BSR logo

Win-Win-Win: The Sustainable Supply Chain Finance Opportunity

Tuesday Jun 12, 2018

Download Report

 




#Financial Services, #Supply Chain,



Why Read This?

Leveraging supply chain finance mechanisms to incentivize sustainable behaviors in global supply chains is an opportunity for businesses and for sustainability. Embedding sustainability factors into the widespread and growing practice of supply chain finance assigns value to supply chain sustainability programs, provides tangible incentives to suppliers and their buyers, and has the potential to open new markets to banks and transform supply chains.

Companies around the world have recognized that the sustainability challenges within their supply chains are a risk and an opportunity to be managed. As such, it has become normal practice for companies to have programs in place to manage the environmental, social, and governance (ESG) risks in their supply chains. Most reputable global companies have supply chain sustainability programs in place to assess and manage the human rights, labor, governance, environmental, and other risks of their suppliers. These programs are largely based on risk management activities such as supplier assessments and audits.

However, after more than 25 years of corporate supply chain sustainability programs in action, environmental, human rights, and governance issues are still pervasive in global supply chains. There is an opportunity to do more to drive better performance among suppliers, not only at the first tier, but also at tiers deeper in the supply chain.

Why Now?

Sustainable supply chain finance is defined as supply chain finance practices and techniques that support trade transactions, in a manner that minimizes negative impacts and creates environmental, social, and economic benefits for all stakeholders involved in bringing products and services to markets.

There are five main reasons why sustainable supply chain finance is a strong opportunity today:

  1. Supply chain finance is a fast-growing market, with about 20 percent expansion annually.
  2. Supply chain finance is becoming digital; moving away from a traditionally paper-based process offers potential for innovation.
  3. Companies need working capital, and cash optimization is a tangible incentive for both buyers and suppliers.
  4. While supplier sustainability performance data is still not perfect, it is getting more and more quantifiable and readily available.
  5. Financial service providers offer solutions that can integrate sustainability data.

The Opportunity

Most companies are not yet putting in place sustainable supply chain finance programs, and banks are not yet readily offering these services. However, buying companies, supplying companies, and financial services can explore and maximize this opportunity in different ways.

Animation showing sustainability integration into supply chain finance.


 

There are US$2 trillion in financeable highly secure payables globally,* and an estimated trade finance gap of US$1.5 trillion.** We estimate that in time the sustainable supply finance market will reach one third of the market, or US$660 billion, representing a US$6 billion opportunity in sustainable supply chain revenue for financial service providers.

The emergence of a new competitive landscape graphic

* McKinsey. 2015. “Supply-chain finance: The emergence of a new competitive landscape.”
**ADB. 2017. “Trade Finance Gaps, Growth, and Jobs Survey.”

US$2 trillion

in financeable highly secure payables globally

US$660 billion

potential sustainable supply chain finance market

US$6 billion

revenue opportunity for financial service providers


Sustainable Supply Chain Finance Solutions in Detail

This report highlights three promising supply chain finance mechanisms to reward, incentivize, and fund sustainable supply chains: payables finance, sustainable trade loans, and smart contract solutions. These mechanisms have the potential to offer tangible commercial and sustainability benefits to global buyers, finance providers, and suppliers. Today there are only a handful of public examples of global buyers and finance providers that have implemented these solutions, and there are untapped opportunities to explore them further and scale successful models.

Sustainable payables finance solutions involve integrating ESG performance criteria into buyer-led supply chain finance programs, allowing global buyers to reward and provide tangible benefits (e.g., better discount rates) to select suppliers (e.g., those with strong sustainability performance). This solution applies to global companies that have or are setting up supply chain finance programs and want to offer a direct incentive to their own suppliers.

Sustainable trade loans are loans provided to a supplier or seller of goods or services for the trade of goods, which have proven sustainability attributes or environmental or social benefits. This solution applies when a supplier needs financing for sustainable goods and projects.

Smart contract solutions are self-executing contracts with the terms of the agreement between buyer and seller directly written into lines of code, including a distributed, decentralized blockchain network. Smart contracts make transactions traceable, transparent, and irreversible, the tenets of a sustainable supply chain. This solution would be best applied when multiple actors in a vertical supply chain want to create sustainable change.

Key Steps for Setting up a Sustainable SCF Program at Your Company

Shared goals icon

1. Develop shared goals between the sustainability/ procurement/finance departments and define the spirit of the program.

Fair deal icon

2. Define what a “fair deal” for suppliers looks like. Incentives need to be large enough for them to join the program—especially if they have been part of a conventional SCF scheme already.

Service providers icon

3. Identify a financial service provider or set of financing partners (e.g., banks, investment funds, buyers’ own capital) willing to provide services in the targeted geographies and sectors.


Rating icon

4. Decide which sustainability aspects to include for supplier rating, e.g. health and safety, social, human rights, environment. Ideally, they would be aligned with your company’s sustainability goals and targets.

Data icon

5. Select a source for supplier sustainability performance data that provides comparable data across the targeted supplier base for the SCF program.

Technology platform icon

6. If not brought forward by the potential financial service provider(s), find a suitable technology platform that allows for the integration of sustainability data. Make sure it is close to a one-click solution to make it efficient to use for all parties involved.


Communicate icon

7. Clearly communicate to suppliers the advantages of the program and how to access it.


 

Call to Action

Sustainable supply chain finance is an unrealized opportunity to improve supply chains while also achieving sustainability goals. We encourage buyers, suppliers, and finance providers to leverage supply chain finance in support of responsible and sustainable supply chains.

Please contact us if you’re interested in learning more about this.


You Might Also Like

Navigating the ESG Ratings Landscape: Five Recommendations for Business

Blog

Navigating the ESG Ratings Landscape: Five Recommendations for Business

ESG ratings can often raise questions and sometimes frustration among companies. We share five common dilemmas with key recommendations for business.

Read More 


Conflict and Modern Slavery: The Investment Perspective

Blog

Conflict and Modern Slavery: The Investment Perspective

As a wave of mandatory due diligence laws come into effect across Europe, human rights abuses such as modern slavery are increasingly under scrutiny. With tangible civil liability and monetary fines on the horizon, as well as basic business responsibility, the importance of examining and managing potential human rights risks has never been greater, both for companies’ management teams and their investors.

Read More 


The Housing Crisis: Key Priorities for Investor Action

Blog

The Housing Crisis: Key Priorities for Investor Action

Institutional investors have both a responsibility and an opportunity to play a key role in the solution to the housing crisis. We share several key actions to take.

Read More 


Beyond Audits: Six Ways to Manage Human Rights Risks in Supply Chains

Blog

Beyond Audits: Six Ways to Manage Human Rights Risks in Supply Chains

Companies are now expected to go “beyond” auditing by adopting more robust approaches to address human rights violations in their supply chain. Six points for companies to consider when addressing human rights risks through a holistic approach.

Read More 


Addressing Human Rights Risks in Renewable Energy Supply Chains

Blog

Addressing Human Rights Risks in Renewable Energy Supply Chains

BSR’s work with energy and extractive companies—including a recent assessment of the human rights risks associated with minerals used in wind, solar, battery, and electrolyzer technology—has surfaced two key strategies for strengthening the management of human rights risks in transition mineral supply chains.

Read More 


Inside BSR: Q&A with Cecilie Jørgensen

Blog

Inside BSR: Q&A with Cecilie Jørgensen

Inside BSR is our monthly series featuring BSR team members from around the world. This month, we connected with Cecilie Jørgensen, a Manager based in Copenhagen.

Read More 


How the Financial Sector Can Help Accelerate Access to Remedy

Blog

How the Financial Sector Can Help Accelerate Access to Remedy

Despite the best efforts of governments and businesses to protect and respect human rights, there is clearly still a need to ensure people harmed by economic activities are able to raise issues and have them addressed.

Read More 


Back to Reports List