How ESG initiatives lift treasury functions
All treasury departments seek operational and financial gain, but those initiatives that improve the environment and client satisfaction, or have social impact, stand out
Achieving operational and financial efficiency is on every CFO and treasurer’s to-do list in the way they perform their treasury functions. This may come in the form of streamlining the collection process, to implementing automated reconciliation, to rationalizing a banking relationship in order to gain better visibility and control over cash.
At the same time, CFOs and treasurers are now looking at opportunities to implement their environmental, social and governance (ESG) initiatives such as dealing with their suppliers and distributors through the implementation of sustainable supply chain finance programmes. Through these programmes, suppliers and distributors are given financial incentives to enhance their ESG standards.
It’s a win-win situation for all parties, as corporates, through these supply chain finance programmes, are able to negotiate improved payment terms with their suppliers, who in turn, are able to access a reliable source of liquidity with enhanced working capital and reduced financing costs. This is possible without the need for corporates to leverage on their balance sheet.
Another example is where service providers assist clients to meet their sustainability commitments through structuring their working capital requirements to help fund renewable energy projects in ways that are more economical than other funding options.
One of the outstanding supply chain finance solutions evaluated by the board of editors of The Asset in The Triple A Treasury, Trade, Supply Chain and Risk Awards 2019 was the one undertaken by Tom Tailor, a fashion and lifestyle company that provides casual wear in the mid-price range market segment.
The company’s Asian sourcing arm, Tom Tailor Sourcing, had mainly used letters of credit for its purchases, which were heavy in terms of process procedures compared to open account. But to initiate a shift to open account, it needed to incentivize its suppliers.
Tom Tailor’s service provider, BNP Paribas, addressed this issue through the extension of an uncommitted supplier financing programme booked in Hong Kong. It offers an immediate financial incentive for suppliers to accept the shift from letter of credit to open account by discounting their Tom Tailor receivables at an attractive rate based on Tom Tailor’s creditworthiness.
The programme includes a sustainable option which Tom Tailor can activate and this option incentivizes suppliers to improve their ESG standards. Under the programme, the discount rate applying to suppliers is reviewed on an annual basis, and the rate will depend on the supplier’s ESG scoring – thus giving a financial incentive for suppliers to improve their ESG standards. Apart from the undoubted environmental benefits, the scheme also enhances and protects Tom Tailor’s brand image.
In another solution designed for the renewable energy sector, CPI Ronghe Financial Leasing - the group consolidated platform for all of the leasing business of the State Power Investment Corporation (SPIC) of China - sought a financing solution based on the receivables due under lease contracts placed with SPIC intra-group renewable energy companies.
CPI Ronghe’s service provider Deutsche Bank proposed a mid-tenor, with recourse receivables finance facility for the company, under which the German bank provided financing for three years against a pledge of the lease receivables. The repayment schedule is in line with the lease amortization schedule and will be made by the lessees directly into the borrower’s collection account held with Deutsche Bank.
The solution also supported SPIC Group’s renewable energy business – a core focus of its business strategy, which also aligns with China’s overall direction to expand the renewable energy sector.
Another solution addressed the unique challenges faced by Johore Bahru Foon Yew Associated Chinese Schools, more commonly known as Foon Yew High School (FYHS). Service provider United Overseas Bank implemented enhanced cash management solutions to resolve these difficulties. These challenges included a cumbersome receivables reconciliation, primarily due to 60% of the school fees’ collections being transacted via cash and cheques, posing a security risk for depositors.
Another challenge was lack of visibility, with accounts residing in multiple banks. FYHS maintains accounts with seven banks, and the dispersed accounts and banking services hinder the bank from having a single consolidated view of their accounts, making it difficult to monitor incoming and outgoing transactions.
With the cash management solutions, FYHS is now able to bank beyond the physical branches. The combination of the multiple facets of cash management resulted in the creation of a complete end-to-end payables and receivables solution for FYHS.
Meanwhile, the solution offered by IndusInd to Cygni Energy Private Limited (CEPL) in India is very instructive. This shows how service providers can meet a funded working capital facility requirement that enables a SME to manage its procurement and delivery cycle efficiently. CEPL is an incubatee of the Indian Institute of Technology, Madras, and an original equipment manufacturer of solar DC equipment.
The company’s solution ranks high on social impact, providing electricity to areas which either do not have access to electricity or its supply is irregular. Availability of power in these areas also helps generate secondary benefits such as upgrading skills, improving living standards and spawning higher disposable incomes.
To see the list of ESG solutions please click here.
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