ESG, Technology, FX Risk Highlight HSBC Corporate Treasurers Survey
Posted by Colin Lambert. Last updated: September 29, 2021
HSBC’s 2021 Corporate Risk Management Survey finds that chief financial officers (CFOs) and corporate treasurers are faced with a host of challenges as the world emerges from the pandemic, not least geopolitical risk, ESG, technology and FX risk.
“Our survey finds the rise of protectionism globally and the risk of a prolonged economic downturn from the pandemic as the two main macro concerns for CFOs,” says Holger Zeuner, head of thought leadership EMEA, corporate sales, at HSBC. “To manage the related risks to supply chains and commodity prices, 92% of CFOs are likely to invest resources to manage country and political risk over the next 12 months, while 67% expect to address supply chain risks. For smaller organisations, however, rising inflation and interest rate risks are ahead of any other concern for a lot of CFOs.
“There is, however, cautious optimism about a return to growth, with 79% of CFOs expecting their company to see a positive impact from the development of emerging market economies over the next three to five years,” he adds. “60% of CFOs also think their business will benefit from a strong economic recovery from the pandemic, but, for that growth to materialise, a strong focus on ESG is becoming a necessity.”
The survey gathered responses from 200 CFOs and 433 senior treasury professionals from multinational corporations around the world, and HSBC says that as was the case with its original survey in 2018, navigating uncertainty remains the uppermost question on treasurer and CFO minds. It observes that progress has been made in spite of the events of the past 18 months and that companies’ success was largely due to swift decisions by their relative finance functions. “CFOs and the treasury need to take the lessons they have learned from this experience and determine the best way to apply it to their growth strategies,” HSBC says.
Key amongst these lessons is ensuring the correct data is to hand, “the quality and density of data will increasingly impact the ability to respond to challenges even more effectively,” the report states. Firms also need to prioritise efficiently, HSBC says there are still “hints” that in some areas CFOs and treasurers are not on the same page, namely around ESG and a broader understanding of the company’s long-term priorities.
“The pandemic and its sweeping impact on economic activity, combined with unprecedented monetary intervention, have made macro and market risks incredibly difficult to gauge for companies,” says Rahul Badhwar, global head of corporate sales for HSBC Markets & Securities Services. “The need for clear lines of communication between CFOs and treasurers has never been more critical to secure both the financial health and growth of a business.”
The survey also observes that while “cash is still king”, technology may soon take its place and companies need to invest resources wisely. “If the pandemic has taught us anything, it’s that technology has become essential to the CFO/ treasury relationship,” the report states. “When lockdown conditions were first implemented and remote working became the norm, many companies had to either invest in the technology needed to carry on or risk falling behind. This is not going to change as companies look to the future.
“The treasury is clearly relying more and more on technology to fulfil its function,” it adds. “CFOs expect to allocate more resources to their treasury department going forward, but they need to make certain that the right foundation and systems are in place.”
Unsurprisingly perhaps, given how the issue has risen to prominence in recent years, ESG is now very much a key issue for companies, with executives recognising that a failure to act could cost them their reputations, and the bank says, their futures.
The survey finds that 68% of CFOs say they are likely to invest resources in ESG risk over the next 12 months, this was topped only by the aforementioned country/political risk. Equally, more than 80% of CFOs see ESG principles as important for their financial decisions on capex, supply chains, debt financing, as well as FX and interest rate hedging.
“Given the speed with which ESG has risen to the top of the corporate agenda, the prevalence of sustainable financing is likely to grow over the medium term,” says Zeuner. “However, only 16% of treasurers expect more than half of their gross debt to include ESG criteria five years from now in contrast to the quicker adoption speed anticipated by their CFOs.”
FX risk continues to impact companies, with 57% of CFOs overall saying they have incurred lower earnings in the past two years due to “significant” unhedged FX risk
CFOs have also been forced to revise financing, investment and capital allocation strategies as a result of the pandemic. In their supporting role to the CFO, treasurers have stepped up and taken on more strategic responsibilities. This journey is at a more advanced stage in Europe and Americas, the bank says, with Asian treasurers positioning themselves for such change. In all, 74% of CFOs expect the level of resources (both employees and technology) within their treasury department to increase in the next three years; and 64% in EMEA are “completely confident” that their treasury department has the required skills to play a highly strategic role in their business, in Asia, however, this number drops to just 30%.
With cash again taking on a natural importance in a time of upheaval, the survey finds that 81% of CFOs believe keeping sufficient cash buffers has become a more important treasury duty in the past three years, with 83% saying the same for optimising working capital. Equally, 74% of CFOs rate their treasury’s cash flow forecasting and monitoring as “best in class”, with 58% saying the same about liquidity management.
The pandemic has, again naturally, caused major supply chain disruptions and companies are responding by reversing the offshoring trend and embracing “nearshoring” to ease the bottlenecks. The survey finds that 79% of CFOs have been working with more local suppliers in the past three years, while 78% say they have moved production and logistic centres closer to customers.
This change is also affecting FX risks in the organisations, the survey finds, more CFOs – especially in Asia HSBC says – where 59% have changed their invoicing to suppliers’ local currencies compared to just 30% in both EMEA and the Americas. FX risk continues to impact companies, however, with 57% of CFOs overall saying they have incurred lower earnings in the past two years due to “significant” unhedged FX risk, within which 77% of EMEA CFOs have been impacted. Thus, HSBC says, “A failure to address all facets of FX risk management efficiently continues to have an impact on corporate results.”
The final key finding from the survey is that digitisation has “firmly entered the corporate’s finance function” and will become more embedded – technology has moved from a “nice to have” to a key differentiator for the treasury. HSBC adds that blockchain technology will become a key component.
Overall, 81% of CFOs believe the digitisation of treasury processes has increased in importance in the past three years, and 70% of treasurers agree. 53% of CFOs expect digitisation to give their business model a “large boost” over the next three to five years and 97% expect a future use case for blockchain technology in their company, with easier and leaner trade documentation, payment security and FX management at the top of their list.
“Digitisation is where treasuries can level up their support to the business and free up their time for more strategic tasks,” says Badhwar. “Digitally-led functions benefit from improved insights that can strengthen risk management capabilities. The fact that both CFOs and treasurers point to treasury digitisation as an increasingly important part of their future is a positive step in realising their shared strategic vision.”
In summary, HSBC says that while “the sky is starting to clear” as businesses recover from the pandemic, new challenges may await. “CFOs may want to keep their eyes on the future but to do so, they need a treasury function that keeps its eyes on the present,” the bank says. “Only by balancing these two imperatives will their organisations be well positioned to achieve their strategic goals.”