The challenge of sustainable supply-chain finance
Previously known as reverse factoring, sustainable supply-chain finance is one of the products currently generating the most interest among both banks and their corporate clients.
If the market for sustainable finance is ever to achieve true scale, it needs to crack the tough nut of sustainable trade finance solutions.
Supply-chain finance (SCF) allows large corporates to leverage their superior credit rating to provide working capital to suppliers via partner banks – a process that has been facilitated by the advent of an array of new cloud- and blockchain-based fintech platforms.
A sustainable component is introduced by offering financial incentives for suppliers that meet certain environmental or social standards.
As multinational companies come under increasing pressure from regulators, investors and customers to take responsibility for the environmental, social and governance impact of their supply chains, SCF programmes offer a neat way to improve sustainability disclosure and encourage improvements in areas such as emissions reduction.
Supply-chain finance makes it very easy to tie financial incentives to behaviours by setting concrete, clear goals
“We are seeing a major drive from clients towards defining their CSR [corporate social responsibility] metrics and then looking at how those key themes can be aligned with their supply chain, which is translating into broad demand for sustainable SCF programmes,” says Heather Crowley, global head of supply chain finance at JPMorgan.
“Supply-chain finance makes it very easy to tie financial incentives to behaviours by setting concrete, clear goals and that’s what corporates want.”
A ground-breaking initiative launched by Puma in 2016, in partnership with BNP Paribas and the IFC, offered lower financing costs to suppliers who achieved a high sustainability score on the sportwear firm’s internal rating system.
Suppliers in developed markets were financed by BNP Paribas, while the IFC supported those in emerging markets such as Bangladesh, Vietnam and Pakistan. HSBC joined the programme in 2019, covering firms in both Asia and Europe.
In the same year, the UK bank was also involved in the creation of a sustainable SCF programme for Walmart, as part of the US retail giant’s Project Gigaton drive to reduce greenhouse gas emissions from its global supply chains by one billion metric tonnes between 2017 and 2030.
Burcu Senel, global head of propositions, global trade and receivables finance at HSBC, says the concept is attracting attention from a wide range of corporates.
“We are having a lot of dialogues about sustainable supply-chain finance across all our regions,” she says. “Many are buyer led, but we are also seeing enquiries from suppliers.”
Wim Peeters of EcoVadis, a leading provider of ESG ratings for global supply chains, agrees that the Puma and Walmart programmes have been “a great source of inspiration” for banks and corporates alike.
“These are the big players, so the fact that they are doing this has been a wake-up call for the rest of the market,” he says.
Yet despite widespread enthusiasm for and discussion of the concept, sustainable supply-chain finance has been slow to take off. Since the Walmart launch, the only high-profile programme to have made it past the planning stage is an initiative by the European arm of Japanese tyre manufacturer Bridgestone, which went live in December.
One global bank that had promised to have several pilot projects up and running by late autumn 2020 admitted in January that they had been either pushed back or abandoned.
What explains the delay? Market participants say it is partly a question of logistics.
As one banker notes, putting any SCF programme in place is a complex procedure.
“It sits across several departments on the client side, including treasury, procurement and accounting, and they all need to share the same objectives, which is not always the case at the start of discussions. And then the suppliers have to be onboarded,” he says.
“When you add a sustainability dimension, you are further complicating the picture. You have to define sustainability objectives for the suppliers that are meaningful, that you can explain and that will align with the objectives of the buyer over the medium to long term.”
Another big hurdle is the difficulty of sourcing sustainability data, particularly from the smaller firms in emerging markets that make up a large part of many multinational companies’ supply chains.
Bridgestone has addressed this by tapping EcoVadis to provide sustainability assessments of its suppliers. Similarly, several firms are reportedly looking to work with CDP, a leader in environmental disclosure, on supply-chain finance programmes.
Other mooted solutions involve innovative uses of technology. In 2019, CISL coordinated a pilot programme, dubbed Project Trado, which saw J Sainsbury and Unilever team up with BNP Paribas to offer preferential supply-chain finance pricing to tea producers in Malawi in return for the provision of sustainability data through blockchain-based platform Halotrade.
Even with such solutions, verification remains an issue for many corporates – a situation that has been exacerbated in an era of Covid-related travel restrictions.
“This is one of the biggest challenges,” says a trade finance banker. “It is why, even though we’ve been having a lot of conversations with clients about sustainable supply-chain finance over the past 24 months, actually getting something live and making it work has been and continues to be a problem.”
Bridgestone taps EcoVadis to add sustainability to supply-chain finance
One of the biggest challenges in setting up sustainable supply-chain finance programmes, for both corporates and banks, has been agreeing on sustainability metrics and ensuring that claims of compliance are adequately verified.
A new programme set up by the European division of Japanese tyre manufacturer Bridgestone and JPMorgan has for the first time addressed this by incorporating scoring by an external rating agency.
Founded in 2007, Paris-headquartered EcoVadis is a leading global provider of sustainability ratings for supply chains. The firm, which assesses suppliers on everything from environmental performance to labour conditions, currently works with more than 500 multinational companies.
Encouraging suppliers to engage with EcoVadis is a key part of Bridgestone’s overall corporate sustainability policy, says Julle Pedersen, the firm’s treasury director for Europe, the Middle East, India and Africa (EMIA).
“We believe the biggest gains in sustainability come through increased visibility and transparency throughout the supply chain,” he says. “We want our suppliers to have an EcoVadis rating so that we can work together on sustainability with them.”
The importance placed on this by Bridgestone is reflected in the fact that the main financial incentives on offer will be awarded for obtaining a rating from EcoVadis, although further benefits will be available to suppliers that subsequently improve their ratings.
The SCF programme had been in the works for two years before going live at the end of December 2020. Bridgestone EMIA received 12 responses from banks and fintechs to its initial RFP in the second quarter of 2020, and awarded the contract to JPMorgan and its fintech partner Taulia in the autumn.
The programme will initially be made available to Bridgestone EMIA’s top 20% of direct suppliers, a group of around 45 firms that together represent around 80% of the division’s total annual spend of $1.6 billion.
Alessandro Camporeale, Bridgestone EMIA’s raw material procurement director, says the response from these initial suppliers – which include companies in India, China, the US and Europe – has been positive.
“So far we have seen quite a good reception,” he says. “Of course, it takes time to explain exactly what we’re looking for, but besides the advantages of effectively allowing participants to discount invoices overnight, the sustainability element is also appealing to our suppliers.
“Most of them are very keen to integrate sustainability, and being involved in such a ground-breaking project is a great way to demonstrate their commitment to analysts, shareholders and other stakeholders.”
The programme will subsequently be rolled out to the rest of Bridgestone EMIA’s direct supply chain later this year and after that to indirect suppliers in industries including transport, logistics and IT.
This is where Taulia, a fintech platform that provides working capital solutions to supply chains, will add value, says Heather Crowley, global head of supply chain finance at JPMorgan.
The US bank announced a strategic alliance with Taulia in April 2020 and subsequently joined a $60 million funding round for the firm in July.
“A key advantage of our alliance with Taulia is that it allows us to reach the whole of a company’s supply chain, from strategic suppliers all the way down to the full tail,” she says.
“Thanks to Taulia we can now go all the way down to the smallest suppliers,” he says. “We wanted to eliminate any excuses for suppliers not to join the programme in terms of the initial cost to integrate platforms, IT, etc.”
Bridgestone EMIA’s programme also incorporates a secondary sustainability element. As well as incentivizing suppliers to improve their EcoVadis ratings, the pricing matrix will generate funds for sustainability projects selected by the tyre manufacturer.
Pedersen describes the initiative as a “win-win-win-win proposition.”
“The fourth win, beyond the direct stakeholders, is for society through the sustainable nature of the programme,” he says.