Insight & Analysis

Building ESG into supply chain finance

Published: Feb 2021

From supporting small businesses to incentivising suppliers to adopt more sustainable practices, supply chain finance has a role to play in helping companies further their ESG goals.

Supply chain with a bright sunrise

It’s no secret that ESG has risen up the corporate agenda in the last year. Data from FactSet that was cited in a recent WSJ article found that 20 S&P 500 companies mentioned ESG or sustainability in earnings conference calls between October and December 2020, up from six companies three years earlier.

But this topic is not just a buzzword, and companies are looking for real ways to improve their green and sustainable credentials. According to Treasury Today’s 2020 Global Sustainability Study, 61% of respondents say sustainability is reflected in their organisations’ core values – and 43% reported that their partners are engaging with them on this topic.

One area which has the potential to help companies meet their ESG goals is supply chain finance. Mark Douglas, Managing Director, Strategic Accounts EMEA at PrimeRevenue, says that there are opportunities for companies to harness SCF both to improve their own ESG impact, and to influence the behaviour of their suppliers.

“The use of supply chain finance as a means to make sure you’re treating your suppliers with the appropriate level of care is starting to have real value,” says Douglas. “Through the lens of ESG, having standard payment terms with your suppliers, but also being able to give your suppliers the option to get paid when they like, is a way of being a good steward of those businesses – particularly small businesses.” As such, he says the firm is focusing on providing liquidity to a broader range of suppliers.

Where the upstream impact of supply chain finance is concerned, there are further opportunities to further companies’ ESG goals. One area of exploration is the use of ESG rating methodologies to determine which level of funding individual suppliers will receive – a topic that was explored in detail during a recent Treasury Today virtual roundtable. Frank Waechter, Global Director Treasury & Insurance at PUMA, explained the mechanics of the company’s ESG-linked supply chain finance arrangement that was developed with BNP Paribas.

Red, Amber, Green

While PUMA may have been an early adopter – the programme was first launched in 2016 – the idea of building ESG performance into supply chain finance is gaining traction. “Most of our customers are thinking about how you could put a ratings regime in place across the supply chain,” says Douglas, adding that this could enable suppliers that score well to gain access to green funding and sustainable funding.

Douglas explains that ESG scoring often works on a Red, Amber, Green (RAG) scoring model. In the context of supply chain finance, a company might have a standard pricing structure for suppliers rated as amber, while red suppliers might be offered a different price – or might not be eligible for supply chain finance at all.

“Then for suppliers who are ticked off by a rating agency as green, we’re confident we’ll be able to raise sustainability-linked funding which will hopefully carry a really attractive price for suppliers to aim towards,” he adds. As such, an important part of the structure would be the need for clear communication with suppliers to ensure they understand how they can improve their ratings.

Looking forward

At this point it is early days for the opportunity to incorporate ESG into supply chain finance – not least because of the lack of an industry standard. But while much activity is exploratory at this stage, Douglas says there is plenty of engagement from customers and funding on this topic.

“I think this has gone from something which is a nice-to-have to a genuine revolution,” he concludes. “I feel that in 20 years’ time we will look back and be amazed that anyone could raise funding in a business that isn’t carbon neutral, or on the way.”

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