How corporates fund their ESG strategies will become increasingly important as their investors and other stakeholders demand evidence that they are hitting or exceeding climate change and other environmental, social and governance targets.
In turn, this will place treasury teams at the centre of corporate decision-making processes as boards face increasing pressure from investors and other key stakeholders to act and report on their ESG policies and how they translate into their organisations’ financial strategies.
And accurate, timely data will be key to understanding how boards, and treasurers, are responding to these pressures. These ESG themes were at the centre of the discussion with treasurers at the Association of Corporate Treasurers’ recent ESG conference, which included a panel featuring BNP Paribas CIB, BNP Paribas Asset Management and a panel of experts from Anglo American plc.
BNP Paribas Exane recently asked 375 managers at 322 listed companies across Europe, representing more than €6 trillion in market capitalisation, what they considered to be the key ESG challenges that now face their companies and investors. The results are illuminating.
According to three-quarters of the survey respondents, less than 5% of ESG issues addressed by investors have a financial impact, and while two-thirds of companies say they integrate ESG into their financial strategy, less than half define key performance indicators for ESG. And although almost all respondents want to retain ESG investors in their shareholder base, only 6% set quantitative targets.
But one of the most important findings is that almost half say their sustainability departments report to the CEO and that two-thirds have a board member appointed to monitor ESG issues.
“Corporates absolutely need to position ESG at the C-suite level,” says Constance Chalchat, BNP Paribas CIB’s head of company engagement and global markets’ chief sustainability officer who led the panel.
“This is probably the key question that investors or suppliers will ask of their corporate clients; where is ESG positioned in your organisation? ESG should not be placed ‘on the side’, it should be integrated into the organisation in a very comprehensive manner. Investors expect to see it within the DNA of what the corporates are doing.”
The implication is clear – if a corporate fails to tackle its ESG issues, and report on how they are doing so, then investors will have less trust in the organisation and increase the cost of finance accordingly.
However, it is equally important to translate an ESG strategy into a financial strategy in a credible way – ambitious ESG targets, which can be measured and reported, will lend credibility to the ESG strategy and how it impacts financial performance.
“KPIs will drive ESG in an organisation, and the underlying data is critical,” says Edward Lees, co-head of the environmental strategies group at BNP Asset Management who shared investor perspectives on the panel. He mentions that without clean or complete data you can arrive at false conclusions, either positive or negative.
He says: “Corporates also need to be careful about how they use and interpret the data as different companies face different situations, including different countries and different sectors. Focusing on impact can help our understanding. For instance, at BNP Paribas we consider the main activities of a company, look through supply chains, and take engagement very seriously.”
Chalchat agrees, calling for “bullet-proof” data that can stand up to close scrutiny. “This can be one of the biggest challenges,” she says, “but it isn’t a challenge that will disappear.”
So how can companies, and their treasury teams, translate this advice into their own organisations? Aaron Field, assistant treasurer at Anglo American plc, a UK-listed multinational mining group, who gave a corporate perspective on the panel, says that it is important that the group continues to be “investible”.
In September 2022, Anglo American plc issued its first sustainability-linked bond, which included performance targets to reduce greenhouse gas emissions and fresh water abstraction, and to support job creation in host communities. The €745m bond was the first instrument issued following the publication of Anglo American’s Sustainability Financing Framework. The financing mechanism will see a coupon increase of 40bps accruing from September 2031 for each of the selected KPIs that do not achieve its target or if the verification of the target being achieved has not been published.
“A key issue for us is that we continue to be widely ‘investible’, meaning that we are able to raise cash from banks and the broadest range of investors in the future,” Field says. “When we brought this bond to market, we felt that we were working off a strong foundation. We have had our Sustainability Mining Plan since 2018, where we have integrated the UN’s Sustainable Development Goals into our sustainability strategy, and our senior leaders would say without exception that sustainability is fundamental to the business of mining.”
For instance, the group is committed to using less water and energy in its mining processes, which can be good for the business as well as the environment. “We really wanted to underline what those commitments and activities meant to us and the market,” Field says.
The process of bringing the bond to market involved prior engagement with investors and holding a number of workshops with subject matter experts to test the KPIs. “We knew we wanted targets on greenhouse gas emissions, and we felt we needed to include social goals, but also wanted to know what was on investors’ minds.”
Field says it is important to give investors time to digest and question the KPIs, and that there is a real need for financial and accounting rigour when measuring ESG data. While the treasury team led the bond issue, Field stresses the important role of the senior leadership team in getting across the line.
“Treasury was at the heart of the bond issue, but it was made possible with the support from the C-suite, who remained engaged throughout the process,” Field says, a position that is reflected in the results of BNP Paribas’ ESG survey.
In its inaugural International ESG Corporate Survey, BNP Paribas Exane identified 10 key ESG challenges for investor relations and how corporates can respond:
Source: BNP Paribas Exane International ESG Corporate Survey, November 2022
This article was taken from Issue 1, 2023 of The Treasurer magazine. For more great insights, members can log in to view the full issue. If you're not an ACT member, you can sign up for eAffiliate membership.
