The importance of taking an integrated approach to sustainable trade finance
In the second in a series of articles, Leo Weng, treasury director, APAC, at Avery Dennison joins Rakshith Kundha, head of trade and supply chain finance, APAC, global transaction services at Bank of America, to discuss the importance of driving ESG goals across the supply chain.
Asia-Pacific (APAC) accounted for more than two-fifths of the global supply chain finance market last year and is expected to grow rapidly over the next decade. This growth is being fuelled by constant innovation, a continued focus on resilience and diversification as well as the drive for cost efficiency and the emergence of new centres of demand.
At the same time, the commitments made by most major economies towards net zero, as well as an increased focus on environmental, social and governance (ESG) issues by stakeholders, mean companies are increasingly looking at ways to help their supply chains become more sustainable.
“Whether it is in relation to the UN Sustainable Development Goals or net zero commitments, ESG is now a key focus area. Clients are not just focused on GHG emissions but on the social aspects of supply chains as well,” says Rakshith Kundha, head of trade and supply chain finance, APAC, at Bank of America.
When we work with our clients, we are not only showcasing best practices but also actively engaging with them at various points of their ESG journey
In this context, sustainable supply chain programmes are increasingly becoming a focus area.
While there are many different definitions of a sustainable supply chain programme, it can describe a programme that helps finance purchases that drive ESG goals (such as production of clean energy or reduced pollution) as well as programmes where there is a specific construct that helps incentivise certain ESG-related behaviours by suppliers.
In this scenario, there is usually a differentiated discount rate for suppliers based on meeting specific ESG criteria which are regularly measured and assessed on a periodic basis by an independent third-party organisation.
“As an organisation, when we work with our clients, we are not only showcasing best practices but also actively engaging with them at various points of their ESG journey, whether that be market research, sustainable financing, M&A, carbon credits, or working capital management,” says Kundha.
"Supply chain is an area that comes up frequently as a specific focus area and our conversations go beyond just the solution. It starts by working with clients to define the scope of their programme, the frequency and methodology of assessments as well as bringing efficiencies to the entire procure to payment process. Once it is up and running we partner with clients to communicate the benefits to their suppliers.”
The financial incentives in a sustainable supply chain finance solution may be enough on their own, but combined with other policies that the buyer has around purchasing, this serves as a carrot to drive the appropriate behaviour towards ESG goals. Communication from both the bank and the client helps address any concerns the suppliers might have.
“In the early stages there will be some additional expenditure, whether that is because of the use of clean energy or enhancing sustainability practices. However, the consequences of not becoming sustainable is increasingly evident” says Kundha. “To assist clients in this process we continue to work to make the product as easy to implement as possible.”
Sustainable supply chains
The Avery Dennison Asia team have always been excellent at introducing process and technological change to achieve their goals.
Avery Dennison, a global leader in the design and manufacture of labelling and functional materials, is one such client that Bank of America has worked with around supply chain finance. ESG has been a key focus for the company and with many of its suppliers located in Asia, the treasury department has been proactively encouraging them to improve their ESG performance through measurable metrics.
“Our partnership with Avery Dennison goes back many years,” says Dino Albuquerque, managing director of corporate banking subsidiaries, Bank of America. “The Avery Dennison Asia team have always been excellent at introducing process and technological change to achieve their goals. This is especially evident in the design and implementation of their sustainable supply chain management programme, which contributes to Avery Dennison’s wider ESG strategy.”
The company partnered with Bank of America to design a sustainable supply chain finance programme that would enable suppliers that met externally validated ESG criteria to access more favourable interest rates on the early payment of invoices. Buyers transmit their invoice details electronically through Bank of America’s CashPro Trade platform.
For Nirmal Khaderia, Bank of America's head of corporate banking subsidiaries, APAC, the solution used by Avery Dennison is one of the best of many examples where the bank is helping its clients along their ESG journey.
“Some key suppliers are on this programme and we continue to onboard more suppliers,” explains Leo Weng, treasury director, APAC, at Avery Dennison. “In terms of incentives, Avery is prioritizing our business suppliers who have higher scores.”
Avery is helping to drive change across its global supply chain and - by incentivising sustainable practices - enabling suppliers to establish a business case for furthering their sustainability efforts.”
He acknowledges that there are some additional costs in getting a certification from an independent certifier – suppliers are currently scored by a third party agency based on their ESG footprint and process.
“However, at Avery we look at this holistically in terms of the benefits across our entire ecosystem,” says Weng. “Avery is helping to drive change across its global supply chain and - by incentivising sustainable practices - enabling suppliers to establish a business case for furthering their sustainability efforts.”
Supply chain finance is integral to the working capital cycle of any corporate – funding this chain efficiently is essential for the smooth running of any company and has historically been one of the key objectives of the corporate treasurer. In recent times, with the focus on ESG, the ability to work with reliable partners to incentivise change through various tools and policies is also emerging as a key priority for a treasurer.
This is the second article in a series of three. In the next and final article, Bank of America explains and demonstrates the work the bank is doing to match investments with sustainable assets.