Treasurers should adopt ESG practices to protect corporate brand reputation with external stakeholders

Multinationals that have embraced ESG expect their treasurers to do the same to better meet investor and customer expectations.

As a result, treasury departments are now applying an ESG lens to everything from investing excess cash and raising capital to offering supply chain finance to their businesses’ suppliers.

At global sportswear manufacturer Puma, Frank Waechter, global director – treasury and insurance, stresses 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 as we do not own or operate any manufacturing facilities and therefore have outsourced all of our production. As a manufacturer of branded sports goods, we need to ensure that what our suppliers are doing does not affect our perception in any way.

He adds that this approach is typical of well-known brands that have outsourced production and rely on third parties.

“We need to make sure that we have good quality products that are produced in a fair and sustainable way,” he says. “Our customers expect us to follow an ESG policy and this must extend to the external factories that we use for production.”

Puma introduced a code of conduct in 1993, which was binding on all supply chain partners entering into a contract with the company. In 2005, it added a code of ethics and ESG ratings for its suppliers, making it an early adopter of supply chain sustainability in Europe.

“Most of our suppliers have been following an ESG program for some time now and report on it,” says Waechter, noting that the company actively helps its suppliers by providing ESG checklists and uses people on the ground to monitor the situation. ESG buy-in from suppliers. .

“We have well-defined key performance indicators that our suppliers must follow and we report them ourselves in our account statement. This is then incorporated into the supply chain finance made available to our suppliers.

ESG financing of suppliers

Waechter explains that the company has set up an ESG-linked reverse factoring facility for suppliers based on their ESG adherence.

“The better their ESG performance, the better the pricing of the financing made available to them on a voluntary basis.”

Waechter adds that the introduction of the company Ever better supplier financing made it the first company in Europe to offer ESG-related supply chain finance, as well as the first to use a private bank to offer such finance to suppliers. .

“Now we’re working with four banks on this because adoption of this type of vendor financing has grown significantly over the years, and it could even reach $1 billion in financed volume this year,” he says.

The same ESG principles and approach are applied in the company’s provision of assurance to suppliers.

“Puma has general liability insurance, and that includes product liability. Because most of our production is outsourced, our suppliers must also have general liability insurance,” 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 program, which is a good deal for them.

“For this insurance product, we have also incorporated an ESG link so that it directly relates to how they deal with ESG. a loss is low and, therefore, the lower the insurance premium.

Meanwhile, at diversified manufacturing company Flex, the treasury department has begun to integrate ESG into its practices and is currently considering converting its supplier financing program to a sustainability-linked facility.

“This will enable preferential financing rates for ESG-focused suppliers,” says Christian Bauwens, SVP and Treasurer of Flex.

“In addition, one of our ESG goals is to ensure that 50% of our ‘preferred suppliers’ set their own greenhouse gas emission reduction targets by 2025 and that this reaches 100% of suppliers by 2030, increasing the percentage of Flex suppliers who demonstrate a commitment to reducing greenhouse gas emissions.

ESG Funding

Nonetheless, Bauwens points out that most of his department’s ESG attention so far has been on the borrowing side.

“Flex was among the very first companies in the United States, particularly in technology, to enter an ESG-related credit revolver in January 2021,” he says, noting that treasury developed the measures in partnership with its corporate ESG team.

“Apart from the credit revolver, we have looked at sustainable linked and green bonds, but have not issued any yet due to other options available.”

Puma has also integrated ESG principles into its financing agreements.

“We issued promissory notes in 2020 with an integrated ESG aspect and are also tracking KPIs for our revolving credit facility. In total, 77% of our total borrowing volume is now linked to sustainability KPIs,” explains Waechter.

“This offers a range of benefits: we meet ESG criteria for cheaper funding, and our investor community is larger, which means we have more funding available to us and can be more aggressive.

“Following this type of ESG funding policy also pays off in that it gives the wider group something positive to talk about.”

ESG advice in treasury

When it comes to ensuring that Puma’s treasury team adheres to 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 members of various charter initiatives, such as the Fashion Charter for Climate Change, and collaborate with working groups such as the standard-setting group at the International Chamber of Commerce on Sustainable Trade Finance. .

“As a treasury department, we have to take on the role of internal business partner for other parts of the group, such as procurement, and I am also an active member of the wider group sustainability committee, which has been put in place because it represents a very important subject for Puma.

Flex’s Bauwens adds that its treasury sees banks as a good source of information because, like many large institutions, they now have dedicated ESG teams.

“In addition, rating agencies incorporate the qualities of the ESG plans of the companies they rate into their overall risk assessment,” he concludes. “This means that companies that focus less on ESG strategy, metrics and improvement will be considered to have higher long-term credit risk.”

Shirlene J. Manley