Why strategic treasurers will take reins of ESG programs in 2021

Treasury interests in risk and cash flow position them strategically as ESG leaders, writes Sam MacPherson, head of treasury at Australian fintech Earlytrade

December 22, 2020
3 Min Read

Originally published in the Corporate Treasurer

Treasury interests in risk and cash flow position them strategically as ESG leaders, writes Sam MacPherson, head of treasury at Australian fintech Earlytrade

Australia has a natural predisposition towards environmental protection, societal contribution, and ethical governance – or ESG – but there is an argument that we lag the rest of the developed world in formally measuring, articulating, and leveraging that natural talent.

After spending a week with leading Australian treasurers at the annual FTA Conference, it is clear that treasury teams -with their penchant for risk quantification and cashflow -are the best candidates to drive Australian companies towards more formalised, and therefore valuable, ESG practices.

Throughout the FTA Conference — which was held from Nov. 10 to Nov. 13 — several demonstrable themes arose, which highlighted the ESG opportunity to elevate the role of treasury within organisations.

Shareholder returns or stakeholder value?

For leaders, doing well while also doing good is a competitive advantage and places sustainability at the heart of business strategy to deliver commercial benefit.

Analysis by MSCI covering 10 years of ESG reporting data from more than 2,000 companies pinpointed a correlation between good ESG performance data, strong profitability metrics, and reduced likelihood of systematic risk. More specifically for treasurers, the top-performing companies were characteristically better at managing their core financial risks.

As a natural progression, investors, asset owners and pension funds are now building ESG data points into investment processes in order to overweight portfolios towards ESG leaders and away from laggards, according to the global ESG ratings agency.

Within the COVID-19 context, the Australian Financial Review has highlighted several bodies of research that show investment managers who put their funds into companies that follow ESG principles have outperformed non-ESG funds throughout the pandemic in Australia and internationally.

‘S’ for Supply chain is an ESG linchpin

While critically important, the ‘E’ for environment and/or emissions in ESG can too narrowly focus leaders’ attention away from more directly influenceable and material elements, such as supply-chain policies.

Put in the simplest terms, Australia’s overlapping supply chains represent no less than our entire economy. A company’s supply chain is ultimately its business; and it is within direct influence of a treasurer’s decision-making mandate.

Coles Group’s strategic and principles-based approach to suppliers is a case study in optimising cash flow, protecting supply and effectively meeting community expectations during a crisis. In other words, their approach generates both commercial benefit and measurable ESG value.

The key difference between the Coles approach to supply chain and a more common compliance-or risk minimisation-focused approach is whether a corporate sees their suppliers as a potential problem or a partner in growth and innovation.

Best practice reporting

Although advances in standardising frameworks have been achieved in recent years, Australia’s ESG leaders are adamant that they have a responsibility to also be explicit about unique areas of greatest impact that may fall outside the fixed models of rating agencies.

Each company is different and should therefore have the autonomy to explore its own data for what is most meaningful to its shareholders and stakeholders, and customise bespoke metrics that reflect those areas of greatest impact to the entire ESG spectrum, according to AGL.

Conversely, masking poor performance on a specific metric with cherry-picked hero metrics opens companies up to accusations of “greenwashing,” wherein rests the value of independent assessments from ratings agencies such as MSCI or Sustainalytics.

As ESG practices become more mature, treasurers are being presented with a pivotal moment. The more strategic in the cohort have already spent 2020 leveraging crisis-driven moments to be an informed voice in the room.

Those treasurers that take ESG programs by the reins in 2021 venture to gain business-as-usual invitations into the boardroom.

Sam MacPherson, a member of the Finance and Treasury Association Conference Committee and head of treasury at Earlytrade, chaired an expert panel on ESG Evolution in Australia, which included participants from Sydney Airport, AGL and MSCI at the FTA Conference 2020 -Treasury re-imagined.