Mega-cap treasurers discuss treasury’s role in promoting ESG and the fragmented ratings landscape.
COVID-19 has moved the subject of ESG ratings and financing to the back burner for many businesses. One banker speaking at a NeuGroup meeting called ESG “a luxury” that many companies can’t afford now. But the issue is not going away, and the pandemic offers another lens to view how corporations affect the world and society, and how businesses respond to crises and the needs of employees, customers and other stakeholders.
- The issue of where ESG fits in the current climate surfaced at a recent NeuGroup meeting of mega-cap treasurers that included presentations by MSCI, a provider of ESG ratings, and BNP Paribas. Highlights:
Prepare for acceleration. A banker from BNP Paribas discussing sustainability-linked finance acknowledged that the pandemic meant that ESG would not be “top of mind” for several months. Before the crisis, the bank forecasted that 100% of finance would become sustainable finance within five years.
- Once the world is “back in rhythm,” he asserted, “what we have gone through will accelerate this move.” Expect to see more sustainability-linked loans, ESG-linked derivatives and continued interest in green bonds.
Treasury’s role. The treasurer of a large tech company told peers, “All of us in treasury can do some simple things to move the needle” on ESG. He mentioned:
- “Changing the way we invest,” such as eliminating coal, tobacco and firearms.
- Including minority-owned firms in all US bond offerings and more use of the firms in all activity.
- Issuing green bonds.
- Committing funds to affordable housing programs.
Another treasurer said his company used the issuance of a green bond to focus on the “e” in ESG both “internally and externally.” He said treasury drove the data accumulation to support the use of proceeds assertions for the bond.
- The first treasurer told the group that corporate sustainability teams can’t tackle the ESG issue by themselves and that he would love to see other treasurers help rally their companies, promote a “sense of urgency” and get buy-in from their boards.
A lack of standards. The ESG ratings landscape is difficult to navigate for corporates seeking relative certainty and standards akin to what exists in the credit rating industry.
- MSCI and Sustainalytics, two prominent ESG ratings firms, have “very different approaches,” said one ESG leader at the meeting who described MSCI’s ratings methodology as “in depth;” she said Sustainalytics uses a “huge number of metrics” and collects a “vast amount of information without prioritization.”
- Another ESG specialist said his team put together a spread sheet with 700 different metrics tracked by 20 different agencies, underscoring the lack of uniformity among raters and the resulting confusion for companies.
- That company and others are developing their own internal standards by, among other things, reaching out to their largest shareholders and bondholders as well as ESG investors to ask what they find most important from an sustainability perspective.
Be proactive. In the same vein, corporates should consider the path taken by one ESG leader who said her company is “really branching out” as it shifts from a “very reactive” stance to ratings to one that emphasizes “developing a strong point of view of what matters,” as her team does its own so-called gap analysis and digs “into where we might be able to improve disclosure.”
Connect with raters. Part of becoming proactive means taking the initiative with MSCI, Sustainalytics and other influencers in the ESG space. MSCI offers an issuer portal and Sustainalytics plans to roll one out in May. Treasury needs to be in the loop on who at the company connects with these firms as the importance of ESG for both investors and issuers increases.