supply chains

The Banker brings together trade and supply chain finance experts from five global transaction banks to discuss the growing importance of ESG in supply chains and how a focus on sustainability can improve the relationship between corporates and their suppliers. 

Sustainability, in all its many forms, is increasingly important for banks, corporates and society as a whole. Banks are focused on helping clients achieve the transition to a more sustainable future by rooting environmental, social and governance (ESG) practices deep into their supply chains. The Banker has polled several trade and supply chain finance experts for their insights on the critical role banks and supply chain finance can play in driving change.

Participants

  • Parvaiz Dalal, global head of supply chain finance, treasury and trade solutions, Citi
  • Kai Fehr, global head, trade and working capital, Standard Chartered
  • Duncan Lodge, global head of traditional trade and Europe, the Middle East and Africa head of trade and supply chain finance product, Bank of America (BofA)
  • Sriram Muthukrishnan, group head of product management, global transaction services, DBS Bank
  • Surath Sengupta, global head of financial institutions, portfolio and distribution, global trade and receivables finance, HSBC

Q: Why is ESG such an important issue for banks and corporates today?

Parvaiz Dalal: Integrating ESG factors can help companies facilitate top-line growth, reduce production costs, align with emerging regulatory trends and increase employee engagement. Being seen as a strong ESG company can optimise investment and funding opportunities through attracting a broader range of financial institutions. For our part, Citi is committed to helping clients achieve their sustainability objectives, especially with respect to supply chains and environmental challenges. In July 2020, we launched our 2025 Sustainable Progress Strategy to support the transition to a low-carbon economy.

Kai Fehr: Our clients and stakeholders are driving the change. We saw heightened focus on ESG issues, such as labour norms, diversity in the workplace, corporate governance and climate change, accelerated by Covid-19. This has, in turn, created opportunities for companies in clean technology. Investors are seeing this opportunity and capital has started flowing into such businesses. Given these changes in the industry and regulations, if banks and corporates fail to adapt or change their business model, there may not be a business to run in the long term.

Duncan Lodge: ESG is probably the most important topic of our time. At  Bank of America (BofA), ESG is embedded in our business lines and reflects how we help fuel the global economy, build trust and credibility, and represent a company that people want to work for, invest in and do business with. When it comes to our clients, research has found that companies that apply ESG are more profitable, less risky, have lower client attrition, and have higher employee and customer satisfaction — their profitability consistently seems to be better.

ESG is not just important: it’s an existential issue for banks, corporates and society at large

Surath Sengupta

Sriram Muthukrishnan: The ESG focus has reached a tipping point, globally. Regulators, investors, end-customers and various other stakeholders are driving an increased expectation from companies to adhere to better business practices with measurable sustainable outcomes. By leveraging digital solutions to aid visibility and transparency of both supply chains and adherence to sustainability metrics, companies can deepen engagement with their customers, reduce risk and imbue trust across their supply chains. Our objective is to support clients transitioning towards more sustainable business practices by partnering them in their journeys towards defined sustainability goals.

Surath Sengupta: ESG is not just important: it’s an existential issue for banks, corporates and society at large. We need to embed an ESG focus into every aspect of our lives. From a corporate standpoint, with more than 80% of the emissions coming from supply chains, there is a real need and an urgency for corporates to focus on transitioning their supply chains, as well as their own transition, to a sustainable future. Financing and banking have a critical role to play. We can be a powerful lever to drive this change.

Q: How do you define sustainable trade and supply chain finance (SCF)?

Mr Sengupta: Sustainable SCF is about enabling companies and suppliers to embed sustainability into every stage of their supply chains, including sourcing, manufacturing, processing and transportation. Access and availability of financing across the value chain is one of the biggest challenges in trade financing. An integrated approach to financing that balances ESG principles, transparency, measurement and practical tools to implement solutions is the ultimate goal. HSBC is focused on developing holistic solutions to help our clients transition their global value chains and supporting financing deep into their supply chains.

Mr Muthukrishnan: It has three components: track-and-trace, certification and financial incentivisation. This allows large corporates to leverage their superior credit rating and buying power to provide working capital to suppliers through their partner banks, while at the same time enabling and incentivising the achievement of agreed sustainability goals. With greater traceability enabled by blockchain and other technology, it is possible to provide detailed, verifiable evidence of sustainable practices, while completing the financing and settlement processes simultaneously.

If banks and corporates fail to adapt or change their business model, there may not be a business to run in the long term

Kai Fehr

Mr Lodge: Sustainable SCF is a highly flexible solution that enables our clients to bring the benefits of SCF to their suppliers, based on a range of criteria. This can include a supplier’s ESG scoring (provided by a third-party ratings agency, such as Sustainalytics), the diversity of their management team (such as minority- or women-owned businesses), or the goods/services they provide (such as inputs into wind farm construction).

Mr Fehr: Our sustainable trade finance proposition, launched in March, builds the Loan Market Association’s Green and Sustainability-linked Loan Principles into our trade-financing framework, encouraging clients to improve disclosure, reporting and definition of use, while meeting their ESG goals. It encompasses solutions for sustainable goods and services (financing goods procured from sustainable sources), sustainable suppliers (financing suppliers based on ESG ratings), sustainable end-use (financing goods and services for use or sale by sustainable sectors), as well as transitioning industries (through setting key performance indicators [KPIs]).

Mr Dalal: We are using our experience and expertise to drive ESG integration further into trade, actively participating in productive conversations with organisations such as the International Chamber of Commerce, and working alongside consultants and ESG certification agencies to put in place financing structures geared towards fostering sustainability in the supply chain. We also work with our clients to bring their corporate sustainability goals into our framework and re-evaluate their suppliers by classifying every supplier on the basis of their operating model’s compliance with the sustainability standards defined at the programme level.

Q: How can a focus on sustainability improve the relationship between corporates and their suppliers?

Mr Fehr: The UN’s Conference on Trade and Development estimates that the value of sustainable-themed investments in capital markets amounted to $3.2tn in 2020. That is an 80% growth over 2019, demonstrating the importance of sustainability and its ability to attract capital for corporates. Sustainable businesses are also resilient, and their supply chains enjoy the benefits of being part of a sustainable ecosystem. Improved recognition and reputation, more demand for goods and services, access to liquidity and improved employee relationships are some of the associated benefits.

Mr Muthukrishnan: Sustainability is a critical component to build resilient supply chain ecosystems. For example, we partnered with a global fashion retailer, Inditex, where we launched an organic cotton procurement financing pilot programme, leveraging local organisations to reach more than 2000 farmers, providing them early financial support to scale their sustainable operations. The transparency enabled by the pilot programme builds trust, as Inditex and cotton spinners in the ecosystem are able to trace the source of the cotton directly and ascertain whether it has been farmed sustainably, while ensuring farmers secure a higher premium for their produce.

The Covid-19 pandemic caused unprecedented volatility and disruption to global supply chains

Duncan Lodge

Mr Dalal: The natural aim of a suppliers is to remain relevant to the buyer and be indispensable in helping deliver growth. They have an opportunity to demonstrate adherence to the buyer’s sustainability goals, which brings stronger commitment and profitability on a long-term basis. This can also be financially rewarding for supply chain companies, given that banks like Citi offers stronger financial incentives to sustainable suppliers. The overall management, monitoring and continuous evaluation of sustainability criteria creates complete transparency and process improvement, which fosters an environment of long-term, sustainable growth.

Mr Sengupta: While corporates can easily implement measures to address their Scope 1 (direct) and 2 (indirect) emissions, they have encountered challenges addressing their Scope 3 (value chain indirect) emissions. Anchor buyers are in a unique position to influence positive change across their supply chains by helping their suppliers with know-how and financing tools to enable the transition. This is a win–win situation for both corporates and their suppliers. By supporting suppliers using interventions such as SCF and measurement linked to ESG performance, corporates can help shape the future business models of their suppliers and create more stickiness for themselves.

Mr Lodge: The challenge for companies in the supply chain, particularly smaller suppliers, is that implementing changes related to ESG can be difficult and costly. This creates a real risk that such suppliers may be unable to provide goods or services to large clients under new ESG frameworks. By providing solutions that enable large corporates to directly support their suppliers in improving their ESG practices, this ultimately creates a win–win scenario that increases financial inclusion and reduces the risk of smaller companies being shut out of the supply chain.

Q: What changes have you made to your SCF programme to incorporate sustainability?

Mr Lodge: Using SCF in its normal form, it is possible to isolate specific sustainable flows (such as suppliers involved in the construction of wind farms). However, in addition to these inherent features, BofA has implemented the ability for clients to provide access and pricing benefits to suppliers, based on criteria set by the client or a third-party rating agency. Also, we are enabling clients to support minority business enterprises by onboarding them onto our SCF programmes, and financing the purchase of receivables using the proceeds from our first-of-its-kind $2bn Equality Progress Sustainability Bond.

roundtable panel

Mr Muthukrishnan: At DBS, we ensure SCF programmes are fully digital and easily accessible. We try to embed our offerings into our clients’ own business processes and platforms, eschewing banks’ traditional preference to draw participants into banking platforms. Secondly, we leverage technology to draw sustainability-linked data on an ongoing basis. This means we employ data directly from business processes to enable tracking, certification and financial arrangements efficiently. We also offer differential pricing to incentivise participants to meet agreed sustainability goals.

Mr Dalal: Citi is currently applying an internal sustainability framework that is consistent with public reporting standards and has set about implementing these standards with its clients, starting with the supply chain. In SCF, you’re dealing with thousands of suppliers and millions of transactions, so it’s difficult to create a sustainability monitoring process on a transactional level. To address this, processes and verification standards need to be automated and delivered on a global platform. That’s lot more challenging from both the bank and corporate perspective, but once the structure and programmes are put in place, it does offer long-term benefits.

Mr Sengupta: HSBC’s focus is to deliver a holistic approach to supply chain transition by co-creating with our clients to develop sustainability programmes addressing not just the ‘E’, but the ‘S’ and ‘G’ as well. Our unique network of global banking and commercial banking clients complements this strategy, whereby we can work with large anchor clients to develop sustainable programmes. We’re also collaborating with multilaterals and third-party agencies to create more capacity and transparency in our SCF programmes. New technologies, such as blockchain and the Internet of Things, can improve the reach and delivery of these programmes.

Mr Fehr: Standard Chartered has incorporated sustainable finance variants into our SCF products as part of our Sustainable Trade Finance Proposition in April this year. These help our clients with putting an incentive-based programme in place to reward suppliers when they improve their ESG performance. It also helps our clients’ suppliers reduce their cost of financing by accessing investors who are keen to fund such business practices. Our processes now incorporate checks on sustainable goods and linked documentation, and performance-linked targets and KPIs.

Q: What has the Covid-19 pandemic taught us about supply chains and how will the focus on sustainability boost resiliency?

Mr Muthukrishnan: Sustainability and digitalisation are intertwined in the future of trade and SCF. Digital ecosystems provide the transparency and space necessary to democratise access to trade financing for small and medium-sized enterprises (SMEs), while enabling resilient and agile practices that empower businesses to keep chugging along, rain or shine. The imperative for end-to-end digital enablement of business processes has been sharply highlighted by prolonged and repeated disruptions to logistics, and even simple courier services.

Sustainability is not considered solely the responsibility of the board or the CEO

Parvaiz Dalal

Mr Sengupta: Our clients and businesses face three broad challenges today: re-evaluating — the long and complex value-chains that have supported dramatic improvements in efficiency and material standards over the past few decades are now being reviewed; re-inventing — businesses needs to undergo a metamorphosis to stay relevant, as consumer behaviour and demand patterns are shifting towards more sustainable and ESG-friendly consumption; and re-financing — we need to be able to evaluate ESG risks and support SMEs in transition by improving access to financing and protecting resilience of the financial system.

Mr Dalal: Even before the pandemic, we have noticed a marked uptick in interest in our sustainable SCF capabilities, which has increased further as the impact of Covid-19 has reinforced the importance of sustainability and elevated it among global priorities within the finance space. Increasingly, businesses are considering reputational risk and the impact on revenue by adopting to a long-term sustainable model, rather than a short-term cost-effective model. Sustainability is not considered solely the responsibility of the board or the CEO; all parts of the company are becoming empowered to promote and enact corporate sustainability goals.

Mr Fehr: Covid-19 has resulted in a heightened awareness around supply chain risk, and companies are seeking a more holistic approach to manage these risks. This goes beyond the environmental soundness and transparency of their suppliers to include collaboration and connectedness across the ecosystem, financial robustness, and flexibility and adaptability. Reinforcing sustainability is a crucial lever for resilience, as businesses establish visibility, and monitor and improve the performance of their suppliers, which in turn helps them to access capital.

Mr Lodge: The Covid-19 pandemic caused unprecedented volatility and disruption to global supply chains, yet they have still functioned surprisingly well across many industries. As clients have redoubled their focus on supply chain sustainability and viability, we have seen a significant increase in demand for SCF. However, it is still predominantly the larger suppliers that access SCF programmes. We are now seeing growing demand from our clients to onboard and support much smaller suppliers to not only drive resiliency, but also help them achieve their ESG goals. We are, therefore, investing in a range of solutions that will enable us to increase support for these smaller suppliers.

 

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