Businesses will have to manage their supply chains differently in future as they respond to extreme weather events and consumers’ growing ethical concerns, writes Jaya Vohra, Director, Head of Trade& Working Capital Product Management at Barclays.
Businesses today are increasingly focused on trading sustainably, using renewable energy and understanding how their activities impact on society and the environment. They know that consumers want to buy ethically sourced products and are concerned by pressing issues such as climate change, the use of child labour in factories, and the environmental damage caused by plastic packaging waste. What’s more, they realise that if they ignore or exacerbate these issues, they risk incurring significant reputational risk that will inevitably impact on the bottom line.
While businesses are sensitive to the needs of their customers, their heightened interest in sustainability is also driven by practical and potential future regulatory considerations. They are aware that extreme weather events, such as floods and hurricanes, could potentially disrupt their supply chains and interfere with their operations. To be competitive and effective, companies need sustainable supply chains that are continuously available. Only then can they reliably deliver goods and services to their customers. It is for these important reasons that sustainability is starting to change the nature of trade. In the future, businesses may face increased regulatory requirements to demonstrate sustainable practices.
The cost of change
If they are to trade more sustainably in future, businesses need to change the way they operate – which requires an investment in terms of time, money and resources. For example, many large companies currently have complex and long-established supply chains. They are not necessarily able to track the provenance of the raw materials that are used in their goods and they may not be aware of what kind of labour their suppliers use, or the working conditions in their suppliers’ factories.
As they shift towards greater sustainability, however, businesses may need to source raw materials from different destinations, work with more ethical suppliers, and change production methods to reduce their carbon footprint. They may also need to ensure that single-use plastics are entirely removed from their end-to-end supply chains, which will mean changing the types of packaging they use.
Inevitably there will be costs associated with innovating to establish supply chains that are both sustainable and cost-effective. These costs are likely to create competitive pressures since the most successful businesses will be those that manage to become more sustainable while keeping a firm grip on their margins and managing their working capital more effectively. As a result, some businesses may look to extend their payment terms with their suppliers.
It’s not just large businesses that will bear the financial impact of sustainability, either. Smaller businesses in the supply chain are also likely to incur costs as they change their operating processes to meet the requirements of their larger customers. Additionally, they may need to comply with new rules and frameworks. Both governments and multinational companies have a role to play in supporting all players in the supply chain to transition to more sustainable practices in future. Governments could use subsidies, for example, while multinationals could provide financial incentives to encourage their suppliers to adopt new ways of working. In fact, some multinationals are already using incentives in this way.
The issue of climate change presents some very specific threats to the future of global trade – threats that have high associated costs. Trade actively contributes to climate change because it depends on airlines, sea transport and land-based vehicles moving goods around the world. If the cost of using fossil fuels becomes too prohibitive due to higher penalties being imposed, or if insurance costs skyrocket, it could become very expensive for companies to trade. Even in a less extreme scenario, businesses will probably have to invest in more renewable energy resources if they are to retain their licence to trade. The public believes that businesses have a responsibility to mitigate the threat of climate change by reducing their carbon emissions.
Seize the opportunities
Although the trend towards sustainable trade presents challenges to businesses, it also creates opportunities for them through disruption. They will attract new customers and earn greater loyalty from their existing customers if they can demonstrate their commitment to ethical supply chains. To do this, they need to show that they understand the origin of their goods and the journey those goods have been on. They also need to be confident that the workers involved in production of those goods have been treated fairly, that their rights have been protected, and that no child labour has been used.
Where businesses are successful at demonstrating their ethical credentials to their customers, they have a great opportunity to grow their revenues by gaining market share. They are also in a good position to future-proof their business by attracting external investment. With this in mind, businesses should pay close attention to the sustainability ratings devised by organisations such as Sustainalytics. Sustainalytics rates the sustainability of listed companies based on their environmental, social and governance (ESG) performance. Already investors are factoring ESG ratings into their decision-making and this trend is only likely to become more pronounced going forward. Banks are also using ESG ratings as part of their scoring methods when they consider whether to offer a green finance product to a company.
How Barclays can help
As a recognised leader in green finance, Barclays is well placed to support your business on its journey towards more sustainable trade. We have an innovative suite of green finance products and services that have been developed specifically to accommodate the changing needs of companies. Among these are our green loan and green trade loan. We pride ourselves on our flexibility and can accommodate the requirements of businesses of all sizes. Barclays can also help mitigate the effect of payment term extension to suppliers through appropriate supply chain financing solutions.
Barclays has issued its own green bond and is a member of the RE100, a group of influential companies that is committed to sourcing 100% renewable electricity globally in the shortest possible timeline (and by 2050 at the latest). By 2030, Barclays will use 100% renewable energy across all our operations and we have set ourselves an interim goal of 90% by 2025.
Since we ourselves are committed to sustainability, we understand the challenges and opportunities that are associated with the pursuit of more sustainable trading practices. So, as well as providing green funding, we can help you to meet the applicable legislative requirements for your industry, and provide thoughtful and relevant information on the topic of sustainability.
Key considerations for businesses
The pressure on businesses to trade more sustainably is not going to lessen in the future. In fact, it is only likely to intensify. So larger companies need to give careful consideration as to how they can make their trading practices more sustainable and how they can support their suppliers to do likewise. It may even be necessary for them to review their end-to-end supply chains right across the globe.
The shift towards more sustainable trade will also require businesses to think about how they fund this shift, both on their own behalf and on behalf of their suppliers. To achieve their goal, they may want to access new finance products or overhaul their working capital cycle. Regardless of how businesses choose to prepare for a future of sustainable trade, however, they should access as much information as they can while drawing on the expertise of their banking partners.