Insight & Analysis

Trading for survival: supply chain finance and sustainability

Solar panel field with wind turbines during sunset

The need for businesses the world over to engage with sustainability is obvious. Here’s a take on one traditional solution that can help persuade every trade partner to do its bit.

When a major transport and logistics firm such as Maersk commits to building a totally sustainable supply chain, those that do not see fit to act are running out of excuses. Maersk acknowledges that carbon-neutral vessels must be commercially viable by 2030 if its aim to reach carbon neutrality by 2050 is to be achieved. With over 90% of goods being transported on vessels such as those operated by Maersk, the role played by supply chain participants in setting the sustainability agenda is vital.

It follows that it is of extreme importance that the financial services sector has a role in facilitating such goals. Has it got anything to offer? Natasha Condon, Head of Trade Sales, Europe, Citi speaking at a recent trade finance media briefing, believes it has.

Condon notes that sustainability may have been on the radar of corporate clients for a while but only relatively recently have they shown “real interest” in this subject. “Whilst I am sure many are doing so for the best reasons, I also think now that there is recognition that companies showing that they are performing sustainably are also financially performing better; there are hard-nosed business reasons to promote sustainability too,” she says.

Old solution, new purpose

One way in which commercial and sustainable needs can be met is by leveraging a well-run supply chain finance (SCF) programme. This, argues Condon, “can help push sustainability objectives along the supply chain”.

Indeed, with many large corporate clients buying from sectors such as agriculture or textiles, or operating in the energy supply chain where climate change is a sensitive topic, she believes SCF presents an opportunity to promote and facilitate Environmental, Social and Governance (ESG) objectives right across the board.

With this in mind, Condon explains that many companies are now realising that “a well-designed working capital solution” – for either the purchasing or sales side – gives the company negotiating power with its suppliers or buyers respectively.

“Traditionally that power will have been used for working capital purposes, to secure a discount or increase sales,” she notes. “But for those corporates who decide to adopt sustainability as a primary goal, it gives leverage to promote that,” she believes. With “several clients actively looking into how they can formalise that approach” as part of their work with the bank, momentum is gathering.

Encouragement

Anecdotally, the sectors currently showing most interest are in the consumer space, particularly those, as already mentioned, with an agricultural supply chain, notes Condon. Here, thoughts are turning to the responsible sourcing of environmentally sensitive commodities such as palm oil. And in textiles too, there is an ESG-driven global trend for corporates to encourage better working conditions for their suppliers’ manufacturing staff.

In both cases, Condon says major buyers can help to ensure their suppliers are conforming to higher ESG standards by offering financial incentives to do so through an SCF programme.

Time to act

With the Asian Development Bank highlighting an estimated US$1.5trn gap in unmet trade finance demand, it should be driving corporate consideration as to how to support suppliers. But, as Condon has explained, that gap clearly has a connection with sustainability, whereby both funding and ESG issues can be met through a product such as SCF.

Peadar Mac Canna, EMEA Co-Head Trade Finance, notes that over the past few years, the cost of providing traditional trade risk solutions, such as letters of credit, has increased. It has done so partially on the back of rising AML and KYC screening costs, and costs of maintaining a correspondent banking network. Snowballing costs makes it “increasingly challenging” for enterprises in emerging markets to source competitive financing, and for sellers to manage trade risk.

Indeed, with costs increasing, Mac Canna notes that many banks have retrenched from that business. “We haven’t. We invested in our technology (largely through a strategy of automation, with the roll-out of a global platform and digitisation with OCR and Artificial intelligence) so we are still providing a huge amount of financing, through our correspondent banking network, into that supply chain to help growth.”

Broader view

The banking sector can further incentivise clients to adopt good ESG practices through the preferential finance deals made available by banks such as ING.

However, currently, Citi has “broad-based targets” for the support of sustainability. But these, says Mac Canna, “are increasing year-on-year”. He points to the capex projects supporting sustainability targets – Maersk’s commitment, for example, amounts to a considerable sum – and, to this end, says that Citi’s export and agency finance team “is very visible in the shipping space, supporting many such projects”.

That support, he continues, extends to other sectors where, for example, clients have been financially supported in the building of new plants to develop and manufacture battery power. Here, suppliers have also benefited from the financing of working capital capacity needed to help them supply major OEMs.

It is apparent that by enabling access to finance where it is most needed, through traditional tools such as SCF, and by engaging with clients on how best to use the available financial resources, banks have a role to play in keeping sustainability firmly on the agenda. Treasurers, it follows, have a duty to demand the right products from their banks.

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