Do No Significant Harm

Navigating Sustainability Standards and Regs

Sustainability in treasury can be tackled in a number of ways – and standards are slowly emerging to steer participants in the right direction. Do these help or just create more work, and is the pace of development too slow? TMI explores the current state of play in the field of sustainability standards and regulations.   

Given its global significance, it’s not surprising that sustainability is reflected in many organisations’ core values. And yet, perhaps because it covers so much ground, there is no hard and fast definition of what it is. Resultantly, standards have been slow in coming.

While effort is being made by many organisations to find and demonstrate their own meaning within their core values, the apparent lack of uniformity is making wider acceptability more challenging, says Jean-Pierre Gomez, Head of Regulatory & Public Affairs, Societe Generale Securities Services. This has led to accusations of greenwashing – disingenuous marketing tactics – undermining credibility.

Jean-Pierre Gomez
Head of Regulatory & Public Affairs, Societe Generale Securities Services

In the treasury community, the adoption of sustainability criteria into areas such as working capital management, financing and investments, is nonetheless gathering pace.

As Serina Hourican, Head of Commercial Banking Sales, Global Transaction Services, Asia Pacific, Bank of America, points out, “treasury is naturally well connected to the other lines of business and can influence the overall sustainability outcome for an organisation”.

This means treasury must be vigilant regarding the curse of greenwashing. Any action that asserts sustainability that it takes, or recommends to colleagues within the organisation, must be demonstrably genuine, warns Hourican. Indeed, at a reputational level, being accused of greenwashing is potentially more harmful than not doing anything. “This is why complying with regulation and ESG standards, and following through with initiatives, is becoming so important,” she states.

Serina Hourican
Head of Commercial Banking Sales, Global Transaction Services, Asia Pacific, Bank of America

The problem is that the current push for definition by policy-makers is as slow moving as it is globally inconsistent. Many treasurers are thus uncertain as to what constitutes best practice. Of course, there is an element of common sense that can be applied, but the broad scope of ‘sustainability’ as a corporate goal means policy on issues such as emissions reduction and social responsibility are typically drafted by corporates unilaterally, creating further divergence.

With Hourican noting that integrating sustainability into policy “leads to potentially lower cost of debt, a happier workforce and a reduction in risk”, she says “it explains why sustainability is a key focus at board level”. For a treasurer seeking guidance, the aim should be in alignment with the sustainability objectives of their organisation because simply leveraging senior buy-in will drive progress.

Regulators are coming

The situation is far from hopeless though. It should be noted that some regulatory authorities are beginning to take decisive action towards standardisation. In the European Union (EU), this includes delivery of the EU Taxonomy – a classification system aimed at clarifying which investments are environmentally sustainable – and the Sustainable Finance Disclosure Regulation (SFDR), which places requirements at both a financial institution and product-level to standardise sustainability disclosures.

By 2024, the European regulatory canon will also include the Corporate Sustainability Reporting Directive (CSRD). Targeted directly at businesses, CSRD requires all large companies (500-plus employees) to publish regular reports on their environmental and social impact activities.

For the most part though, sustainability is an emerging area of regulation. It somewhat mitigates the confusion being created among businesses seeking to take action. The issue, Gomez notes, is that if lack of absolute clarity persists globally as interest increases, it may force the many that have already taken action into duplicating their efforts as they continually update in line with regulatory revisions.

Mounting regulatory pressure, and pressing board mandates to adopt sustainability drivers, are giving some treasurers a difficult choice, Gomez believes. With the enduring view that “green means expensive”, some feel they would be forced to pay a premium to take this path, particularly for investments. However, in this context, he suggests that the gap is closing between sustainable and traditional returns, and that “this should make it easier, and cheaper, for treasurers to build a portfolio of balanced allocations”.

That said, Gomez also argues that, while market confusion reigns, it should not be considered ‘unsustainable’ to invest in products that, while they may not yet be officially labelled green (and thus may not strictly be policy compliant), they ‘do no significant harm’ (a principle of the EU Taxonomy) and thus do not counter the moral drivers of sustainability.

Effort required

The pressure on corporates to be seen to be doing the right thing is intensifying and the effort required just to comply should not be underestimated. Companies seeking to align with the six environmental objectives of the EU Taxonomy (see box below) may struggle to find the bandwidth to simultaneously focus on the demands of other regulations such as SFDR. In the UK, the Financial Stability Board’s Task Force on Climate-Related Financial Disclosures (TCFD) reporting requirements further compete for (mandatory) attention, and larger firms will soon be facing the prospect of adding the EU’s CSRD into the mix.

For a treasurer, it could be difficult to cover the required ground, formulate satisfactory responses, and endure ongoing compliance monitoring activities for both internal and external partners. Sustainability’s broad scope of coverage at least ensures treasury has several opportunities to help deliver internal and external compliance. However, Hourican says treasury’s key role in ensuring that vendors and suppliers are also aligned with corporate sustainability objectives and standards adds to the work, but assistive mechanisms are in place.

“External benchmarking providers, such as MSCI and Bloomberg, are a good starting point to check the ESG-status of partners, although not all may have a rating,” she notes. “Using ESG-friendly solutions such as SCF is also an effective way of encouraging suppliers to be more focused on sustainability, by providing them with preferential pricing and other incentives to improve or maintain their efforts.”

With the moral burden on businesses to comply gathering pace, the regulatory focus of treasury is clearly being drawn in many directions at once. The EU has now endorsed the SFDR regulatory technical standard (RTS), which sets out the scope of the rules and the mechanism for their delivery. This will come into force in January 2023, with first reports due in 2024. For Gomez, with a Europe-wide call to apply to it a broader scope of sustainability risk and ESG criteria, a more realistic implementation regime should be considered by businesses, with further standardisation of reporting data still required.

Data dependency

Companies should understand that putting sustainable principles in place may have an attendant cost, says Hourican. Those investments will generate a return, but when considering CapEx, she says increased diligence on the regulatory environment, for example, will place more demands on an organisation to act sustainably.

What’s more, making a statement of greenness in an annual report, under CSRD, will have to be backed up with appropriate information. “This is why it’s essential to have good data to ensure appropriate informed decision-making,” she says. “But obtaining credible data can sometimes be an issue and treasurers can also face the problem of too much data, how to obtain the data in the right format, and determining what is truly relevant.”

In practice, a listed company that seeks to attract investors and use its sustainability credentials as part of its allure needs to offer credible evidence. Statements need to be supported by relevant and timely data, whether that relates to diversity of employees, support for supplier wellbeing, carbon emissions or any other claim under the broad sustainability banner.

As such, additional KPIs may be required internally to enable robust monitoring and measuring of activities. For treasury this will certainly be the case where, for instance, sustainability-linked loans or sustainability-linked bonds are used, because rates are based on evidence of performance against agreed sustainability targets.

For investments, if supporting data is not immediately presented, it may be found through a number of external resources. But, warns Gomez, finding and collating evidence is a manual process that can be time consuming and costly, especially where multiple targets are selected.

If the data is found, it still needs to be analysed. With a range of methodologies available to compare targets, like-for-like comparison of companies, and even investment products, is far from simple, he cautions. “Many firms declare their intention to partner only with companies that have made a commitment to reduce greenhouse gas emissions, but proving that statement can be challenging,” he says. 

Even for regulators, monitoring and assessing published information where there is no single standard of data or description, is difficult. Indeed, Gomez adds, it’s unlikely that any will have the time and expertise to assess every statement, or even counter every legal challenge to their decisions. “They just don’t have the resources.”

Setting the agenda

The regulators understand that they need a unified direction on sustainability. However, the process of rule-making can be slow, particularly when many voices are to be heard. In Europe, the approval of the RTS for SFDR, for example, required a final decision from the EC. But the six European supervisory authorities were for some time not in agreement as to how to proceed. Gomez observes: “It meant that even the European Banking Federation was uncertain whether SFDR reporting should use turnover, CapEx or OpEx metrics from relevant activities to draw comparisons; mixing data would not work.”

Meanwhile, well-meaning companies are still without a single standard or definition of sustainability by which all may be judged, and on which they can build their sustainability response, at least not without the possibility of having to amend it if rules change. With obvious difficulties in bringing credibility to a corporate policy of sustainability, certainly in terms of satisfying external opinion, the push for sustainability standards is likely to continue to flow from the bottom up.

Indeed, one of the most powerful drivers to engage with sustainability for businesses, and whole sectors, is customer pressure. This happens in both consumer and B2B spaces. Failure to implement a satisfactory response to issues of sustainability is a risk, while flagrant disregard (or even accusations of greenwash) can cause significant reputational damage. Both could have a bottom-line cost.

Companies know they have to act now because it is increasingly easy for stakeholders, including customers and investors, to see and share what a business is doing (through social media, for example), and there is a willingness to take action where there is disapproval. The rise of the shareholder activist in particular is focusing the attention of boards and many are desperate to push sustainability up the corporate agenda.

Accusations of greenwashing undermine all progress in this space and companies are now realising that only the creation and adoption and implementation of a unified set of sustainability standards and definitions will satisfy all stakeholders. If the regulators are being too slow off the mark, then collaboration between businesses and sectors is required to start making a difference.

Individual organisations have a role to play in setting the agenda too, says Gomez. With stakeholders watching closely, it’s time for accurate measuring, recording, and reporting of all outcomes, with delivery in a way that enables easy comparison between the efforts of similar organisations.

The problem is that there are now several connected yet subtly different ideologies that could misdirect both businesses and interested parties. For instance, Gomez says it’s important to understand that ESG is not the same as corporate social responsibility (CSR).

Whereas CSR holds a business accountable for its social or environmental commitments in a qualitative manner – it makes a declaration of intent around internal processes and company culture to which it should adhere – ESG is a measurable set of intentions (usually expressed as a score) that external partners and investors will consider as part of their evaluation of the company.

And ESG is not interchangeable with sustainability. “ESG criteria are a subset of the wider sustainability matrix that is connected to financial performance,” comments Gomez. In fact, ESG was developed by financial institutions with investment in mind. “We need to discover how we can use these criteria to help predict the future growth and profitability of companies, but I think ESG ratings are too narrow. We need to go a step further and incorporate the wider field of sustainability into our view.”

For want of a singular and transparent approach, the impact of each ‘branch’ of sustainability may have been unintentionally diluted. For that reason, Gomez feels that ultimately harmonisation and standardisation can be delivered only by policy-makers. It is they who need to drive the last mile. “But while there is no common definition and approach, progress will remain difficult.”

Clearly, there needs to be deeper discussion between national and international policymakers. But the pressure to do so must be maintained from the other direction, where at the strategic level organisations must work towards greater collaboration, and operationally, functions such as treasury should be given the green light to explore and implement suitable practical solutions.   

Anna Alex
Co-Founder, Planetly