BSR’s recently published report, Win-Win-Win: The Sustainable Supply Chain Finance Opportunity, delves into the details of an overlooked and potentially significant tool to improve sustainability performance across global supply chains that also benefits all parties involved.
Sustainable supply chain finance is an important opportunity that we hope more companies will implement, so to learn more, we conducted an interview with Charlotte Bancilhon, lead author of the report.
Let’s start with the basics: In simple terms, what is sustainable supply chain finance?
It’s a financing technique that’s used to bridge the payment gap between global buyers and their suppliers. Both parties want to optimize their own cash flow in opposing directions: Buyers want to pay as late as possible, and suppliers want to get paid as early as possible. Banks can provide a solution platform. Through payables finance, the global buyer can put in place a platform – via a bank or a fintech – where their suppliers discount their receivables at a small fee. The supplier benefits from the global buyer’s credit rating and can borrow money at a lower cost. Suppliers using this platform can get paid early (e.g., 10 days vs. 60 or 90 days) against a small fee.
Through this structure, the global buyer can also incentivize their supplier’s ESG performance by offering a discounted rate for the fee. Let’s say a supplier has a better ESG performance, they will pay the basic financing rate of for example 3% and a supplier that has worse performance will pay for example 4%, so the cost of capital would be less for stronger ESG performance.
What can buyer and supplier companies gain from using sustainable supply chain finance?
We called our report “Win-Win-Win,” because if you set it up correctly, it’s a win for buyers, suppliers and banks. It’s a win for buyers because they maximize their working capital while incentivizing sustainability practices in their supply chain. In fact, according to brands that have implemented such programs, it’s the only way to positively incentivize, rather than punish, your suppliers to use sustainable practices.
Taking PUMA as an example, during the first year of its sustainable supply chain finance program, it provided more than $100m in lower financing costs to 15% of its suppliers – those that achieved a high sustainability score.
For suppliers, it increases their access to working capital and provides them with an opportunity to monetize sustainability performance and build a business case for improving sustainability within their own operations. It’s also a win for banks. It’s a new product offering and an opportunity to differentiate themselves from their competitors. Furthermore, many banks have their own goals for integrating ESG into their products, and these solutions help them meet these goals.
Which companies are using sustainable supply chain finance tools so far, and what were their main outcomes?
Currently, two companies are publicly talking about using payables finance in this way: PUMA and Levi’s. Both have set up a partnership with the IFC, which has a specific program around sustainable payables finance. There are a couple of other companies involved in this partnership that are confidential.
Taking PUMA as an example, during the first year of its sustainable supply chain finance program, it provided more than $100m in lower financing costs to 15% of its suppliers – those that achieved a high sustainability score. The impact for sustainability can’t be overlooked: By PUMA’s internal accounting, 94% of its environmental impact is in its supply chain.
What is the potential impact of sustainable supply chain finance if used more broadly?
There are very few companies using sustainable supply chain finance so far, so we believe this is a huge opportunity. Based on our research, it’s a $660B market opportunity. When you consider that 30% of assets under management globally are managed under some type of ESG strategy, we think that ESG integration in supply chain finance can reach the same level in time. We also need to consider that the supply chain finance market is growing at a rate of 15-20% annually.
There are very few companies using sustainable supply chain finance so far, so there is a huge opportunity. Based on our research, it’s a $660B market opportunity.
The buyer companies that are engaged so far are all in the apparel sector. Does that sector have fewer barriers than others to using sustainable supply chain finance tools?
The apparel sector was one of the first sectors to set up sustainable supply chain programs generally. Apparel brands have a good sense of sustainability performance of their suppliers, and who needs incentives most. The sector also tends to have a smaller, more manageable supply chain, compared with for example a diversified retailer’s supply chain. In general, companies with complex supply chains will have a more difficult time measuring and comparing the performance of their suppliers. Even where the data is available, the data is not necessarily comparable.
In addition, payables finance options are particularly appealing for the apparel sector because it tends to be a cash-poor industry where margins are low and both suppliers and buyers are in need of working capital.
Are there other tools that companies can use?
Beyond payables finance, there are two other tools that we’re looking into. The first is trade loans, which tend to be more directly between banks and suppliers. These are usually applied to agricultural trade commodities. Banks are coming up with ways to integrate ESG into trade loans to finance sustainable goods. For example, a bank could provide better terms and better incentives to suppliers that are producing certified green crops or Fair Trade certified crops, etc.
The second are smart contract solutions. These focus on using new technologies like blockchain to provide working capital finance beyond first tier suppliers, for example smaller upstream suppliers. One pilot that is taking place now is in Malawi Tea Sector being led by the Banking Environment Initiative. The tool incentivizes suppliers along the supply chain to put in sustainability data on the blockchain. In exchange, suppliers get access to supply chain finance.
We’ve seen that two of the barriers to having positive impacts on supply chains is the misalignment of the procurement team and the sustainability team and the lack of awareness of these tools.
What advice would you offer a company looking to gain support for supply chain finance? What immediate steps would they need to take?
One of the main barriers to scaling sustainable supply chain finance solutions are the siloes within global companies. Often, teams in sustainability, procurement or treasury departments do not talk to each other. Putting these people in the same room and defining shared goals would be the first advice that we have. From the few events that we’ve done so far, it has been productive to put global buyers, bankers and partners in the same room to define this opportunity.
At BSR we’ve been working with our members to implement sustainable supply chains for the last 25 years, and this report is part of our effort to raise awareness about these opportunities. We encourage sustainability teams to start a dialogue with their internal procurement teams and for supplier companies to explore these opportunities with buyers.