As companies increasingly understand ESG considerations, they are including them in their risk management strategies. This is achieved through executive compensation structures and greater transparency in terms of disclosing information related to ESG performance
The financial landscape is evolving and with it the strategies for managing counterparty risk.
ESG considerations have become increasingly important in counterparty risk management due to the growing awareness of the negative impacts of climate change and social inequality.
A recent discussion between Tarek El-Yafi of Standard Bank and Patrick Bauman, treasurer of Tupperware, shed light on a significant trend: the growing importance of environmental, social, and governance (ESG) considerations in counterparty risk management.
Companies are now beginning to realise that these factors can have an effect on their long-term business performance, and they are looking to incorporate ESG considerations into their risk management strategies.
ESG-informed strategies can help treasurers identify and manage risks that may not be evident with traditional financial analysis. This can help to create a more resilient balance sheet and ensure business continuity for the long term.
The discussion underscored that ESG is no longer a peripheral concern and is becoming a competitive differentiator for many companies, integrated as part of their business and seen as a good business practice.
For instance, many companies are now making ESG performance a part of their executive compensation structures, tying bonuses and other incentives to sustainability goals.
This shift is impacting counterparty risk management, including treasury policies, investment policies, and supplier policies. According to a December 2020 survey from NAVEX Global, 88% of public companies have ESG initiatives in place, while two-thirds of privately-owned companies do.
Companies are incentivising their executives to prioritise ESG performance, with the idea that this will result in better risk management and long-term sustainability. By tying rewards to ESG performance, companies are also showing their commitment to sustainability and the environment.
Companies are also increasing transparency by disclosing information related to ESG performance, such as emissions levels and energy usage. This greater transparency helps stakeholders to assess the sustainability of their investments and partnerships, strengthening relationships and fostering trust.
The conversation between El-Yafi and Bauman offers valuable insights for corporate treasurers navigating the evolving landscape of counterparty risk management.
The integration of ESG considerations into risk management strategies is not just about good stewardship—it’s also about good business.
Index:
00:00 Understanding the Survivability of Financial Institutions
02:30 Counterparty Risk Management in an Uncertain World
10:01 Diversification in Counterparty Risk Management
12:31 Forecasting and Scenario Sensitivity Analysis
17:26 Importance of Real-Time Information
22:29 Role of ESG in Counterparty Risk Management