Recognition of the environmental impact of upstream and downstream supply chains is encouraging corporates to incentivise sustainable practices.
It is widely accepted sustainability is playing an ever-increasing role in corporate business strategy. In response, the 25 largest European and US banks have set sustainable finance targets amounting to approximately €13trn by 2030.
From a supply chain perspective the most important element is Scope 3, which includes all other indirect emissions that occur in the upstream and downstream activities of an organisation and is also referred to as ‘value chain emissions’.
Corporates usually have little control over their downstream value chain, but they can leverage their buying power to influence the behaviour of their suppliers.
Chris Cox, Global Head of Trade and Working Capital Solutions at Citi explains his bank previously saw sustainability considered primarily when making investment decisions – such as buying plant and machinery to create infrastructure in line with sustainability goals – whereas now it is a growing part of businesses’ overall operating models and there is increased focus on the importance of ESG in working capital financing.
The main task involved in linking supply chain finance programmes to the ESG ratings of suppliers is aligning the structure of the programme to the sustainability requirements of the corporate’s procurement department says Anil Walia, Supply Chain Finance EMEA at Deutsche Bank.
In converting an existing supply chain finance programme to a sustainable supply chain finance programme, suppliers need to be informed and educated about the changes and the benefits, especially as these changes often relate to the discounting margins, he adds.
“When setting up a new programme the rules are embedded into the initial structure,” says Walia. “The right provider will have the know-how and resources to make this a smooth process for the buyer and the supplier.”
Citi manages more than 4,000 buyers globally with over 90,000 suppliers across more than 85 countries.
“The real challenge is to work with clients to provide optimal governance when monitoring commercial trade flows to ensure sufficient oversight and alignment with ESG standards,” says Cox. “All of this is incremental over and above the existing processes, both at financer level as well as at buyer level to encourage inclusion of sustainability in their working capital flows.”
Sustainable supply chain finance programmes are emerging across all types of industries. For example, Levi Strauss & Co’s sustainable supply chain finance programme led to 21 suppliers receiving funding worth just over US$142m in its first year, with 16 of those suppliers receiving lower interest rates based on their effective sustainability performance.
Late last year, multinational building materials company Cemex signed an agreement with BBVA Mexico to make a revolving line available to approximately 3,000 suppliers who can access preferential rates by demonstrating best ESG practices.
In August 2022, Coca-Cola Europacific Partners became the first major beverage group to set up a sustainability-linked supply chain programme, while energy company Eni made a new digital and sustainability-related model available to its suppliers earlier this month.
The incentive offered to suppliers to participate in such programmes is in the form of a decreasing financial cost as their ESG scores improve – the wider the range between a ‘red’ and a ‘green’ supplier around the average margin, the more effective the incentive.
“As the average margin reflects the creditworthiness of the buyer, this range can vary,” says Walia.
“Furthermore, suppliers are securing their business as buyers are looking for improvements in ESG credentials along their value chain and making this a selection criterion.”
Citi’s sustainable supply chain finance programme provides independently assessed sustainability scores and indicates improvement areas. Qualifying suppliers can access financing at preferential rates, including integrated purchase order financing, deep-tier supplier financing, dynamic discounting, and receivables financing.
