Frank Waechter, global director - treasury and insurance at Puma, tells The Global Treasurer that companies committed to ESG increasingly expect treasurers to embed its principles into their own practices or risk reputational damage
Multinationals that have embraced ESG expect their treasurers to do likewise to further satisfy the expectations of investors and customers.
As a result, treasury departments are now applying an ESG lens on everything from investing surplus cash and raising capital to offering supply chain finance to their companies’ suppliers.
At global sportswear manufacturer Puma, Frank Waechter, global director – treasury and insurance, points out that ensuring sustainable supply chains is important to his treasury team to help maintain the company’s global reputation.
“Puma relies on a chain of external suppliers because we don’t have owned and operated manufacturing facilities and, therefore, have outsourced all our production. As a branded sports manufacturer we have to make sure that what our suppliers are doing does not damage our perception in any way.
He adds that this approach is typical for well-known brands which have outsourced production and rely on third parties.
“We have to make sure that we have good quality and fairly and sustainably produced products,” he says. “Our customers expect us to follow an ESG policy and this has to go right down to the external factories we use for production.”
Puma introduced a code of conduct in 1993, which was binding for all supply chain partners entering a contract with the company. In 2005, it added a code of ethics and ESG ratings for its suppliers, making it one of the earliest adopters of supply chain sustainability in Europe.
“Most of our suppliers have been following an ESG agenda for quite a while now and report on it,” says Waechter, pointing out that the company actively helps its suppliers by providing ESG checklists and uses people on the ground to monitor suppliers’ ESG adherence.
“We have well-defined KPIs for our suppliers to follow, and report on this ourselves in our statement of account. This is then built into the supply chain financing made available to our suppliers.”
Waechter explains that the company has built up an ESG-related reverse factoring facility for suppliers based on their adherence to ESG.
“The better their ESG performance, the better the pricing of the financing available to them on a voluntary basis.”
Waechter adds that the introduction of the company’s Forever Better Vendor Financing programme made it the first European company to offer ESG-linked supply chain financing, as well as being the first to bring in a privately owned bank to offer such financing to suppliers. .
“Now we work with four banks on this because adoption of this type of supplier financing has grown considerably over the years, and it could even reach $1bn financed volume this year,” he says.
The same ESG principles and approach are applied in the company’s provision of insurance to suppliers.
“Puma has general liability insurance, and this includes product liability. As most of our production is outsourced, our suppliers must have general liability insurance too,” says Waechter, noting that the company has manufacturing suppliers based in emerging markets such as Bangladesh and Vietnam.
“We help our suppliers access insurance by offering them a general liability programme, which represents a good deal for them to take up.
“For this insurance product, we have embedded an ESG link as well so that it is directly related to how they treat ESG. The better they are at ESG adherence, the lower the probability of a claim and, therefore, the lower the insurance premium.”
Meanwhile, at diversified manufacturing company Flex, the treasury department has started to embrace ESG into its practices and is currently looking at converting its supplier financing programme into a sustainability-linked facility.
“This will allow preferential funding rates for ESG-focused suppliers,” says Christian Bauwens, SVP and treasurer at Flex.
“In addition, one of our ESG targets is to ensure that 50% of our ‘preferred suppliers’ are setting their own greenhouse gas emissions reduction targets by 2025 and that this reaches 100% of suppliers by 2030, increasing the percentage of Flex suppliers that demonstrate a commitment to reducing greenhouse gas emissions.”
Nevertheless, Bauwens points out that most of his department’s ESG focus has been on the borrowing side to date.
“Flex was among the very first companies in the US, particularly in the technology space, to enter an ESG-linked credit revolver in January 2021,” he says, noting that treasury developed the metrics in partnership with its corporate ESG team.
“Outside of the credit revolver, we have looked at sustainable linked and green bonds but have not issued any yet due to other available options.”
Puma has also embedded ESG principles into its financing arrangements.
“We issued promissory notes in 2020 with an embedded ESG aspect and also follow KPIs for our revolving credit facility. All in all, 77% of our total borrowing volume is now linked to sustainability KPIs,” explains Waechter.
“This provides a range of benefits: We meet ESG criteria for cheaper financing, and our investment community is bigger, meaning more financing is available to us and we can be more aggressive.
“Following this type of ESG financing policy also has its payback in that it gives the wider group something positive to talk about.”
When it comes to ensuring that Puma’s treasury team follows ESG principles, the department relies on several sources.
“The International Finance Corporation is a good source of information on sustainable supply chains,” says Waechter. “We are also a member of diverse charter initiatives, such as the Fashion Charter for Climate Change, and engage with working groups such as the group setting standards at the International Chamber of Commerce on sustainable trade finance.
“As the treasury department, we must take the internal role of a business partner to other parts of the group, such as sourcing, and I am also an active member of the wider group’s sustainability committee, which was set up because this represents a very important topic for Puma.”
Flex’s Bauwens adds that his treasury finds banks to be a good information source as like many large institutions, they now have dedicated ESG teams.
“Also, rating agencies are factoring the qualities of ESG plans for the companies they rate into their global risk assessment,” he concludes. “This means that companies that are less focused on ESG strategy, metrics and improvement will be deemed to have higher credit risk in the long-term.”