The challenge
Henkel has long-monitored and influenced the sustainability of its supply chain through its procurement practices. In 2021, the company went one step further when it approached Deutsche Bank to convert its existing supply chain finance (SCF) programme to a sustainability-linked SCF (SSCF) programme that went live in May 2022. Deutsche Bank has been running a large SCF programme for Henkel in Europe since 2012, enabling suppliers to discount their receivables against Henkel and receive early payments. The cost of discounting or the ‘discount margin’ is pegged to Henkel’s credit risk and is almost always lower than the suppliers’ own funding costs.
Now the new SSCF programme goes a step further by also linking the discount margin to the ESG score of the supplier. Suppliers with better ESG scores pay lower margins, providing a financial incentive to improve their sustainable behaviour. The process aggregates to an improvement in sustainability within Henkel’s supply chain. By year-end 2022, Henkel has converted all its regional SCF programmes in APAC, North America, EMEA and Latin America to SSCF programmes.
The solution
Changing an established financing structure for several hundred counterparts or suppliers is daunting. Yet, through a combination of technology (self-generated documentation, customer support videos) and a streamlined transition process, Henkel introduced a transparent and simple solution for which all onboarded suppliers are eligible.
A one-page ‘plug-and-play’ ESG schedule to the existing receivables purchase agreement is available to suppliers via the bank’s online portal. Deutsche Bank accesses the suppliers’ ESG scores directly from the EcoVadis platform and suppliers receive a reduction in their margin based on their ESG score grouped into four tiers.
The bank then adjusts the discount margin automatically as the ESG scores changes, informing the supplier.
Apart from updating ESG ratings annually, additional intervention from the supplier is not required. Meanwhile dedicated staff support the suppliers in understanding the programme. The solution is the first truly global programme that combines existing ESG ratings for suppliers in the purchasing organisation with a financial incentive scheme for supplier financing, creating a coherent assessment across multiple dimensions. While ESG ratings are more general and encompassing, they are also better at setting a mid-term incentive to improve over time than achieving one-time goals set by KPIs.
Best practice and innovation
Henkel’s sustainability-linked SCF programme addresses several burning issues present in today’s world. For example, the present economic instability underlines the necessity of reasonably priced and readily available funding to small and medium-sized enterprise (SME) suppliers worldwide. Sustainability is no longer just a buzz word for a new way of doing things, but an existential necessity. One of the most contentious discussions on the global stage is the north-south and the east-west divide, with outstanding questions including who pays the cost for improving sustainability, and who is responsible for driving it.
With this solution Henkel is proactively tackling these challenges. Through its global SCF programme, Henkel uses the power of its balance sheet and good credit rating to provide its suppliers globally with funding and financial stability. While Henkel is not alone among its peers in setting up SCF programmes, it is one of the pioneers in using the SCF programme to promote and actively incentivise sustainable behaviour among its suppliers.
In doing so it attempts to find answers to the questions of “how” we address sustainability, and “who” should drive this.
The KPIs in the sustainability-linked SCF programme are not just linked to the environment, but the whole concept of ESG – including the social and governance components. The programme structure is flexible, and these rules of engagement are subject to change as the market demands.
Key benefits
