Sustainability is growing ever more important for treasurers’ organisations and careers. Important reasons include sustainable finance, and an ever sharper focus on environmental, social and governance (ESG) from financial markets. Evidence of sustainability’s importance include the ACT’s Diversity and Sustainability Awards in October, regular treasury discussion forums, and the annual ACT ESG Conference in November.
Is there a difference between sustainability and ESG?
Sustainability and ESG overlap, and each of them is evolving rapidly. ESG is generally defined as one part of a much wider-ranging concept of sustainability. For example, the criteria for the ACT Sustainability awards cover not only environmental, social and governance solutions, but also innovative finance solutions and more.
Another important example for treasurers is sustainable finance, meaning finance for sustainable projects. In turn, sustainable projects are defined ones that take account of all three of Environmental, Social and Governance concerns, and more.
In the shorter term, an initiative may focus more narrowly to start with. UK retailer Tesco’s innovative sustainability-linked supply-chain finance (SCF) programme is a good example. With its initial focus on emissions and environment, it was the overall winner of the ACT’s Deal of the Year award in 2021.
Tesco’s sustainability-linked SCF solution
UK supermarket group Tesco boasts a groundbreaking sustainability-linked SCF programme. It was the first such solution to be delivered in the UK. The project involved enhancing Tesco’s existing SCF programme with a sustainability-linked element, targeting an ambitious emissions-reduction strategy. With emissions from Tesco’s supply chain accounting for 90% of the group’s total emissions, supplier emissions were a key focus.
The resulting programme supports more than 200 of Tesco’s suppliers, directly linked with Tesco’s own sustainability goals. Suppliers that demonstrate success are rewarded with lower funding costs under the programme.
While the initial objective was the Environment element of ESG, the programme’s supporting KPIs are designed to evolve and broaden into Social and Governance over time, particularly the sourcing for Tesco’s clothing products.
Extending scope – Scope 1, 2 and 3 greenhouse gas emissions
Tesco’s focus on its supply chain illustrates the evolution and extension of scope of sustainability concerns over time. Scope 1 emissions are those resulting from an organisation’s own direct activities, and are the easiest to measure. Scope 2 covers indirect emissions caused by the generation of purchased electricity, steam, heating and cooling consumed by the organisation.
Scope 3 greenhouse gas emissions include all other purchased goods and services, travel and commuting, waste disposal, transport and distribution, use of sold products, investments, leased assets and franchises. For many organisations this is the most significant element of their total emissions. But it also the hardest to measure.
Seasoned treasurers are aware of this pattern in many areas of their work, appreciating that it also offers the greatest opportunities to add substantial value and leadership. They view it cheerfully as all part of the fun.
Treasury’s unique contribution to sustainability
Treasurers are uniquely positioned to drive sustainability through practical financial strategies and detailed implementation. By integrating ESG factors, issuing green bonds, managing climate risks, and sustainable financing solutions, treasurers can play a pivotal role in advancing both organisational sustainability and financial performance.
This not only meets evolving regulatory requirements but also enhances organisational resilience in challenging times when sustainability is a critical factor for investors and other stakeholders. As we’ll see in the next case study, this applies just as importantly to not-for-profit organisations.
Not-for-profit fossil free request for proposal
In 2024 over 70 UK higher education institutions issued a joint fossil free request for proposal (RFP) to banks and money market fund managers, co-ordinated by the University of Cambridge. The institutions are especially keen to avoid financing companies that are constructing new coal- and gas-fired power plants in OECD countries.
University of Cambridge Chief Financial Officer Anthony Odgers explained: “What we and our partners are focussed on with this mandate is finding financial services products that do not contribute to the expansion of fossil fuels – in particular, new coal- and gas-fired plants which lock in demand for decades.”
The RFP criteria are based on the International Energy Agency’s (IEA) Net Zero Emissions by 2050 Scenario and are in line with emissions reductions laid out in the Intergovernmental Panel on Climate Change (IPCC)’s Sixth Assessment Report.
University of Cambridge Head of Group Treasury Heather Davis added: “The University treasurers in this group all share a common goal, which is to manage money in a way that doesn’t contribute to the financing of fossil fuel expansion and to find something that aligns with the IEA Net Zero Emissions Scenario, and that has been lacking in the cash space up until now.”
Hard-to abate - Heathrow Airport’s sustainability-linked bond
In 2023 Heathrow Airport issued the first bond by an airport to include validation from the Science Based Targets initiative (SBTi). Its two ambitious sustainability goals were a carbon reduction in the air of 15%, and a carbon reduction on the ground of 46%, both to be achieved by 2030, using a 2019 baseline.
The Sustainability Performance Targets contained in the framework represent a major advance for the airport sector, as they were the first to comprehensively include Scope 3 emissions (see “Extending scope – Scope 1, 2 and 3 greenhouse gas emissions” above). The success of the trade was evidenced by participation from SFDR Article 9 funds, which is rare for an issuer in a hard-to-abate sector.
Invest time to understand your own organisation’s net-zero journey
Viktoria Hadarits, assistant treasurer at Lightsource bp, told a recent ACT treasury forum: “In 2021 we published our sustainability framework, which included the three key pillars of the company – people, environment and energy. Building on the sustainability framework in 2022, we have now published our first annual sustainability report, confirming the sustainable development goals that we support in our operations. And we have also published the first numbers around our own greenhouse gas emissions, and set ourselves KPIs to reduce them over the coming years.
It is very important for the treasury team to be aware of the goals and objectives of the company to help embed those sustainability processes much faster within treasury.”
Examples include excess cash investment, including ESG-based money market funds and ‘green’ bank deposit accounts that support UN Sustainable Development Goals. Lightsource is also looking at foreign exchange products that can be linked to existing sustainability KPIs so that some funds can be returned to the business via a rebate system, which in turn will be used to support the sustainability objectives of the company.
Biodiversity for treasury
Other examples cited at the forum included revolving credit facilities (RCFs) linked to sustainability elements, with interest varied depending on performance against sustainability KPIs. Corporate treasurers can also ensure their organisations invest surplus cash in ESG-related funds, and help employees with their own investments, such as pensions, so that they are also comfortable with where their personal money is invested.
Biodiversity loss is another area of increasing focus for many companies, as the Taskforce on Nature-Related Financial Disclosure (TNFD) continues its work to develop and deliver a risk management and disclosure framework for organisations to report and act on evolving nature-related risks.
The ACT’s ESG conference
The ACT’s annual ESG conference was established in 2022 and remains the only global treasury-focused ESG conference, strongly recommended for your learning and enjoyment.
Structured sessions always include a wide range of treasury-relevant ESG opportunities and challenges such as ESG regulatory changes, the practicalities of ESG cash investing and how to identify and mitigate the risks associated with greenwashing, ensuring treasury strategies are credible with external markets and effective within our organisations.
The conference also addresses the role of sustainable finance in supporting corporate sustainability, best practices for structuring ESG-linked financial products and the impact of regulatory developments on sustainable finance. It is also a great opportunity to revitalise and extend your personal connections with knowledgeable and enthusiastic colleagues.
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Author: Doug Williamson, FCT
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