The Treasurer’s Role in ESG and DEI Initiatives
The Association of Corporate Treasury (ACTSA) defines treasury management as “The corporate handling of all financial matters, the generation of external and internal funds for business, the management of currencies and cash flows and the complex strategies, policies and procedures of corporate finance. The goal of most treasury management departments is to optimise their company’s liquidity, make sound financial investments for the future with any excess cash, and reduce or enter into hedges against its financial risks”. There are two distinct parts of treasury management – one is making sure that the cash flow is well structured, and the other is the creation of the policies that ensure the company’s risk strategy is one that is sustainable and suitable for its needs. Both distinct parts involve embedding ESG and DEI initiatives into treasury management. Corporate treasurers increase business and operational risks when this isn’t done. Let’s unpack those two loaded acronyms – ESG and DEI – in order to better understand what they have to do with the corporate treasury function. According to Forbes, a landmark study in 2005 entitled Who Cares Wins saw the acronym ESG being used for the first time. It stands for Environmental, Social and Governance and in the South African context we are most familiar with the King Codes on corporate governance (1 – 4) that the Institute of Directors South Africa tells us applies to all organisations incorporated in South Africa. The latest iteration, King IV, encourages corporate South Africa to comply with the King Code principles related to Environmental, Social and Governance. The concept has evolved and continues to do so, and it is useful to consider that there is a broader category that includes the E, the S and the G, and that is sustainability. In 2015, the United Nations member states adopted the 2030 Agenda for Sustainable Development. This agenda contains 17 sustainable development goals (the SDGs), that the UN describes as “an urgent call for action by all countries – developed and developing – in a global partnership”. These 17 goals include the E, the S and the G, but are broader than just those elements. The concept of sustainability becomes important when a company is considering raising capital, and the investors that it wishes to target. An increasing quantum of funds are being assigned to impact investments, defined by the Global Impact Investing Network (GIIN) as “investments that are made with the intention to generate positive measurable social and environmental impact alongside a financial return”. The second acronym, DEI, stands for Diversity, Equity and Inclusion. This idea apparently first appeared in the corporate landscape in the mid-1960s, and McKinsey & Company describe these as “three closely linked values held by many organizations that are working to be supportive of different groups of individuals, including people of different races, ethnicities, religions, abilities, genders, and sexual orientations.” Diversity is who makes up the workforce of a company, equity is fair treatment of those employed and an inclusive culture provides each person with a voice that is heard. Many academic papers have shown that there is a positive correlation between diversity and the performance of the business. Why is this important for treasurers? The answer to this question is twofold – value creation and risk mitigation. It becomes clear that both ESG and DEI initiatives are intentional policies and strategies that a company crafts to maximise opportunities and minimise risks, and therefore must be key components of the treasurer’s role. Although they may seem different, there are crossovers, and the outcomes of implementing these strategies effectively are interlinked. It is not, however, only the role of the treasury to roll out ESG and DEI initiatives, and as The Global Treasurer noted in an article in February this year “organizational silos and competing priorities still impede the treasury function from spearheading the ESG charge at most companies”. So while it is unlikely that the treasurer would or should ever lead the ESG and DEI initiatives, that should not detract from the importance of having treasurers as an important part of the team. There are two distinct parts of treasury management – one is making sure that the cash flow is well structured, and the other is the creation of the policies that ensure the company’s risk strategy is one that is sustainable and suitable for its needs There are several elements to the role of the treasurer in ESG and DEI initiatives, and these are capital structure, cash flow and risk. Strategies around these initiatives can positively affect capital raising – companies that score well on ESG and DEI metrics and performance open up additional pools of capital for themselves, from funders who would like to be associated with their initiatives. For example, in January 2022, Imperial Logistics secured a R1bn sustainability linked revolving credit facility (RFC) from their primary bankers. The company press statement says that the three- year facility is based on “mutually pre-agreed sustainability performance targets over the debt term” and that the funds will be used in green projects that will assist them in attaining their ESG targets. In a similar vein, corporates can access funding on the capital markets under the sustainability banner. The Johannesburg Stock Exchange (JSE) has a Sustainability Segment on its debt market. While a variety of instruments have been listed, they are mostly ‘use of proceeds’ bonds. These include green bonds, issued to fund projects that have positive environmental and/or climate benefits and social bonds that raise funds for new and existing projects with positive social outcomes. Corporates can access funding on the capital markets under the sustainability banner ESG and DEI initiatives are very much part of the role of the corporate treasurer, but for treasurers to be effective in this sphere, the different business units need to work together. The benefits and the associated risks are both financial and non-financial and ideally, these initiatives need to be woven into the DNA of the organisation, and not be treated as an add-on or an optional extra. A company that understands where it is, and where it would like to be in terms of cogent ESG and DEI strategies and objectives understands its environment well, and can but succeed. Consultant, Tamsin Freemantle has extensive experience working on the continent, with a focus on the development of capital markets. Tamsin is passionate about building the African continent, and is convinced that the markets on the continent are the way to do it. She has a focus on sustainability and her work includes training on capital markets and their development, and strategic advice on sustainable market development. She currently serves as Vice President and board member of the South AfricaNigeria Business Chamber. Tamsin has recently entered into a collaboration with 8Hundred, an independent strategic advisory firm in Johannesburg, South Africa, specialised in assisting African companies secure debt and equity funding through the capital markets. Tamsin studied English, International Relations and Law at the University of Witwatersrand and has an MBA from Pretoria University’s Gordon Institute of Business (GIBS) in South Africa.
ESG
DEI
The treasurer’s role
Weaving the initiatives into the organisation’s DNA
Tamsin Freemantle
8Hundred Enterprises (Pty) Ltd