by Bruce Meuli, Global Business Solutions executive, and Jonathon Traer-Clark, Head of Strategy, Global Transaction Services, Bank of America Merrill Lynch
JTC Today more than ever, treasurers engage with, and therefore need to consider the motivations and objectives of multiple stakeholders – teammates, support functions, management, board, investors, bankers, lawyers and so on. At the same time, they have to operate within a defined risk framework and adhere to strict policies and processes. An additional, related dimension to treasurers’ decision-making is how to incorporate the demands and obligations associated with being a socially responsible organisation that considers the long-term impact of its actions and investments. So how can treasurers achieve this balance, particularly on occasions where these diverse objectives may appear to conflict?
BM Well, let’s look at investments, specifically those that are considered ethical. One of the early advocates of socially responsible investing was John Wesley, founder of Methodism, who advocated the basic tenet of “Look after your neighbour through appropriate business practises”. Today, there are a variety of investments geared to climate projects, medical facilities and many other social, cultural or environmental objectives.
JTC Indeed, the appetite certainly seems to be there and today, many firms have dedicated research departments that explore and evaluate investments. Key to note too is that in the US you can now add ESG (Environment, Social & Governance) funds to 401k plans. But how exactly does a treasurer assess these investment alternatives?
BM I would suggest the first consideration has to be price – make sure the fees are compatible with fee benchmarks outlined in your treasury policy. This leads to the second point – balancing risk and return. Treasurers need to ensure sufficient diversification and high quality credit in their portfolio, whether this comprises ‘conventional’ or socially responsible investments. Indices can be useful for directional indicators, but the time base for analysis should be carefully considered too. As with conventional investments, the performance of SRI can vary considerably, so balancing risk and return remains vital.
JTC Ah ha! Yes – you are right, but you also hint at something else. Your baseline for assessment of these investments isn’t just financial. As we discussed earlier, stakeholders in the business have a variety of motivations and objectives, both qualitative versus quantitative. Or, to put it another way, what is my return, and crucially, how am I achieving it? This doesn’t just apply to investments either: with whom does the company work, i.e., suppliers, vendors, partners and of course customers, and how?
BM I call that the ‘extended enterprise’. In this context, it’s about ensuring that your practices as a business are sustainable and are based on the principle that what is good for my partners across the extended enterprise, is good for me. We have seen situations where some large corporates have unilaterally extended payment terms either selectively or across their supplier base. For some, this has had ‘undesired consequences’ and caused reputation issues, and even an unwinding of the increased terms. An alternative is the opportunity to implement financial solutions and internal operational improvements that will benefit all partners. There are some corporates who are evaluating options to reinvest in their extended physical and financial supply chains, looking for win-win outcomes.
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JTC Taking the premise we started with – that looking after your neighbour through appropriate business practices is a good thing – all things considered, you could argue that the longer-term viability and health of the business is likely to be equally good. Let’s also think about funding. Apple recently launched a $1.5bn Green Bond to finance environmentally sustainable development projects. On the surface, you might ask why they have done this. But many investors, both in equity and debt, as well as employees, suppliers and customers, are very proud to be involved with a company that considers its overall social role in the world. Energy companies look at solar power for example. If you are an issuer, then surely you would want to appeal to as broad a base of potential investors as possible?
BM So a company that has a strong awareness of the extended enterprise considers this when looking at its organisational, operational and financing approaches and structures. And today, as well as seeking fiscal return, stakeholders are increasingly looking for appropriate behaviour and responsibility. Recent technological advances and the rise of new economy organisations that allow and encourage greater interaction between individuals, partners and their business, are driving changes in how a corporate defines and sees itself within its environment, and how it interacts with all parties.
JTC I understand how appropriate corporate social behaviour, and the associated investing or issuing of financial instruments, are just a couple of ways for a company to get closer to its enterprise ecosystem; I also recognise the value of its brand increasing in multiple ways. I guess it comes down to sustainable business practices for the benefit of future generations: after all, green bonds help drive capital to renewable energy, energy efficiency and other low-carbon sectors. Increasingly, companies are viewing and conducting business through an ESG lens and as a consequence the definition of value is being reassessed.
TMI Comment - by Helen Sanders, Editor
Promoting and educating readers in the opportunities for socially and environmentally responsible investment, and indeed wider socially, culturally and environmentally responsible business practices, has been a priority for TMI for many years. When we ran various cover stories on these issues a decade ago however, there was little support from banks, while many treasurers too considered corporate and social responsibility to be an issue confined to their CSR departments as opposed to directing the culture and behaviour of the company.
It is very encouraging to see that this is changing. Increasingly, performance is measured not only in absolute terms, but also in how a company does business. In a world of ubiquitous social media, the power of ‘name and shame’ can be very persuasive. This change in performance measurement is increasingly reflected in KPIs (key performance indicators) at department level. The next step will surely be that the concept of SRI or ESG no longer exists, but is the default way of conducting business.
