Despite the disruption brought by COVID-19 this year, companies and treasury teams are continuing to focus their attention on the sustainability agenda. What this means in practice was the subject of a recent sustainability roundtable, hosted by Treasury Today in partnership with Standard Chartered.
Setting the scene, Michael Harte, Executive Director, Trade Product at Standard Chartered Bank, noted that sustainable financing “is probably the most pressing and important topic and agenda that we have in the bank today.”
Sophie Jackson, Treasury Today’s Publisher & Head of Strategic Content, shared some of the findings of Treasury Today’s 2020 Global Sustainability Study. She noted that 61% of the survey’s respondents said that sustainability was reflected in their organisations’ core values, while 43% said some of their partners were engaging with them on matters of sustainability. Nevertheless, over half were having no dialogue – or none that they were aware of – with financial institutions and vendors.
Deniz Harut, a global leader in sustainable finance and Executive Director, Sustainable Finance at Standard Chartered Bank, outlined the Bank’s sustainable finance activity to support financial inclusion and economic growth. She also spoke about the work she is doing to develop a data science-backed gender-smart investment platform, which aims to unlock capital for female leadership initiatives, entrepreneurs and female-led SMEs.
In addition, Harut talked about the importance sustainability will play post-COVID-19: “What we have observed over the past six months is that sustainability will accelerate in its importance. And as we work towards a global economic recovery, it’s no longer just a compliance or risk discussion – it’s more about the future, and the opportunities that it enables to us,” she commented.
Sustainable supply chains
Frank Waechter, Global Director Treasury & Insurance at PUMA, spoke about the importance of sustainability within the company’s supply chain. Noting that sportswear manufacturers typically rely on external suppliers for production, he explained that customers who buy branded sportswear products increasingly expect “that products…are produced in a fair, honest and sustainable way, and also in a safe environment.”
With companies becoming more concerned about the source of their goods and raw materials, Harte noted that organisations are not just looking at their tier one and tier two suppliers – “they’re looking at the suppliers of the suppliers of the suppliers, and they’re really focusing the lens on the deepest raw materials they need to build their own product.”
In the current environment, Harte said there is a lot of interest from clients in this topic, some of which has been triggered by COVID-19. Looking ahead, he said that Basel IV could have the effect of making trade finance more expensive for small suppliers, in addition to the existing trade finance gap. “I think that’s where products like supply chain finance or deep tier financing really come in,” he added.
Financing the supply chain
Demonstrating how sustainability initiatives can work in practice, Waechter spoke about PUMA’s ESG-linked supply chain financing arrangement, which has been in place since 2016 and allows suppliers to access cheaper financing based on their sustainability rating. Key to this was setting the ESG-rating methodology used to rate PUMA-suppliers as an acceptable parameter to influence financing costs for this Supply Chain Financing Instrument. Good ESG-performance of suppliers leads to lower financing costs providing financial incentives for those.
Waechter also spoke about PUMA’s initiative to extend financing to its suppliers via purchase order financing, given that suppliers incur costs well before they send out an invoice. As part of this planned extension of the already existing ESG-linked invoice-based Supply Chain Financing instrument, he said there is a need to replace solvency risk with performance risk – “because if a supplier is not providing good products at an appropriate time, to the right location and in a good quality, we have nothing to sell.”
Harte agreed that by taking financing back to the purchase order, there is a greater opportunity for companies to help suppliers, although this can be hindered by difficulties in getting information away from paper.
As Harut noted, “When buyers, the ecosystem and financing partners come together and are able to establish a tool that facilitates that financing, that to me is the future we would like to see.”
Opening up the conversation
In a question and answer session, Harut emphasised the importance of commitment from the finance function, as well as the need for KPIs, when it comes to success of sustainability initiatives. She also spoke about the role that regulators are playing in shaping the markets.
Participants were invited to discuss the topic of sustainability in breakout rooms before reconvening. Tarek Tranburg, Head of Public Affairs at the European Association of Corporate Treasurers, shared his insights about the regulatory aspects of sustainability. Participants also discussed the need for KPIs and how these should be structured, given that smaller suppliers may be less able to respond to those KPIs than large, sophisticated suppliers.
In closing, Harte noted the high level of interest in this topic across the industry. “From a bank’s perspective, we’re open to talking and listening,” he concluded. “Either we’re working on something right now – or you’ll bring us an idea that we hadn’t thought of, and we can put a proof of concept together.”