Insight & Analysis

‘Braking’ with tradition on sustainable supply chain finance

Published: Jan 2023

A major German corporate is offering participants in its sustainability-linked supply chain finance programme a choice of ESG rating providers to boost supplier involvement.

Knorr-Bremse is a market leading provider of braking systems and other safety-critical rail and commercial vehicle systems. The company has 30,500 employees in more than 30 countries and generated revenues of €6.7bn in 2021.

Over the last 15 years the company has operated a supply chain finance programme in collaboration with Deutsche Bank that enables suppliers to get their money sooner because the bank pre-finances at attractive interest rates until Knorr-Bremse pays the invoice.

In December, Knorr-Bremse announced plans to link its existing supply chain finance programme to the ESG ratings of suppliers to create more sustainable value chains and ensure suppliers with good sustainability performance benefit from more attractive financing terms.

There are several benefits for Knorr-Bremse in working with suppliers who adopt sustainable business practices according to Chief Financial Officer, Frank Markus Weber.

“To achieve sustainable transformation, ESG must be driven along the entire value chain,” he says. “It is therefore vital to create further incentives for our suppliers to act and operate sustainably. This programme is an important tool for encouraging more suppliers to improve their ESG measures.”

The supply chain finance programme implemented in collaboration with Deutsche Bank has been particularly attractive to suppliers as their financing costs are based on the creditworthiness of Knorr-Bremse, which usually reduces the overall cost.

“Adding sustainability components to the programme increases these financial benefits for the suppliers since those who operate more sustainably are rewarded with even better financial terms,” says Weber. “In this way, the global programme will gradually encourage more and more suppliers to improve their ESG rating.”

Suppliers can choose between two ESG rating providers – Ecovadis and NQC – which makes the programme more flexible than similar offerings. Weber explains that the company has been using NQC as an ESG ratings provider for a number of years for its supplier due diligence.

Although this is the first time NQC has participated in such a programme, its supplier assurance platform is already used by many global automobile brands to assess their suppliers using the corporate social responsibility tools created by the Drive Sustainability partnership (a group of automotive companies that have made a collective commitment to collaborate to improve supply chain sustainability in the automotive industry).

“Since we work with a large number of suppliers, it was obvious to us that we should not rely on just one provider for ratings but to provide a choice for our suppliers,” says Weber. “After all, we are interested in a fast growing number of suppliers driving their ESG efforts.”

The sustainability-linked supply chain finance programme is the third financing instrument with which Knorr-Bremse is specifically promoting sustainability. “With our syndicated loan and our sustainability-linked bond we have already shown how financing instruments and sustainability can be combined in a meaningful way,” adds Weber.

In January 2022 the company concluded its first-ever syndicated loan which included a sustainability component in the structure of the credit facility. The loan of €750m has a term of five years and can be extended by one year up to two times.

Last September, Knorr-Bremse issued its first sustainability-linked bond on the European debt capital markets with a volume of €700m and a tenor of five years. The interest rate of this bond is linked to the achievement of a predetermined sustainability target.

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