So far in 2022 we have seen sharp interest-rate rises, inflationary pressures, looming regulatory change in money markets, ESG-related demands, plus the fallout from the Russian invasion of Ukraine. These are translating into challenges for treasury officers and are all reflected in Calastone’s latest Global Liquidity Barometer survey, writes Ed Lopez
Thanks to the Global Liquidity Barometer, our annual survey of corporate treasury leaders and financial officers across the world, we don’t have to guess what treasurers think about the current financial climate and the tools available to help them manage short-term investments. They tell us they are increasingly concerned about the growing gap between their needs during a period of heightened volatility and what they can achieve in practice.
The Global Liquidity Barometer is a real-world snapshot of the current thinking and concerns of treasury leaders at some of the world’s biggest companies and offers an insight into what comes next. Top of the list comes the broad financial environment – and that represents a significant change. Above all, treasurers today are concerned about interest rates, inflation and the pace of change. There is also a broad-based move to rethink the role of money market funds in short-term corporate investment strategies, not least because of the impact of new regulations in the US and Europe. Add to that growing concern over the ability of investors to meet demands for improved ESG performance and, of course, the pressing desire for digital innovation that delivers simplification, transparency and cost-efficiency.
Clearly, financial conditions are the issue of the moment. A generation has grown up knowing only low rates and low inflation, but that era is now over. Interest rates are the top concern of over half (54 per cent) of our survey respondents and three-quarters (76 per cent) say it is a considerable concern. Almost as many respondents cited inflation as either a first or second-order area of concern (67 per cent). This is not surprising since for many treasurers inflation and interest rates are two sides of the same coin. Together, they are major factors in determining what kind of operational liquidity treasurers need to keep on hand and what the longer-term financing environment will look like.
Other issues rank lower down the scale of importance, although the effect of the conflict in Ukraine on short-term investment through amplification of inflation pressure was cited as a concern by 51 per cent of respondents (albeit most of those responses came from European companies).
The future of money market funds (MMFs) is also a worry. More than half of treasurers (58 per cent) are either using MMFs now or intending to do so this year as one part of their short-term investment strategy. These funds have been a mainstay of the corporate investment space for many years in good times and bad, but there are signs that could change soon. A striking 70 per cent of treasurers are questioning the longer-term future of MMFs as a corporate instrument and new regulation seems to be driving this concern.
With each successive Global Liquidity Barometer, we record higher levels of interest and engagement over ESG and how sustainability will play out in treasury operations. Compliance with ESG policies is still not a leading issue for treasurers – only 22 per cent of respondents rate it as one of the top three affecting short-term investment. This is probably because treasurers still struggle to find short-term investments that are credibly ESG-compliant.
Only 10 per cent of respondents are currently investing in ESG-compliant MMFs (although another 32 per cent have plans to do so), but many treasurers believe that such funds are not yet sufficiently mature to meet corporate ESG demands. Limited choice and lack of transparency about the underlying holdings are behind these reservations. We think treasurers’ use of ESG-compliant investments will grow, especially as regulators in Europe and the US are acting to strengthen definitions and improve transparency. The message from many global treasurers on using ESG funds seems to be ‘soon – but not just yet’. However, the day will come when treasuries play a much greater role in executing corporate ESG strategies.
Last but certainly not least, the Barometer tells us where treasuries stand on digital innovation. We know that the automation gap is gradually closing – but there is still a gap. Setting up MMF trades, entering data into the TMS, actioning payments and confirming settlements are all areas where many respondents say there is either no or limited automation, and in all of these areas fewer than half of respondents report a high level of automation.
Above all what treasurers want is more consolidated single-screen information on issues such as portfolio composition, fund performance, yields and fees. And the great majority of respondents (77 per cent) would like to access this information in real time from their TMS. This is where companies like Calastone have a key role to play in providing the technology to connect all parties and create treasury systems that are truly integrated and function just like the seamless device interfaces to which we are accustomed in the retail banking world.
Visibility and connectivity are vital to addressing many of the treasurer’s rising concerns – and our 2022 survey shows treasurers realise that too.