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How corporates are embedding ESG in their decision-making

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ESG is an increasingly critical part of financial decisions, as our 2021 corporate risk management survey discovered. Many corporates, however, are just at the beginning of this journey, with the C-suite building and delivering their ESG strategy from the top down.

There’s no doubt that corporates as a whole are convinced of the need to embed ESG criteria across the business. Many of them are just at the beginning of building their strategies and for treasurers and CFOs, how ESG is being considered is still evolving. However, ESG is very firmly on the agenda.

“Sustainability awareness has really grown in recent years, I'd say especially since the Paris Agreement was adopted in 2015,” says Wai-Shin Chan, Global Head of ESG Research at HSBC.

“We've all seen the impacts of climate change storms, floods, droughts, wildfires, they’ve hit all over the world, and everybody knows someone or somewhere that's been affected. Now this demands a response. So there’s a response from governments, businesses, investors and the general public, and more investors are considering ESG criteria in their investment decision-making frameworks. And some estimates put that up at $35-$40 trillion, that's close to half of all the assets under management globally.”

More investors are considering ESG criteria in their investment decision-making frameworks. And some estimates put that up at $35-$40 trillion, that's close to half of all the assets under management globally.

Wai-Shin Chan | Global Head of ESG Research, HSBC

The top-down approach

There is something of a disconnect in how CFOs and treasurers view ESG. While 87% of all organisations we surveyed see ESG as important to the allocation of their capex budget and an average of 80% of CFOs across regions view ESG criteria to be important across both financial investments and supply chains, the importance in the treasury is not so high.

Over a third of treasurers (36%) say they do not yet embed ESG criteria in their financing arrangements but they are looking to embed it in their internal policy – rising to 43% in the Americas. And 23% of all treasurers say they only embed ESG on a case-by-case basis, with other factors (cost, documentation) deemed more important – this rises to 33% in Asia.

But Paul Harvey, Head of Corporate Sales for UK CMB, Greece & Malta at HSBC, who is also the bank’s global lead for ESG across corporate sales activities, isn’t really surprised by that finding.

“There is a very mixed agenda and it's certainly top down. The C-suite are very aware of the competitive edge it could give, and appreciate the importance of a well-defined ESG agenda,” he says.

“There are an increasing number of corporates recruiting sustainability specialists tasked to help define the agenda alongside the treasurer and the CFO, in order to establish their core KPIs and sustainability performance targets and to drive the change in adoption. But there's an education process here, as well. And this is where risk partners and relationship teams across their banking syndicate can help in building the agenda.”

There is a very mixed agenda and it's certainly top down. The C-suite are very aware of the competitive edge it could give, and appreciate the importance of a well-defined ESG agenda.

Paul Harvey | Global Markets Corporate Sales, Head of UK CMB, Greece & Malta, HSBC

Addressing ESG risk

Not only are companies considering ESG in how they invest, but they’re also considering how ESG issues, climate-related or otherwise, could impact the company’s future performance. In fact, 62% of CFOs were expecting to invest resources to tackle ESG-related risk over the next two years.

“The companies are disclosing more ESG-related information, and investors take that information and consider how well the businesses are addressing these issues. And if ESG risk is material over appropriate time horizons, then there can be an impact on the finances, and the valuations, and hence the share price,” adds Chan.

Differing paths to and speeds to sustainability

There are also strong regional, sectoral and company size differences in how companies are currently embracing ESG. Companies in Asia more commonly embed ESG criteria in their financing arrangements only via defined (minority) quotes for ESG-linked investments (32%) or on a case-by-case basis (39%), for example. However, EMEA is leading the way with embedding ESG criteria into their financing arrangements (62%), aligned with proactive ESG policymaking in the region. Another difference appears to be attributable to the size of businesses: Over half of large-scale organisations, with revenues over US$5bn, say they predominantly embed ESG criteria into their financing arrangements (52%), compared with 30% of smaller organisations that say the same.

“I would say that large cap companies are more advanced in this,” says Chan. “They perhaps have bigger budgets and bigger communications and sustainability departments. But it’s also companies with international exposure, those that either sell their products and services into international markets, or have a lot of international investors, who are asking ESG questions often.”

Regulatory evolution

Regionally, European firms are frequently the most advanced, followed by North America and then Asia. But those that are lagging are catching up quickly, says Chan. “Regulation also plays a part, there’s a journey for regulators,” he says. “Some of them start off with giving ESG guidance, and they say, “Let's make that voluntary”. And then they say, “Okay, now we're making that “comply or explain”. And eventually we get to mandatory”.

“If we take the EU, there are lots of changes on the horizon there. The Fit for 55 package that came out this summer will see changes to the EU taxonomy regulation (EU ETS), transportation, land use, and more. And don't forget the carbon border adjustment mechanism, that carbon border tax they're considering introducing in the next couple of years.”

ESG: the whole picture

With COP26 on the horizon, which has been billed as the most important climate negotiations since the Paris Agreement was adopted, climate and net zero are certainly leading the near-term ESG agenda. Companies will need to be focusing on setting their net zero targets, explains Chan, but it’s important not to lose sight of social issues.

“Even with the focus on climate, we’ve seen the ‘S’ of ESG move up the agenda, especially during COVID-19,” he says. “This does vary from region to region but we’re looking at gender, at ethnicity, worker rights, migrant working, and even vaccine equality. Often these things differ right down to the company level.”

With so many elements to consider, Harvey concludes that the journey will be different for every sector, every client and every CFO. There’s no off-the-shelf answer, so whatever the company, what’s key will be tapping into outside resources to help build their ESG strategy.

Rethinking Treasury: The road ahead

CFOs and treasurers are navigating through numerous challenges. Explore more from our corporate risk management survey.

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