Long reads

Why treasury teams should help lead sustainability policies and reporting

Scott Hamilton

Scott Hamilton

Contributing Editor, Finextra Research

Corporate finance and treasury teams need to be ready, willing, and able to assist – rather than simply rail against – compliance with new carbon and methane emissions reporting requirements, and even consider assisting their companies’ response to social impacts and related regulations, explained sustainable investment expert Taylor Anderson.

Anderson, head of sustainable portfolio solutions, Americas, for DWS, was joined by Bloomberg intelligence senior ESG analyst Rob Du Boff in an information session moderated by Robin Carpenter, board member for the NW Association for Financial Professionals at the organisation’s annual Summit in Bellevue, Washington. “Meaningful Signals from Noise – Integrating ESG into Treasury” encouraged treasury professionals to take prominent roles in preparing their companies to meet looming global greenhouse gas emissions (GHG) reporting requirements.

Doing business in the Golden State means new emissions reporting for many

Corporations doing business in California will soon be required to report their climate emissions according to a globally common standard beginning in 2026. The larger ones, above $1 billion in annual revenue, will have to report not just their own emissions, but eventually also those of their suppliers, partners, and customers, under reasonably workable formulas proposed by environmental organisations and adopted by the state. It all starts in 2026, with increasingly stringent requirements for transparency and detail kicking in over the following years up to 2030 and beyond.

Many larger firms, especially publicly traded companies, are already reporting emissions because of growing regional requirements coming into force in various parts of the globe. California was the first major government to announce specific emissions rules, and the latest regulations codified by the state – the fifth or sixth largest economy in the world as measured by GDP.

Soon, the Golden State will require larger firms from the US and abroad – estimated at about 15,000 in total to start – to disclose carbon outputs of their operations and implement clear climate resilience plans.

California’s rules will also mean smaller companies ($500 million in annual turnover or more) doing business in the state – no matter where they are headquartered - will need to report biennially, with larger enterprises above $1 billion in revenue required to do so annually, and in more depth.

Now’s the time to comply, formulate, and formalise policies on climate and social questions

DWS’s Anderson said not complying with the increasing regulatory requirements is not an option for targeted organisations doing business in California or other localities around the US and globe with established ESG-related (environmental, social, governance) requirements. However, the way these firms choose to respond to these mandates is the question.

“Many of my clients have very lofty climate commitments. That is certainly the ‘E’ in ESG, but we don't have to call it ‘ESG’. What it really is is sustainability - sustainability of this planet, yes - but also sustainability of cash flows. We're looking to understand material factors.” Materiality means more than just doing the right thing, he emphasised. “Just as an example. “Oil (and/or coal) that has not come out of the ground - that could potentially be a stranded asset (for fossil fuel companies) at some point (once new regulations come online). From my perspective, that is a material factor that (if invested or operating in that sector) you may want to take into account within your overall investment due diligence.”

ESG principles and commitments are not new, just a new chapter

Noting that “ESG means many things to many different people”, Du Boff added that concerns about investing in certain sectors or product types is not new for many companies, governments, or for one example, religious organisations.

“Probably the oldest form of ESG investment (governance), one of the first pension funds, was from the church, and their policy was just ‘don't invest in alcohol or gambling' and things like that.” Beyond that question comes what he called “ESG integration”, or “thinking about the risks and opportunities from environmental and social governance factors and how they might ultimately impact investment decisions or value over time.”Finally, he said, there’s “impact”, which might be defined by an investing entity as “How do I find and invest in products or services that actually further our goals around environmental, social and governance issues?”

Taylor admitted that corporate finance leaders may or may not elevate these impacts above purely financial returns or fiduciary responsibility. He acknowledged that ESG impacts have not historically been the top priority for the treasury function. However, Taylor asserted, “there are so many things within the treasury space, even keeping it short in the curve – liquidity - that we can do to continue to promote sustainability, or one of those particular pillars that are near and dear to your overall stakeholders.”

Responding to a question from Carpenter about the need to focus on creating more circular manufacturing and consumption models for the economy, Taylor agreed that “real world” examples of sustainable investing and operation include not just environmental, but social and governance factors as well, starting with the “E” in the equation. He said that is rooted in the plants, animals, and living things supported by the environment.

Materiality varies by company, yet people and governance play critically important roles

“Biodiversity - ensuring that we have a preponderance of different types of life on Earth, and we can all continue operating - climate is really one of the biggest parts of the equation there. The social side of things, a lot of people get up in arms about certain parts of that, but social can also include more diversity and I happen to think that more preponderance of different thought within a boardroom can generally lead to better risk adjusted returns because you're coming at problems from different angles. I do believe there is a financial, material element to the social side of the equation as well. And, like I said, I'm not buying anything that has bad governance.”

Du Boff shared that views often differ among industry sectors, even at his own (very sustainably focused) company. However, he cautioned treasury and banking practitioners – and investment managers - in the audience: “You really want to think about the environmental, social, and governance issues that could impact value for a certain industry. Even beyond climate, thinking about water, say you're a beverage manufacturer. If your whole product is taking water and putting something into it to sell to consumers - if that water goes away or where your factory is located, means it has less access to that water due to environmental factors or government regulation; that's a huge problem for your business.”

Employee health and safety also play into the social side of sustainability, as do talent recruitment, local and global pay practices and other variables, many of which companies can make conscious commitments to support or take leadership on through their governance.

The key point, said both Taylor and Du Boff, is to have policies on all these important environmental and social criteria that fit your business, to stick by them, always know where your company stands, and make sure your customers and partners are aware of and support your stance on those policies.

As for the regulatory mandates, requirements on emissions reporting offer a great opportunity for treasurers to take the lead and add value by ensuring their businesses (and suppliers and customers, whom treasury and finance teams are well positioned to influence as they pay and get paid by them every week) are on track and in sync with their own organisation’s values.

Taylor said it’s critical first for any companies without policies already in place to know their organisation’s (and suppliers’, if possible) “state of the union” in terms of emissions and people-related benchmarks. Then from that base, they must chart out an environmental and social policy direction that makes sense for the company, and will help it accomplish its mission, in an increasingly environmentally and socially challenged world.

“There's no one size fits all, but what I encourage (treasury leaders) to do is to start talking to some data providers. This is going to happen eventually.” Reiterating some of the key elements of a successful policy and reporting strategy, including that treasury leaders make sure they coordinate and communicate regularly with any designated internal sustainability groups or project teams, Taylor outlined the key questions that need to be answered by all companies:

“Where do I want my organisation to be over the short term? How do I adjust to certain risks that pop up around climate disasters, for example, hurricanes, heat waves, and more? Lastly, what specific metrics do I need to think about that are applicable to my industry, where we can keep track of where we are on our climate strategy? That's definitely a framework that I think you all should be paying attention to…But there's no cookie cutter answer to any of this.”

Comments: (0)