EuroFinance 2015: A timely message on profit vs sustainability

Three major corporate names – Levi Strauss, Starbucks and Swiss flavours, fragrances and cosmetics group Givaudan – were represented in a debate on the balance between corporates’ drive for profitability and a sustainable finance function. Not that the two are mutually exclusive, said Johan Nystedt, vice president finance and global corporate treasurer at the iconic blue jeans label. “Not only is sustainability the right policy to follow, but it’s also a profitable one.”

Levi’s ‘Better Cotton’ initiative had seen productivity improvements among its cotton farmers, while Starbucks’ vice president and treasurer for the US, Drew Wolff, said that the chain’s sustainability programme originated in the 1990s when Starbucks was asked if its coffee was Fairtrade-certified. Its product was 100% sustainably grown and treasury was involved in all discussions on the issue, liaising regularly with the director of global responsibility.

Stewart Harris, group head of treasury, tax and insurance at Givaudan, told the audience to expect a dramatic change in the tax environment for business over the next five years. “Corporates will need to take a more responsible view of tax and how they distribute profits,” he forecast. “[The OECD’s] base erosion and profit shifting [BEPS] project will look closely at this.”

Harris added that the push for greater tax transparency will impose a greater burden on companies to provide more country-by-country reporting, greater disclosure and more granular information. He hoped that more sophisticated technology and reporting systems would enable companies to rise to the challenge.”

The three panellists were also asked if there were any “corporate role models” that set a high standard on sustainability. Nystedt said that both Nike and Starbucks had done a good job and Nestle was to be lauded on its creating shared value (CSV) strategy. Harris added that major chemical producers had attracted less publicity, but should also be recognised for the steady improvement in their safety performance.

Banks and Basel III

A later morning session on Day Three of the conference was titled ‘Is your bank sustainable’ for your future. As with several other sessions at this year’s conference, the shock announcement last February by Royal Bank of Scotland (RBS) that it planned to wind down its non-UK and Western Europe cash management services, including trade finance, was regularly referenced.

According to Daniel Blumen, a partner of Treasury Alliance Group, the RBS decision is just one of the ways in which the Basel III capital adequacy regime has begun to impact on the banking sector. “Treasury might not be glamorous, but it’s crucial to any enterprise and needs sustainable banking relationships,” he declared. “That sustainability is now under threat from the triple forces of politics, technology and regulation, while Basel III – which is already having an impact – will get much worse.”

Indeed, polls conducted among the audience found that 45% of delegates confirmed that their bank had increased the price of term bank credit in the past six months. Asked ‘have any of your banks withdrawn services in a country’ over the same period, three in four delegates replied ‘yes’.

Blumen highlighted a number of major changes that have been driven by Basel III, although often they had not been directly attributed to the new regime:

  • In the US, the earnings credit rate (ECR) now varies significantly from one bank to another.
  • There is greater precision in selecting the level of revolving credit agreements.
  • Banks are selectively exiting relationships and/or lines of business, which has seen a number of broker dealers “unceremoniously dumped”.

He offered a number of tips to corporate treasurers for maintaining a sustainable relationship with their banks: be open with them (they hate surprises); develop a matrix of business that can be offered to a bank but reallocated as and when necessary; meet personally with the bank and give them access to division managers; and don’t give your business to any bank that doesn’t appreciate it.

Adopting Plan B

Among the companies that have had to find a new cash management bank following RBS’s decision is oil and gas giant Shell. In a session titled ‘How to function when your bank doesn’t. Frances Hinden, vice president, treasury operations for Shell International UK, explained that the group had originally selected ABN Amro as its cash management bank for Western Europe back in 2001. This had changed to Royal Bank of Scotland six years later, following RBS’s purchase of the Dutch bank.

“Earlier this year, RBs informed us that they would no longer be providing cash management services, despite having regularly assured us that they were in it for the long term,” said Hinden. However, they had explained the reasons behind their decision and given Shell the opportunity to select a replacement cash management bank.

She told delegates that Shell ran a request for proposal (RFP) process between April and July this year and asked each candidate bank about its strategy, operations and the profitability of its cash management business (which not all banks had been keen to provide). “The most important question was would they be there in the future?” added Hinden. “It gave us a very different focus from similar tenders that we have carried out in the past.”

It will take Shell around 18 months to find a replacement for RBS and the project must be completed by the end of 2016 when “several hundred thousand customers” will need to be informed of the change. “The cost to the group will be between £3m and £6m, which explains why people seldom change their cash management bank voluntarily,” commented Hinden.

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