ESG Investing Needs Better Benchmarks That Align With Effective Treasury Management

ESG. KPI.

We live in an age of acronyms, of shorthand that helps point the way toward business concepts that, in turn, can redirect companies in how they conduct everyday operations.

J.P. Morgan’s Stuart Roberts, global head of trade, and Lori Schwartz, global head of liquidity solutions, said that ESG — short for Environmental, Social and Governance — considerations can help transform treasury and liquidity management.

At a high level, ESG can offer guiding lights for treasury executives and CFOs to make sure the projects they are financing will give rise to equitable distribution that is good for the economy as whole. Nuance matters, of course. Firms differ from one another; treasurers do, too. And ESG, as Schwartz and Roberts said, is ripe for a “breakup” of sorts, where some individual components can hold sway over others.

As Schwartz noted, ESG is something “that we seem to hear about lately — and with increasing importance.” ESG, said Roberts, is increasingly becoming part of a given firm’s key performance indicators (KPI), he added. In short: It’s not just about profits anymore, but about how companies derive those profits. Drill a bit deeper into those pursuits, they told Karen Webster, and there are any number of ways that finance professionals can examine cash flow and liquidity management, and how their businesses affect, and are affected by, social, economic and regulatory forces.

Roberts noted that ESG is a fairly broad term and can cover a range of focus areas. He contended that in Europe, investors and other observers — and, of course, executives themselves — tend to focus on environmental concerns. In North America, they’re increasingly paying attention to including more minority-owned businesses and suppliers — where, as Roberts said, a key question must be asked: “How do you promote equity through injections of capital?”

Added Schwartz, “How do you put governance in place to ensure that you’re not inadvertently financing unethical practices?”

Having those questions as key drivers helps determine where businesses center their resources. Textile firms, for example, are making concrete efforts to ensure that they do not use suppliers that use forced labor.

Those examples of narrowed focus, said Roberts, show that ESG means different things to different constituencies. More recently, said Schwartz, products coming to market with the promise of “green deposits” may pique interest among treasurers — or sow confusion. “My encouragement to all corporate treasurers is to double-click on really what that means and what that doesn’t,” she said.

Looking Ahead

Roberts said that building consensus around ESG will require governments and regulators to put guideposts and incentives in place — as well as transparency within the global trading community. CFOs, said Schwartz, need to consider governance frameworks just as they would liquidity components, and can incorporate their ESG scores, too.

Those frameworks will be especially important given the fact that we’re headed into the second generation of ESG-focused investment offerings for financial executives, said Schwartz and Roberts.

As Schwartz noted, banks including J.P. Morgan are crafting and marketing ESG-centered offerings that reward client firms with products that give enterprises higher interest rates on their deposits based on their ESG scores. Banks also have a role in helping commercial clients make sense of their data (and recommend outside consultants and partners) in pursuit of successful ESG strategies.

Adopting these measures, Roberts and Schwartz suggested, would do much to promote progress on the UN’s 17 sustainable development goals. These include, among other things, gender equality, sustainable water management and climate change.

But as of yet, said Roberts, “we’ve not seen that big, coordinated policy push of public finances at the developer or the [Organisation for Economic Co-operation and Development] level.”

In the meantime, they said, J.P. Morgan will work in tactical and company-by-company fashion to tackle ESG initiatives.

“It’s an evolving space, Schwartz said. “Little steps can be steps in the right direction.”