Increased global awareness and debate surrounding climate change and sustainability has propelled environmental, social and corporate governance (ESG) practices from a ‘nice to have’ to a necessity for today’s corporate treasurer, according to Karin Flinspach, head of transaction banking, Europe & Americas at Standard Chartered
In the latest instalment of our Future in Focus series, Karin Flinspach, head of transaction banking, Europe & Americas at Standard Chartered sat down with Aaran Fronda, editor at The Global Treasurer to discuss the measurement of ESG, sustainability in supply chains, and the shift towards digital finance.
Standard Chartered itself has recently announced its commitment to reach net-zero carbon emissions from its financed activity by 2050, with interim targets to reduce financed emissions for thermal coal mining, oil, gas and power by 2030. And Flinspach says the company won’t stop there.
“We are continuing to work on announcing other indirect targets across different sectors. We have also set ambitious goals in transition financing, committing 300 billion US dollars of green transition finance by 2030.
“These are just some of the bigger and broader goals, but we have already started to make global trade more responsible and more inclusive, which is important.”
However, for all the progress made in the ESG space, greater transparency into corporate reporting remains essential to effectively assess ESG risk and limit so-called ‘greenwashing’.
Although a handful of providers, such as FTSE Russell, have published detailed ratings taking dozens of factors into account, there is no unanimity on what constitutes ‘good ESG’. What’s more, there’s little commonality between the different scorers: in fact, there are several high-profile cases of companies being marked down by one ratings provider and championed by another.
Flinspach herself alluded to this problem in her discussion with The Global Treasurer, saying that “one of the challenges of linking financing to sustainability goals has been the lack of consistent, transparent and universally accepted metrics that can be measured and monitored.
“Even though this is changing quickly with many industry bodies, governments and non-governmental organisations focused on it. We’re not quite there yet.”
However, the situation could soon improve with the introduction of a series of clearly defined metrics, mandated by central government.
In the UK, for example, a proposed parliamentary bill would make it compulsory for publicly traded firms to publish ESG metrics to shareholders. These metrics could include changes in fuel consumption, use of electricity and reductions in carbon emissions, as well as ethical policies such as diversity and inclusion within the workplace.
There is certainly plenty of appetite for such a system. In a survey spearheaded by experts from Bank of America, KPMG and the other ‘big four’ accountancy firms, 85 percent of corporate respondents agreed a set of universal, industry agnostic ESG metrics would be useful for their company. Furthermore, 90 percent agreed that these metrics would be useful for both financial markets and the economy.
However, it’s not just about the metrics: companies themselves must take proactive steps to beef up their reporting structures and provide greater transparency. In this respect, Flinspach believes we can do much more to encourage effective reporting. In fact, she believes a reward system would make a huge positive impact on sustainability.
“I believe it’s currently 137 countries that have committed to carbon neutrality, which is remarkably positive, and we support this in our sustainability ambitions.
“But having said this, from a finance industry perspective, more is needed to support the direction of capital to low-carbon and more sustainable businesses. An accelerated and significant shift will only happen once we see [differential] capital treatments for more sustainable companies come into effect globally.”
Another trend at present is the greater focus on sustainability in supply chains. According to a recent report by McKinsey, “sustainability has become a top priority on the CEO agenda, making the supply chain an integral part of managing an organisation’s carbon footprint.”
Flinspach certainly echoes these sentiments. In fact, she believes the chaos of Covid-19 may have forced a complete re-evaluation of corporate strategy, causing companies to question the viability of the tried-and-tested ‘just in time’ models during periods of extreme stress and uncertainty
“For decades, supply chain management has focused on cost and operational efficiency, but now, with the pandemic and even Brexit, things are changing quickly. We are now seeing a shift towards ‘just in case’ management.”
Adherents to the ‘just in case’ strategy strive to keep large inventories in stock and entering long-term contracts with suppliers, minimising the possibility of shortages due to unforeseen events. And it’s certainly true that the pandemic has acted as a stimulus for this paradigm; nearly three-quarters of senior executives who responded to a McKinsey survey admitted that their companies had encountered production and distribution problems during the pandemic, forcing them to make alternative arrangements.
As Flinspach notes, just-in-case is more capital-intensive than just-in-time. However, “it helps these companies to protect themselves against risks such as trade wars, higher tariffs, punitive regulations, or even another pandemic.”
More broadly, she notes that resilience is now a key priority for supply chain management, and this is intrinsically linked with sustainability. The more progressive you are on green issues, the fitter you are to face the future.
Indeed, Flinspach revealed that Standard Chartered had conducted market research in this field, gaining insight into 900 global companies into the factors they now prioritise in their supply chains. Environmental soundness emerged as a leading priority, along with transparency of direct and indirect suppliers, flexibility, adaptability and having clear and collaborative scenario planning.
Again, however, there is no room for complacency.
While it’s hugely encouraging that so many companies are now ‘greening up’ their supply chains and embracing their social responsibilities, these companies are typically at a very early stage of their evolution.
Returning to her company’s research, Flinspach noted that 90 percent of companies had identified the aforementioned five areas as important. However, just 40 percent of the same companies claimed to be confident that they perform very highly when understanding and monitoring environmental standards and labour practices.
“What our research clearly shows,” she said, “is that there is much work to be done.”