recruiters in this hectic market?
  • How to shape and direct 𝐘𝐎𝐔𝐑 career in Treasury?

In our joint webinar , these and other topics were covered by recruitment consultants  and Haia Aaraj. The webinar is free to watch.

Watch the recording

Interview | 8 questions for Dinesh Kumar, Treasury Strategy Consultant

20-12-2022 | treasuryXL | Dinesh Kumar | LinkedIn |

 

Meet our newest expert for the treasuryXL community, Dinesh Kumar.

Dinesh is specializing in architecting and leading large scale treasury technology transformations helping clients embrace the power of technology.  He supports group wide treasury projects in the further development of a broad range of methods and processes in the related treasury IT systems, e.g., improvement of cashflow planning, FX management and treasury reporting.

He involves in designing overall organizational strategy in the field of treasury technology application services, including evaluating new processes, models, pricing, and tools and related competitive offerings delivered treasury Service providers.

Dinesh has successfully led large treasury transformations projects utilizing SAP S/4 HANA across US, Australia, and Middle East region.

 

We asked Dinesh 8 questions, let’s go!

INTERVIEW

 

 

1. How did your treasury journey start?

After finishing my studies in Finance, I started working on stock and option trading platforms at a stock broker firm. I learned the basic concepts of stocks and options. I also built up experience at  the front office, middle office, and back office. During my time at this stock broker firm I received a lot of exposure working on trading platforms.

After 2 years, I got a chance to work on a SAP treasury implementation for a giant telecom company. I worked on Money Markets, Derivatives, Forex and Cash Management. Since then I am working on Treasury transformation projects for various clients in various countries.

 

2. What do you like about working in Treasury?

 

I love the diversity of challenges. You are dealing with the financial heart of the company and need to make sure that the right amount of blood reaches every cell. I was more into technology so turning treasury operations into systems was always challenging. I worked for many international clients, I had the opportunity to learn how different companies from different sectors and industries adapt their treasury operations and cash management as per various country regulations.

 

3. What is your Treasury Expertise and what expertise gives you a boost of energy?

 

I have been working in various roles on different Treasury projects, from interim roles to system implementations. My core treasury expertise areas are the selection and implementation of Treasury Technology (i.e., SAP, Payment Hubs, SWIFT, integration with Trading Platforms), Treasury Analytics and Insight, Technology Integration and Optimization, and Application Managed Services.

 

4. What has been your best experience in your treasury career until today?

 

For me, it’s working with different geographies, different people and cultural diversity that I personally feel is the greatest experience so far.

 

5. What’s the most important lesson that you’ve learned as a treasurer?

 

“Sound treasury management begins with a robust treasury policy”.

 

6. How have you seen the role of Corporate Treasury evolve over the years?

 

Treasurers play a unique role in managing a large portion of the balance sheet. In addition to the detailed understanding of the organization in which they operate, they are closest to macro-economic developments, particularly financial markets, and can offer valuable insights to support corporate strategy.

Increasingly over the last 10-15 years treasurers have been asked to play a bigger role, as a strategic partner to the board, advising on how best to build the business line with funds available. Treasurers, certainly in the larger companies, are now much more visible in the board room, recognized for the skills and knowledge they can bring to the table.

 

7. What developments do you expect in corporate treasury in the near and further future?

 

More and more treasurers are getting involved in ESG initiatives. Not only financing them but also embedding them into treasury processes and spearheading departmental sustainability projects. When discussing ESG in corporate treasury, green financing is often mentioned as one of the main instruments to support ESG goals.

I sense that treasurers generally are now exploring options other than multiple spreadsheets, excel data, and month-end accounting and reporting much more than they used before Covid. They are devoting more time and energy to enterprise digitalization and process automation. This is enhancing their ability to support the business round the clock from the office or virtually.

With the help of technologies like AI, we can make fact-based decisions much more rapidly in terms of resources available. Such advances are helping us to analyze M&A opportunities more critically, and explore funding, forecasting, and hedging options more forensically, even helping predict and shape our responses to supply chain disruptions.

Technology is allowing us to think and act differently, in a good way, and as treasurers, we have to seize it.

 

8. Is there anything that you would like to share with our treasury followers that they must know from you?

 

Finance and in particular treasury operations today are very dynamic and open to many uncertainties. And all the signs are that the current turbulence will continue for some time yet, perhaps worsen considerably.

In such a climate treasurers need a highly dynamic approach to fulfilling both their core and strategic responsibilities. They need to anticipate and react quickly to fast-moving developments.

They should not be afraid to act decisively, even though it may not be possible to do so based on having a clear direction and end-point certainty – inaction can also cause considerable damage.

 

Want to connect with Dinesh? Click here

 

Thanks for reading!

 

 

Kendra Keydeniers

Director Community & Partners, treasuryXL

The 3 Fundamental Treasury Concepts: Transfer Pricing

14-12-2022 | Vasu Reddy | treasuryXL | LinkedIn |

The 3 fundamental treasury concepts being discussed currently include Working Capital Management, Bank Relationships and Treasury Transfer Pricing which are pivotal pillars for effectively and efficiently optimizing cash, liquidity,  funding and managing risk for any Treasury function to support the achievement of the organizations business objectives and strategy. In the second blog of a series of 3, Vasu Reddy explains the best practices and benefits of Treasury Transfer Pricing.

Intercollegiate loans and intercollegiate services MUST be billed and charged at a market rate – i.e. as you would bill/pay a third party to avoid tax risk and margin loss.

How to price loans and how is service charge billing done?

  • The price of a loan can be obtained from partner banks, financial institutions and the market, using the central bank rate of the borrowing LE as a benchmark and taking into account the borrowing LE’s creditworthiness, balance sheet strength and currency of the loan based on standardised inter-loan agreements.
  • The billing of service charges by head office to OPCOs is based on time commitment, transaction volume or actual costs incurred plus a margin – this is usually the difference between the market rate and the risk-free rate and may be agreed with the tax authorities.

What are the benefits of good managing of Transfer Pricing?

  • Reduced Tax Risk
  • Reduced margin Risk
  • Improved Cash repatriation and concentration
  • Accurate cost allocation and recovery
  • Reduced Trapped Cash

 

Thank you for reading. If you want more explanation, I’d be happy to help!

 

Vasu Reddy

Corporate Treasury, Finance Executive

ESG in Treasury: What Can Treasurers Do to Impact Business Sustainability?

01-12-2022 | Anastasia Kuznetsova | treasuryXL | LinkedIn |

The expression “Money makes the world go round” probably underscores the importance of the finance community for the transition to a greener economy. Financial market participants can significantly accelerate the transition to a more sustainable world by directing capital flows to the most sustainable projects, assets and companies. 

ESG and sustainability in Treasury

What can treasurers do to impact business sustainability?

Corporate Treasurers can have a substantial impact on business sustainability by allocating capital to green projects as well as incorporating ESG factors in their risk management processes. Below I will summarize some of the instruments Corporate Treasurers could use to support companies on their way to sustainability.

ESG debt: Sustainability-Linked Financing

ESG debt is perhaps one of the most common instruments that may help companies to meet their ESG goals. For instance, to achieve environmental objectives, some companies issue green bonds. The proceeds from green bonds can only be spent on funding climate-related projects, including renewable energy, construction of green buildings, installation of air pollution control systems and etc. Most green bonds issued are “use of proceeds” bonds, which determine a range of eligible green project categories for which capital raised can be used.  These bonds are also backed by the entire balance sheet of the issuer. Project bonds are another popular type of green bonds for which the proceeds are earmarked for specifically identified projects and are exclusively backed by the project’s assets. While green bonds might be more relevant for large public companies, private companies may still add ESG debt in their capital structures by arranging green loans which serve the same purpose as their public market bond equivalents. 

 

Another type of ESG debt is sustainability-linked loans (SLLs), which are even more popular than green bonds and loans. The rise in popularity of SLLs may probably be explained by higher flexibility when it comes to the use of debt proceeds. Hence, the proceeds from SLLs can be spent on general corporate purposes but not exclusively earmarked for environmental projects. Moreover, SLLs are normally structured in the form of revolving credit facilities, which enables companies to fund their daily liquidity needs if they encounter a working capital deficiency. The purpose of SLLs from an ESG perspective is to encourage companies to achieve sustainability as quickly as possible. This is done by linking loan margin to a borrower’s sustainability performance. At first, sustainability performance targets (SPTs) for the borrower are established. After that, the borrower’s progress toward SPTs is monitored on annual basis via Key Performance Indicators (KPIs). If the targets are achieved, the loan’s margin will be reduced, enabling the borrower to benefit from lower interest payments. If the targets are missed, a step-up provision applies, increasing the loan’s margin and, thus, interest payments. Such an ESG Margin Ratchet provision incentivizes the borrower of SLLs to not only achieve but also maintain a certain level of ESG performance. The public markets equivalent of sustainability-linked loans is sustainability-linked bonds (SLBs) whose coupon payments are reduced (increased) if SPTs are met (missed). 

 

On top of ESG-related loans and bonds, hybrid instruments such as green convertible bonds are becoming more and more popular. Thus, in 2020, Neoen, a French producer of renewable energy, issued €170M of the first ever green convertible bonds in Europe. This year, the company launched another €300M offering of green bonds convertible into new shares and/or exchangeable for existing shares.

 

Finalizing the topic of ESG debt, it is worth mentioning that when it comes to the EU’s finance providers, and particularly credit institutions who will soon have to disclose the percentage of green assets on their balance sheet under the EU Taxonomy, it is reasonable to expect that sustainability-linked debt will be favored by creditors. Specifically, being an underwriter of ESG debt could add prestige, and improve reputation and market positioning. In contrast, non-ESG debt may experience a pricing premium since such loans are likely to worsen the “greenness” of capital providers’ balance sheets.

 

A few words on FX Trading, Derivatives and ESG

Although currently ESG is not widely incorporated in foreign currency trades, some banks have already started to develop FX products that have a similar structure to SLLs. Such FX products will be linked to sustainability KPIs that will measure a company’s sustainability performance against pre-defined SPTs. If SPTs are successfully achieved, then a company may receive a rebate on its FX trades or a reduction in the required FX margin.

 

Sustainability-linked derivatives (SLDs) are another instrument that can be adopted by Treasurers to facilitate a transition of businesses to greener operations. SLDs are particularly relevant for companies, operating in “high-impact climate sectors” such as energy and agriculture. Cash flows of SLDs are connected to the sustainability performance of counterparties that is monitored via KPIs. Having met KPIs, a counterparty in a derivative transaction may receive a higher incoming payment, or be able to make a lower payment if the transaction results in a cash outflow. SLDs are OTC derivatives, meaning that counterparties can customise the derivatives’ terms and, thus, embed other ESG incentives, i.e. reduction in margin/spread, or payment of rebate upon achievement of pre-agreed sustainability targets.

 

Sustainable Supply Chain as an ESG trend

Sustainable supply chain is one of the current ESG trends, particularly among retailers whose total carbon footprint mainly consists of Scope 3 emissions, which are essentially emissions of suppliers. That is why, more and more companies are trying to encourage procurers to reduce their emissions and, hence, decarbonize the supply chain. Corporate Treasurers can make a substantial contribution to this objective by arranging sustainable supply chain finance programmes. Programmes are based on early-payment principles. As a first step, a company sets up sustainability KPIs to monitor the ESG performance of its suppliers. The performance of suppliers may be measured once or twice per year. After meeting at least one of the established KPIs, a supplier is paid earlier than originally agreed. Hence, highly sustainable procurers will effectively receive better payment terms, which should encourage more suppliers to improve their sustainability performance.

 

Sustainability Objectives and KPIs

Almost all the above-mentioned ESG products require the establishment of sustainability targets and KPIs. This unfortunately cannot be done by Treasurers on their own but instead should be done at the strategic level by company management. Sustainability targets must be ambitious, meaning that their achievement would require a substantial transformation of business models, e.g. switching to more sustainable suppliers; divestment or restructuring of high-carbon footprint units. Practice shows that not all management teams are capable of setting ambitious targets relevant to the business. Thus, the least Treasurers could do, besides the arrangement of ESG debt or other sustainability-linked products, is to question the adequacy of the chosen sustainability objectives within their organisations. In other words, Treasurers could make sure that the answer to the question “Why did your company set up its net-zero objective?” is not “Because everyone does it” but “Because it is relevant for our core business operations”.

 

Thank you for reading!

 

 

Anastasia Kuznetsova