Emerging environmental influence in treasury   Stockholm surveys emerging environmental influence in treasury Summer 2008 The emerging influence of environmental and corporate social responsibility (CSR) issues in treasury featured significantly in ‘The New Corporate Treasury Environment’, EuroFinance's annual conference on Cash and Treasury Management in the Nordic and Baltic Regions, held recently in Stockholm. Key sessions addressed corporate responses to climate change and carbon trading.   “Green revolution” The scale of the climate challenge - removing 27bn tons of annual carbon emissions globally by 2030, a 15-fold increase in carbon productivity – led Arne Mogren, Head of Climate Policy at Swedish energy utility Vattenfall, to suggest that nothing less than a third, ‘green’ industrial revolution is needed. Despite this, he was notably optimistic.   In ‘CSR Comes to Treasury – Responding to the Key Challenge of Climate Change’, Mr. Mogren sought to “demolish” a number of what he characterised as myths about carbon “abatement”.   In particular, he argued that abatement potential is well spread across the global economy by sector and region, and that in many cases abatement will stimulate rather than compromise economic growth; of course, the corollary is that growth is likely to decline if no action is taken. With this in mind, he noted that the cost compares favourably with spending on areas such as defence, insurance and aid.   Emissions trading mission In a companion session, treasurers from two companies already active in the area shared their different experiences of emissions trading – a topic that has gained ground in Nordic/Baltic corporate treasury debate like no other, despite being more marginal even than weather derivatives two years ago. Now emissions trading and the related suite of environmental finance issues are increasingly talked of as a future core treasury competence like FX management.   Even so, initial experiences of the emissions market at Ahlstrom – which has 16 factories within the EU’s emissions trading scheme (ETS) – were of “a totally new world for treasury”, according to Annika Westerholm, Director, Group Treasury Operations. Challenges included obtaining reliable emissions forecasts in order to construct basic data about the engineering company’s position.   A further difficulty is the relatively short horizon of the political agreements underlying most schemes, notes Tamiko Hutchinson, Assistant Treasurer, Greater Europe, Middle East and Africa at Intel. The cost of a wind farm is too great to fit into the five years covered by current rules, for example.   The micro-chip company, an early member of the voluntary Chicago Climate Exchange, is carbon-neutral. But it is already considering a reduction of 20-30% in the US.   In contrast, companies that are significantly short of carbon allowances are unlikely to be able to buy sufficient cover for their exposure in the market – they will have to consider earning credits from measures such as opening factories in Africa, commented Philippe Freund, Director, Carbon Services at the strategy consultancy BeCitizen.   The wide-ranging discussion also took in outsourcing, accounting, spread risk, fungibility, issued and non-issued credits, the likelihood of US and emerging market schemes, and the post-2012 outlook.   A new operating environment Other important topics at the event, which was marking its eighth year, illustrated its broadest theme of a new operating environment for treasury. This incorporates the growing number of increasingly complex disciplines for which treasurers are responsible or in which they are involved - as the conference’s Special Guest Chair, ECD Insight partner and former CNBC MarketWatch host Axel Threlfall, noted.   These topics included operating business co-operation, pensions, non-financial risk, supply chain, e-invoicing, capital restructuring, Swift’s Standardised Corporate Environment (SCORE), supply chain, working capital, SEPA, emerging markets currencies, the US dollar’s performance and outlook, the global credit crunch, FX and interest rate benchmarking, treasury technology and spreadsheet risk.   Leadership requires relentless innovation One of the conference’s clear highlights was its keynote address. Marcus Wallenberg, Chairman of the Board at SEB and Chairman of the International Chamber of Commerce (ICC), argued persuasively for globalisation, technology and innovation as the key drivers of long-term change – and contended that European companies are failing to match the research and development (R&D) investments of their Asian and US peers.   Strikingly, Mr. Wallenberg’s ‘Embracing the New Environment’ address was made without notes or slides. In it, he argued that retaining global leadership in the face of the competitive threat delivered by globalisation requires constant innovation, as well as a willingness to fail that is more typical of US attitudes to risk and which he believes European governments should support. Equally, he dismissed the idea that price is the only competitive parameter in the new environment.   Instead, he cited initiatives such as the new ‘Nordic Climate Cluster’, a group of 16 Norwegian and Swedish companies that are seeking to create a global centre of excellence in the area of clean technology.     Moreover, Mr. Wallenberg cited treasury as an important part of the “relentless pursuit of excellence” that characterises global leaders. Eliminating costs is one contribution treasury professionals can make, he suggested; more generally, they can work towards achieving the same efficiency in capital that top-performing companies manage in their operations.   Satisfying investors and competitive demands in this way is a recipe for “real sustainability”, he suggested.   Bringing the Baltics back to sustainable growth Another highlight was an analysis by Christoph Rosenberg, the International Monetary Fund (IMF)’s Senior Regional Representative for Central Europe and the Baltics. While acknowledging that Estonia may already be in recession and arguing that private-sector forecasts for all three Baltic states need to fall further, Dr. Rosenberg made a compelling case that ‘The Baltics Party Need Not End in a Bust’.   In his view, the Baltic states’ current slowdown was much needed as their credit expansion-driven growth had reached “unsustainable” levels far beyond their intrinsic potential. He emphasised the three countries’ very large current account deficits and very rapid inflation, which raises the risk of stagflation as growth slows.   Nonetheless, the IMF sees the region’s problems as very different from those previously experienced by Portugal and in Asia. This is due to their EU membership, open capital markets, labour mobility and currency pegs. The latter, combined with limited liquidity in Baltic currencies and ERM2 membership, has deterred speculative attacks and pushed hedge funds instead to short more liquid proxies like the Romanian leu.   Accordingly, Dr. Rosenberg sees scope for a soft landing this year – though the decline will still be sudden and painful.   In addition, SEB’s high-profile Chief Economist Robert Bergqvist was found ‘Making Sense of the Macro Mix’. A former central banker with Sveriges Riksbank, Mr. Bergqvist addressed recession in the US and slowdown in Europe, but saw prospects of faster-growing countries helping to sustain global growth.   Corporate best practice from cash & capital to pensions          The event’s key corporate presentations included a ‘Cash Management Masterclass’ from Philips. The Dutch electronics giant’s ‘Expert Cash Strategies’ – presented by Martina Markmann, Head of Global Liquidity Management – focused on its development of a single ‘Global Cash Management Cluster’ over several years.   The cluster now centralises all of the company’s available cash worldwide every day. It is founded on a zero-balancing global cash pool structure with an in-house bank and relies on one local cash management bank in each of the 30 countries integrated, one bank account per reporting unit and the minimising of physical transfers. Measured by opportunity cost, it has reduced costs by 25% in two years.   Despite the technical sophistication of Philips’ system, Ms. Markmann emphasised the importance of “getting a feeling for cash” – a trader-like intuition about likely flows that also contributes to the company’s ability to generate a daily global cash figure that its money market team can base its liquidity investing on.   Another notable presentation came from another household name company, Electrolux. In ‘Collaborating to Cope with the Pension Problem’, Mikael Friberg, Head of Corporate Finance examined the household appliance manufacturer’s approach to managing the pension liability for its 57,000 global employees.   The SEK2.2bn value at risk (VaR) of this SEK20bn liability is exceeded only by its balance sheet FX and raw materials exposures. In view of the potential impact on its operating margin if its funding position were increased by the VaR figure, the company has sought to lower its risk without increasing its costs (as a result of lower expected returns) – particularly by lowering interest rate exposure.     Treasury plays a key role in this. Its pension group monitors risk and results and proposes strategic and tactical changes in the company’s defined benefit schemes.      In ‘Managing the Company’s Capital Restructuring’, Atlas Copco addressed its recent share and bond buy-backs. Like SEB and Electrolux, Atlas is a major Swedish company from the industrial grouping around the Investor AB holding company. Group Treasurer Ken Lagerborg explained how strategic transactions in 2006-07 (a large divestment and a significant acquisition) took it from a net cash position to net debt.   This “triggered the need for treasury to take action” – which comprised determining the appropriate capital structure for maintaining the company’s credit rating (A-), optimising the use of excess liquidity and implementing a funding plan. The plan hinged on creating “competitive tension” between multiple debt markets, Mr. Lagerborg explained.