ESG in treasury management is visible in cash and debt instruments such as green bonds and green accounts. Increasingly, however, the application of ESG principles to trade and supply chain finance is rising up the corporate agenda. CTMfile's Ben Poole spoke with Baris Kalay, head of Trade and Supply Chain Finance for GTS EMEA at Bank of America, about the importance of ESG in the supply chain.
Ben Poole, CTMfile: How have you seen ESG increase in importance for corporate treasurers?
Baris Kalay, Bank of America: Over the past couple of years, the finance industry has increased its focus on ESG. Green bonds have been in the spotlight, as have green loans in the debt markets.
As a natural evolution, the next step was ESG being increasingly more linked with transaction banking activities. In particular, trade finance is one of the fields where the focus on ESG has increased considerably. There is not one meeting we have with clients, from treasurers to procurement managers, where we are not discussing ESG. We explore how we can help our clients think more with an ESG lens when they are looking at their trade finance and supply chain requirements.
BP: What ESG tools are out there for treasurers today?
BK: Changing the way treasurers look at the business, rather than using tools, is a first step. Treasurers are thinking more about how they can run their departments in a more sustainable and ESG-friendly way. There are many ways to do this. One simple example is to use virtual cards instead of plastic cards. Reducing paper instruments and processes in trade finance and treasury is another way to decrease our impact on the environment, which also creates efficiencies for corporates. But this is just the start.
In terms of the treasury tools available, the first step we recommend is for clients to analyse the projects they have in flight, so we can have a project-based strategy. For example, are they working on initiatives that are related to green energy or decreasing water consumption? A few months ago we were in a meeting with a client and I was pleasantly surprised that, for a bottling company, they were very focused on how they used water.
It could also be based on a solution that we can offer to our clients, such as supply chain finance. We can work with clients to look at their supply chain and see where we might be able to help them incentivise ESG-friendly suppliers. How can we use data to help our clients identify suppliers who they can also have ESG discussions with?
Clients are also using indices that are available in the market. There are a number of indices, provided by ESG rating agencies, for example, that clients can look at applying to their business.
BP: It must be quite challenging for corporates to pursue ESG policies throughout their supply chain?
BK: Supply chains are complex. They cover multiple geographies and countries, and years of buyer and supplier relationships. Sometimes procurement managers don't want to change the way they have done business for a decade or more. It is always a struggle to change things, but ESG is increasingly on the treasurer's agenda.
BP: Earlier this year, CTMfile published findings from Bank of America Global Research, looking at the major shifts happening in global supply chains. How does the ESG piece fit in here?
BK: The report makes a good reference to ESG creating tectonic and slow changes, and it covers how ESG-related decisions will be a subset of changing supply chains. That is definitely in line with the increasing focus on ESG that we see in our meetings and client interactions. All these day-to-day interactions, when you add them up, will result in the tectonic changes referred to in the research.
BP: What are the first steps corporates can take if they want to address ESG across their supply chain?
BK: When we initially speak with clients, we encourage them to think about what they want to achieve, based on the industry they are in. Having an ESG focus on supply chains requires time and resources on the client side. So we want to make sure they have a clear understanding of their goals. This could be incentivising ESG-friendly suppliers, or it could be an overall analysis of their supply chain. They might be looking for quick gains that can impact the organisation with some positive outcomes in the short run, such as paperless initiatives, for example.
Secondly, based on our experience, we share market insights and aim to bring the whole bank to our clients. That's why most of our ESG discussions are done with our debt capital markets (DCM) colleagues on green bonds, and with our corporate banking colleagues on green loans. You can't have a siloed approach. We also share our experience in terms of the ESG-related trade finance facilities. Follow-up meetings are important, as clients know their supply chain better than anybody else. This is why, once the strategy is set, we always look to do a deep dive into what we can achieve together. Is their focus more on talking to their suppliers with us, or is it more about looking at the data and how we can help them there? It is a multi-step process, and we like our ESG collaboration with clients to go far beyond the initial meetings, where possible.
These discussions start at the treasury level, particularly in our field of trade finance, but as everyone in an organisation has a part to play in supporting ESG, we have learned that, at the right time, bringing other teams into the discussion is extremely important. For example, procurement teams have the most information on their supply chain and vendors so add a lot of value to selecting “ESG friendly” suppliers. IT departments can also add a lot of value through analysing an organisation’s data. When everyone looks at their work with an ESG lens, incredible results can be achieved.
BP: On that technology point, treasury has heavily focused on automation and digitisation in recent years. There's a perception that the trade space lags a little bit behind compared to the cash management space in this regard. Is trade's digital moment here?
BK: The short answer is yes. But there are some differences between cash management and the trade business that creates this delay. This is because the number of counterparties that touch a trade transaction are much more than the number of counterparties in a payment chain. In trade, you have the forwarders, insurance, shipping companies, and the custom authorities. Bringing all of them to a paperless system or a paperless chain is much more difficult than a basic payment transaction.
However, as you rightly said, the industry has increased capacity in areas such as artificial intelligence, data analytics, and blockchain - all of these as part of the process, and I believe there is no turning back. In the near future, all of these new data environments and technologies may help companies and banks to analyse supplier data in a way that cannot be done today. This will be a very interesting piece to watch.
Through our discussions with our technology partners and vendors, we also want to put ESG on the table. We want them to consider the impact of technology and how it can help corporates and banks achieve a sustainable goals as well as efficiencies.
BP: Are the relatively new bank consortia in this space, such as the Trade Information Network, Contour, and Marco Polo, one of the ways that the industry is moving to address the entire supply chain and all the different connections that you touched upon earlier?
BK: Exactly. It's a very interesting time to be a trade finance professional. Developments such as these consortia are a direct result of banks understanding the need to work together. I'm really excited to see how this will evolve, both in terms of creating efficiencies in trade finance and having a positive influence on ESG within the industry.
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