13th Feb 2023 by Pushpendra Mehta, Executive Writer, CTMfile
TreasurySpring, in partnership with ICD and the London Stock Exchange, recently distributed a survey report titled Sustainable Finance Survey 2022 that threw light on major ESG and sustainability-related trends in money markets to “Give a voice to those in the treasury space who consider sustainable finance a key aspect of their cash management strategy.”
The survey respondents included a broad range of corporations (including several FTSE100 and FTSE250 organizations), holding an estimated “c.£50billion” in total cash balances across multiple regions including the UK (79%), Europe (14%), the US (4%) and Africa (1%).
“Through our survey, we observed that treasurers are generally keen to play their part in achieving the transition to net zero, utilising all the tools at their disposal including ESG investing, financing and other initiatives”, observed the TreasurySpring report.
ESG investing has moved into the mainstream
“We’ve seen a recent shift in treasurers’ thinking around ESG investing, moving from ‘nice to have’ to realising just how crucial it is to their function and the variety of real-world advantages on offer”, says the report.
Summary of Bank Failures (2001-2023)
The survey data backs this notion, with 87% of treasury respondents observing that ESG investing is either very (41%) or somewhat (46%) important to them. While those who have not invested in ESG products currently stand at 69%, it is expected that the ESG space will undergo a rapid change, evidenced by the fact that “44% of respondents plan to engage in ESG investing, in addition to 31% who are already invested”, the report noted.
TreasurySpring further validates this trend through another survey query: 57% of the organizations questioned say that they intend to increase their ESG investments over the next 12 months. The survey results compare this surge to “The outcome of a survey conducted by the European Association of Corporate Treasurers (EACT) in 2021, where only 16% of respondents said they invest in sustainable investment instruments or are developing a plan to do so.”
Three main areas of interest for treasurers from an ESG and sustainability angle
While there are many aspects of treasury where ESG can have an impact, cash investing, supply chain management and long-term financing are three focal areas for treasurers that align with their ESG and sustainability efforts and strategies.
While cash investing is the area of treasury that impacts ESG the most, supply chain management has evoked considerable interest because of the sustainability perspective, particularly since the advent of the pandemic.
Of the treasurers surveyed, 13% more chose long-term financing (35%) over short-term financing (22%). While there may be a number of reasons for this, the report notes two factors it believes are influencing the preference.
“The first is lesser access to short-term borrowing in general, beyond a revolving credit facility (RCF) and other banking facilities. The second is the fact that the sustainable bond space is currently far ahead of money markets from a framework perspective. This shows a clear standard in the Green Bond principles and equivalent, developed by the International Capital Market Association (ICMA)”, the report explains.
Corporate social responsibility primary driver for ESG and sustainability push
Nearly 80% selected corporate social responsibility (CSR) as their corporation’s primary motivation for the pursuit of ESG and sustainability initiatives.
This positive response indicates the potential benefits of adopting ESG and sustainability as a “non-negotiable” for most organizations, ranging from “A higher valuation and improved financial performance to a reputational uplift and better access to capital”, states the report.
Embracing sustainability through financing strategy
Besides ESG investing, another pertinent area where treasurers can adopt sustainability is through their financing strategy. As per the TreasurySpring survey, over half (53%) of the participants said that they are considering implementing ESG-compliant financing. However, 47% of those surveyed do not intend on fundraising through an ESG-linked structure.
For those who are likely to engage in ESG-compliant financing, the survey results clearly demonstrate “The growing relevance of KPI-based structures, as sustainability-linked loans and sustainability-linked bonds garnered a combined 32% of responses.”
Though the concept of sustainability-linked structures is still relatively nascent compared with traditional bonds and loans, “These sustainability-linked instruments are similar to traditional bonds and loans but with a sustainability angle, in that the proceeds can be used for any purpose, however, the interest rate rises after a certain time, if the company does not meet its pre-defined sustainability targets,” the report further added.
Sustainable financing and ESG cash investing: risks and barriers
Sixty-nine percent of treasurers mentioned greenwashing as one of the biggest risks they see in the world of sustainable financing, followed by three other significant risks – the lack of regulation, standardisation and transparency.
The fact that there are three responses with more than 50% (and a fourth with almost 50%) is “An apparent sign that treasurers perceive that there are still major hurdles to overcome when it comes to sustainable borrowing.”
When it comes to ESG cash investing, lack of standardization and regulation (19% each), lack of supply (19%), lack of know-how (18%), risk of greenwashing (15%), and lack of transparency (13%) have been found to be the biggest barriers for cash investing, a sign that the “ESG investment landscape remains challenging to navigate for most treasurers amid all the buzz”, the survey further added.
While accessing more accurate ESG data, improving the prevailing skills gap, and an uptick in rigorous sustainable investing standards are required, there are some positive developments as “Regulators across the globe kick into higher gear in formulating more stringent rules, with the development of standards under way both in the UK and US (and already in place to some extent in the European Union)”, observed the report. Given that regulators are stepping up scrutiny on greenwashing, transparency around sustainable finance should improve.
To conclude, the TreasurySpring report demonstrates the willingness of treasurers to engage with ESG and sustainable finance, even as “A majority of organisations are ready to embrace ESG integration in cash investing and/or in financing.”
Given the stringent regulations looming globally and the expected elevation of conversation around sustainability in treasury, supported by strong demand from investors, boards and treasurers alike, the report points out that “The next few years will mark an inflection point in the development of this space and will be key in determining the long-term potential and impact of ESG and sustainability in money markets.”
But for that to happen, the report recommends treasures adopt a “practitioner-level engagement” approach to drive ESG investing and sustainable finance forward.