Marrying Liquidity, Risk, and Sustainability Objectives

When Covid-19 restrictions began to ease, many of us started looking above the parapet to see what’s next. What we saw was the end in sight for one crisis, but the beginning of another.

The geopolitical and economic turmoil triggered by the war in Ukraine, as well as ongoing supply-chain disruptions, means that business-as-usual feels further away than ever before. As a result, treasurers are redoubling their efforts to strengthen their funding and risk profiles. At the same time, however, the pandemic has irrevocably changed priorities around how organizations—and their treasury teams—do business.

At Standard Chartered, we see companies around the world diversifying their risk and liquidity profiles in several ways:

1. Through a renewed focus on working capital optimization.

With inflationary risks and rising interest rates hammering businesses in many parts of the world, and with those challenges exacerbated by heightened geopolitical risk and uncertainty, CFOs and treasurers are seeking new ways to optimize working capital and boost supply-chain resilience.

One key area in which this desire is taking shape is in their pursuit of policies and tools that help improve access to funding across their supplier ecosystems. Some companies are becoming more assertive in their payment and collections terms, but they’re looking to do so without losing their preferred status with suppliers. Others are looking toward supply-chain finance solutions to inject liquidity into their supply chains.

Meanwhile, companies’ need for liquidity is ballooning in many cases. Management teams across a wide swath of industries are showing a renewed interest in mergers and acquisitions (M&A), which were seen as cost-prohibitive during the height of the pandemic. Likewise, many companies are seeking to make their stocks more competitive by increasing dividend payouts and share buybacks.

Market liquidity is high currently, but that is by no means guaranteed to continue. In fact, we are already seeing corporate cash hoards beginning to see material declines from pandemic highs as a result of recent interest-rate increases. Corporate treasurers are looking at how they can optimize internal funding, and many are leveraging technology to increase their organization’s operational efficiency.

2. By leveraging operational and financial innovations.

In this environment, treasurers are seeking more immediate—and often real-time—access to information and transactions. Digital, instant payments have become a higher priority because of their potential to increase customer choice and convenience, and to enable digital business models. Internal capabilities, such as auto-reconciliation tools, are helping treasurers and finance managers more quickly reconcile and allocate cash flows to customer accounts, freeing up credit and maximizing usable funds.

Treasurers’ choice of financial instruments is also evolving. With interest rates increasing, treasurers are taking a more proactive stance in terms of optimizing returns, and they are seeking greater optionality in their choice of instruments.

Overall, we see treasury groups focusing on growing cash flow and maximizing flexibility during a potentially prolonged period of uncertainty. For example, companies are looking at the most favorable opportunities for short-term cash investments, then using the returns to pay down debt. This is a particularly notable trend amongst businesses that have high levels of floating-rate debt. With the outlook for continued interest rate increases over the near term, this approach is likely to become even more common.

Treasurers are also looking to optimize efficiency and agility in the way they manage their operations. We are seeing a post-pandemic return to investment in treasury management systems, with the objectives of increasing visibility over cash and risk, enabling the use of a wider range of financial instruments, and becoming more bank-agnostic. This is particularly apparent amongst companies in the energy sector as oil prices rise, which both drives inflation and unlocks project investment in areas such as renewables.

3. By aligning sustainability and financial objectives.

Energy companies are not the only organizations seeking to embed sustainability into their investment activities. Environmental, social, and corporate governance (ESG) risks and opportunities have become powerful motivators for treasurers, who are looking not only at how financial products meet the financial needs of the business, but also how they support its sustainability objectives.

Banks are increasingly building suites of sustainable solutions ranging from trade and supply-chain finance to bonds and advisory services that are aligned with the United Nations’ Sustainable Development Goals. For example, sustainable supply-chain finance tools are becoming more prevalent as companies look to simultaneously inject liquidity into their supply chains and incentivize sustainable business practices.

The emphasis on sustainability also extends to funding. We’ve seen significant interest from corporates in new solutions such as Standard Chartered’s Sustainable Account, which enables companies to invest overnight operational cash in sustainable assets that are independently audited. Such funding solutions help treasurers maintain financial flexibility whilst contributing proactively to the company’s ESG agenda.

Ensuring that corporate liquidity and risk management activities align with the company’s sustainability agenda can be challenging for treasurers. Many companies are still adapting their liquidity and risk policies, and the landscape of available solutions is evolving rapidly. Consequently, many treasurers are proactively consulting with banks that are leaders in sustainability to understand the most appropriate solutions that contribute to the company’s ESG agenda.

Karen Hom is a managing director and transaction banking team lead at Standard Chartered Bank. She has 25 years of banking experience across multiple geographies and client segments. She is currently managing the global cash management business for top U.S. multinational corporations across the industrials and oil-and-gas sectors, primarily in Asia, Africa, and the Middle East.

Tarek El-Yafi is a managing director with Standard Chartered, where he is head of Americas cash and trade sales. His team is responsible for helping clients across the Americas grow their businesses and operate efficient, market-leading cash management processes in Asia, Africa, and the Middle East. El-Yafi joined Standard Chartered in 2009; before that, he spent 13 years with Citibank in New York and Texas in senior product management, sales, and relationship management roles.