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Rethinking Treasury: Embedding ESG in the treasury
23 Plays4 years ago
Welcome to HSBC’s ‘Rethinking Treasury’, a podcast miniseries where we explore the findings of our recent corporate risk management survey – conducted in partnership with Acuris – and analyse the changing role of corporate treasury today and the road ahead for corporate risk management.
In this episode, we explore the ever-increasing importance of Environmental, Social and Governance criteria for corporate finance functions. Holger Zeuner, Head of HSBC’s Corporate Sales Thought Leadership team for EMEA, is joined by Wai-Shin Chan, Head of HSBC’s Climate Change Centre of Excellence and Head of ESG research, and Paul Harvey, Head of UK Commercial Banking Global Markets Corporate Sales, to discuss how CFOs and their treasuries are adapting to ESG priorities.
To read HSBC’s ‘Rethinking Treasury: The road ahead’ survey report in full, click here.
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Transcript
Introduction to Global Banking Trends
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This is HSBC Global Viewpoint, your window into the thinking, trends and issues shaping global banking and markets.
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Join us as we hear from industry leaders and HSBC experts on the latest insights and opportunities for your business.
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A heads up to our listeners that this episode has been recorded remotely, therefore the sound quality may vary.
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Thank you for listening.
Rethinking Treasury: A 2021 Perspective
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Welcome to the Rethinking Treasury mini-series, where we analyze the changing role of corporate treasury today and the road ahead for corporate risk management.
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In June and July 2021, HSBC and Acuras partnered to survey CFOs and treasurers across the globe to find out how corporate risk management was evolving to meet the challenges of today and build resilience into the future.
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A full report titled Rethinking Treasury, The Road Ahead, covering the trends emerging from the survey, has been recently published.
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You can find a link to access this report in the podcast description.
Why ESG Matters in Corporate Finance
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In this series, HSBC is bringing together key experts to discuss the main themes arising from the survey in more detail and discover just what drives VFOs and treasurers today and how those themes will impact their work tomorrow.
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Welcome to today's episode, where we're going to discuss the rising importance of environmental, social and government, in short, ESG criteria for corporate finance functions.
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Thanks for tuning in.
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My name is Holger Zeuner.
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I'm the head of HSBC's Corporate Sales Thought Leadership Team for EMEA.
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And today I'll be talking with Reixin Chan and Paul Harvey about evolving ESG priorities for companies and the perspective of CFOs and their treasuries.
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Before we start, let me quickly introduce our experts.
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Reixin is head of HSBC's Climate Change Center of Excellence and head of ESG Research.
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His dual role involves analysis of climate change and its multi-asset implications
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as well as the integration of ESG within HSBC's global research.
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Paul Harvey heads the UK Commercial Banking Corporate Sales Team and is also responsible for the Greek and Maltese corporate sales business.
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In addition to his regional responsibilities, he is HSBC's global lead for ESG across corporate sales activities, coordinating the development of both ESG-linked investment products and hedging instruments.
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Gentlemen, welcome and thanks a lot for your time today.
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Thanks for having us, Holger.
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It's really good to be here, especially to talk about ESG.
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Likewise.
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It's a pleasure to be here, Holger.
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I look forward to the podcast.
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Thank you, and let's get started.
Impact of ESG on Investments and Disclosure
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In our survey of 200 CFOs and more than 400 senior treasury professionals, the vast majority of CFOs are convinced of the need to embed ESG criteria across the business.
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As one supporting piece of data for our audience here,
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62% were expecting to invest resources to tackle ESG-related risk over the next two years.
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Reishin, why are such investments becoming more and more important and what role do investors hold in this?
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Sustainability awareness has really grown in recent years, I'd say, especially since the Paris Agreement was adopted in 2015.
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We've all seen the impacts of climate change, storms, floods, droughts, wildfires.
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They've hit all over the world.
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Everybody knows someone or somewhere that's been affected.
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Now, this demands a response.
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So the response from governments, businesses, investors, and the general public, and more investors are considering ESG criteria into their investment decision-making frameworks.
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And some estimates put that up at 35 to 40 trillion US dollars.
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That's
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That's close to half of all the assets under management globally.
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They are considering how ESG issues, climate or otherwise, could impact a company's future performance.
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So the companies themselves are disclosing more ESG-related information.
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Investors take that information and consider how well or otherwise the businesses are addressing these issues.
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And if it is material over appropriate time horizons and financially, then there can be an impact on the finances and the valuation.
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And hence the share prices.
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But also, let's not forget about financing itself.
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What happens when companies need to raise capital through equities or bonds?
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Then a lot of the financiers who provide this capital will be considering ESG as well.
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So it's very, very important for investors and companies themselves.
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Thanks, Reixin.
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And we've seen this wide range of ESG considerations also being reflected by CFOs in our surveys.
Accessing ESG Financial Instruments
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where more than 80% are seeing ESG criteria to be very important for each of their decisions on supply chain, on capex, on financial debt and on hedging.
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Paul, moving to you, you're closely observing this rapid development of ESG-linked financial instruments.
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What are the key steps corporates need to take to use those instruments?
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Yeah, thanks, Helga.
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ESG-linked financial instrument access depends on a number of factors and should therefore form part of the corporate's ongoing risk management dialogue with their global markets and banking partners.
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ESG-linked financial instruments, including hedging and cash investment solutions, are typically tailored to the corporate's underlying risk management objectives and their specific ESG agenda.
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But the first key step, really intruply, is to engage with their global markets and banking partners in order to discuss investment and risk management objectives and how ESG measures can be incorporated into a corporate existing risk management framework.
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Thanks, Paul.
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That makes a lot of sense.
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When we look into the different pace of adoption for ESGNX, our survey data tells us companies in Europe are at a more advanced stage and that there are more obviously some industries impacted more than others.
Regional Differences in ESG Adoption
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Reishan, moving back to you, are you observing differences from region to region and sector to sector in ESG as well?
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How do those look like?
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Absolutely.
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There are quite a lot of differences between the regions.
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At a very high level, I would say that Europe, as you say, is more advanced and more so than North America and then with Asia and emerging markets following.
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But I would say that they are catching up rapidly.
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The movement and the pace at which they are advancing in ESG in Asia and emerging markets is very, very quick.
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So also there's a difference for sectors.
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Some are naturally more exposed to high carbon sectors, for example, and hence they're more advanced.
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The other differences would come through for the size of the company.
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I would say that large cap companies are more advanced in this.
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Maybe they have bigger budgets and bigger communications and sustainability departments.
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but also companies with international exposure.
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By that I mean either they have to sell their products and services into international markets or they have a lot of international investors who are asking ESG questions of them as we discussed earlier.
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So that's very, very interesting indeed.
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But don't forget regulation.
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Regulation also plays a part.
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It's a journey for regulators.
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Some of them start off with giving ESG guidance and they say, let's make that voluntary.
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Then they say, okay, now we're making that comply or explain, and eventually they get to mandatory.
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If we take the EU, lots of changes on the horizon there.
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The Fit for 55 package that came out this summer will take a lot of areas in the EU and make some changes.
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So we're seeing changes to the EU ETS, transportation, land use, and so on and so forth.
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And don't forget the carbon border adjustment mechanism, that carbon border tax that they're considering introducing in the next couple of years.
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Thank you, Reishan.
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That's some really good background here.
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Paul, one of the notable differences our survey revealed is the level of engagement on ESG between CFOs and treasurers.
CFOs vs Treasurers: Who Leads in ESG?
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While CFOs can't seem to move quickly enough, only 16% of treasurers expect their business to include ESG criteria in the majority of their financing arrangements in five years' time.
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And many even have not yet started policy work.
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Are you surprised by that finding based on the conversations you are having with corporates?
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If not, why do you think this would be the case?
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I'm not really surprised by the finding.
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There is certainly a very mixed agenda.
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It's certainly top-down.
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The C-suite are very aware of the competitive edge it could give, but I certainly appreciate the importance of a well-defined ESG agenda first and foremost.
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There are an increasing number of corporates recruiting sustainability specialists tasked across many different corporates to help define the agenda.
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alongside treasurers and the CFO in order to establish the corporate key performance indicators, KPIs and sustainability performance targets in order to drive the change and adoption.
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We're certainly not surprised by the observation.
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There's certainly an education process here first and foremost as well.
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This is where risk partners and relationship teams across their banking syndicates are there and need to be used to help build agenda first and foremost.
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Great.
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Thank you, Paul.
The Need for Consistent ESG Reporting Standards
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You both have briefly touched base on observable ESG criteria, the aspect of regulation and reporting standards.
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How do you see the development here?
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Would there be a growing pressure for global reporting standards?
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Would that further change how corporates deal with ESG?
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Veishen, maybe you want to go first again?
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Yes, thank you.
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Thank you, Holger.
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There's certainly a lot happening in this sustainability disclosure space, and it's not as cohesive as it could be or should be, and we're definitely working towards that.
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First things first, I think we need to distinguish between corporate disclosures, sustainability disclosures from listed companies, and then disclosures from investors and fund managers, because these are fundamentally asking for different things.
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There's a whole suite of emerging standards coming from, say, the climate world on the task force on climate-related financial disclosures, that's TCFD, but also for companies themselves on corporate disclosures, sustainability disclosures.
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So lots coming out of the accountants, for example, the World Economic Forum, and even the CFA Institute is doing something there.
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Regulators are also keen.
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We're looking at the stock exchange regulator, IOSCO.
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but also the FCA in the UK.
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So what is important here across this whole suite of different standards is consistency.
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We're looking for consistency over time and we're looking with consistency with peers so that we can compare and contrast the sustainability status of the companies and make better investment decisions.
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One thing I always hear from companies is that there are too many surveys to respond to.
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So hopefully that will change as we see growing convergence in the future.
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Great, thank you.
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And I hope our survey was not one they picked for one of the too many to respond to.
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Paul, anything to add on reporting standards, comparability between instruments from a corporate risk management perspective?
Corporate ESG Priorities and Strategies
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I would say at the CFO and treasurer level, that reporting standards is definitely an area of interest, but it's not huge at a cultural space right now.
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It's more about understanding, reporting, and evaluating the ESG scores.
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It's certainly a huge journey that everyone is on right now.
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The primary focus, as previously mentioned, is certainly building out the ESG agenda, first and foremost, then financing, and then the associated risk management considerations.
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Great.
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Thank you both.
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And we probably could discuss the growing importance of ESG for corporates and different shapes of activities for quite a while.
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However, we're already approaching the end of our podcast time today.
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So there's one final question for both of you.
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What would you see as the near-term priorities for corporates when they build out the ESG agenda further?
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Reishen, maybe you want to go first and the further question also for you, if you likely are going to travel to your home country of Scotland, how could the climate summit in Glasgow in November, how could that change the picture?
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Thank you very much.
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Yes, there's a lot of differentiation between
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I think what to focus on for different sectors and regions.
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But in general, yes, it is going to be climate and net zero for the next six months.
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I mean, definitely COP26 has been billed as the most important climate negotiations in many years, especially since the Paris Agreement was adopted.
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And they really need to agree on a lot of things, especially raising climate ambition.
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Now, when it comes to companies, they'll be needing to focus on setting those net zero targets and working out the appropriate strategies to implement them.
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especially thinking about what needs to be done differently in terms of priorities and so on and so forth.
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But don't forget social issues there.
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We've seen those move up the agenda, especially during the COVID-19 period, although these vary depending on the region.
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So we're looking at gender, we're looking at ethnicity, we're looking at white worker rights, migrant working and even vaccine equality.
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And often these things differ right down to the company level.
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And that's where these ESG issues really come to life.
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Great, perfect.
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Thank you, Reisin.
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Paul, when we look into the direct dialogue with corporates, what is there to build in the near term?
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Where would you see the priorities to develop further?
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Companies should be tapping into outside resources to build their ESG strategy.
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There's no off-the-shelf answer is my main view here.
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It's a very interesting subject, one that's very unique to that particular sector, that particular client, and that particular CFO.
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The ongoing development of financial services is going to be imperative to help clients achieve their ambitions as Holger.
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It's a very new and complicated area and we need to help all of our corporate clients to build their strategy here.
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Thank you, Wei Xin and thank you, Paul, for your time today and the great insights into the role of ESG for CFOs and treasurers.
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We hope you enjoyed our short conversation.
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And we all at HSBC look forward to support your business on progressing into a sustainable future.
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Thank you for tuning into this episode of Rethinking Treasury.
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If you're interested in learning more about the 2021 Corporate Treasury Risk Management Survey, click the link in the podcast description or talk to your HSBC representative.
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Thank you for listening today.
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This has been HSBC Global Viewpoints.
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banking and markets.
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For more information about anything you heard in this podcast, or to learn about HSBC's global services and offerings, please visit gbm.hsbc.com.