ESG in the Consumer and Healthcare Sector

ESG in Consumer and Healthcare: The Challenge, Opportunity and Role for Treasury 3 Performance Ultimately, ESG projects should meet the same scrutiny and return hurdles as any investment prioritised to maximise return on invested capital and earnings per share. Could reconciling and delivering on shareholder and stakeholder expectations be the key? The McKinsey report says yes. In August 2019, 181 CEOs committed their organisations to striking this balance by defining a “profit with purpose” strategy, suggesting high-performing ESG programmes are seen as proxies for good management. The same report shows companies paying attention to ESG concerns experience a boost, not a drag, on value creation. A strong ESG proposition correlates with higher equity returns, for instance. Indeed 44% of companies surveyed identify business and growth opportunities as reasons for starting sustainability programmes. Witness Unilever developing a less water-intensive Sunlight dishwashing liquid and sales outpacing category growth by over 20% in water-scarce markets. Better ESG performance also corresponds with reduced downside risk, evidenced by lower loan and CDS 4 spreads and higher credit ratings. So how does strong ESG drive financial performance? Cash flows ESG links to cashflow in five key ways: it facilitates top- line growth, reduces costs, minimises regulatory/legal interventions, increases employee productivity, and optimises investment/capital expenditures. Notably, employee satisfaction positively correlates with shareholder returns: companies in Fortune’s 100 Best Companies to Work For generated 2.3-3.8% higher returns a year against peers over a 25-year horizon. Outlook Investor and consumer activism, alongside a growing awareness of climate change, plastic waste, etc., will continue. Companies can choose to drive enterprise- wide change, from how they source raw materials and hold suppliers accountable to their manufacturing footprint through to how they distribute products in end markets. Can treasury show the contributions it can make in driving these improvements? If the shifts seen recently are any prelude, ESG agendas are sure to influence how shareholders and stakeholders assess their companies. Companies that don’t fully embrace ESG may suffer. Figure 2: Global consumer top 5 ESG themes Figure 3: How treasury can contribute to the ESG agenda 4. Credit Default Swap. Raw material sourcing and circular economy Labour conditions and supply chain Data privacy Appropriate and transparent disclosures Board independence and diversity G 31% E 23% S 46% Source: Citi Research ESG item Item explained Treasury’s role Raw material sourcing and circular economy (E) Growing consumer awareness of polluting nature of raw materials used for the manufacture of goods. Supply chain finance (SCF) and B2B cards with supplier access to liquidity tied to “E” KPI compliance. Direct debit and online collection mechanisms to support emerging rental/subscription/ re-use models. Redirecting rebates from cards programmes to carbon offsetting. Labour conditions and supply chain (S) Consumer industry characterised by labour-intense supply chains with a focus on improving worker conditions (minimum wage, healthcare, training, insurance, etc.). SCF and B2B cards with liquidity access tied to “S” KPI compliance. Targeting tail suppliers (often SMEs) with accelerated liquidity solutions. Leverage instant payment and API solutions for flexible salary payments to gig economy workers. Automated cross-currency payments to influencers and freelancers to realise maximum beneficiary value. Appropriate disclosures (G) Demand for enhanced transparency in reporting and increasing prevalence of ESG metrics in management scorecards. Leveraging tools such as Citi Liquidity Manager and Payment Insights and artificial intelligence / machine learning tools such as Citi Payment Outlier Detection for greater enterprise-wide visibility and control.