Related News

Supply chain finance industry hopeful EU will soften late payment rules

Balancing inflation and growth

TDB further bolsters African trade finance offering with US$100mn UK-backed facility

Investec, Frontclear launch “first of its kind” trade finance facility for African SMEs

Late payment issues worsening in global supply chains, Taulia data reveals

Global trade is about more than moving goods; it can serve as a conduit through which the ambitious agenda of the United Nations Sustainable Development Goals (SDGs) can be achieved. From climate action to poverty reduction, reduced inequalities and economic growth, trade can be leveraged to transform lives and uplift entire communities – as long as everyone can participate.

The pandemic-related disruptions of the last two years brought the interconnected nature of supply chains around the world into sharp focus – for all the wrong reasons. But, as numerous participants in global trade are fast realising, this very same interconnectedness can serve as a means to achieve broader economic and sustainability objectives.

 “Trade accounts for approximately 52% of world GDP, which gives it an outsized influence,” says Natasha Condon, global head of core trade at J.P. Morgan. “If we can solve for an issue in trade, the multiplier effects across the global economy are enormous.”

The United Nations Global Compact, the world’s largest corporate sustainability initiative, now counts over 15,000 signatories who have committed to 10 ESG principles, and they are increasingly looking at how their trade activities can help them meet their objectives.

“In the past 12 months, we have witnessed these ESG targets filter down within the corporates. Where previously these would only be at the C-suite level, we are now seeing very focused requests from corporate treasurers,” says Condon, who adds that there is a huge variety in how different companies are evaluating their ESG goals.

“For example, several corporates are looking at reducing carbon emissions in that supply chain and how they can evidence that to their consumer base. If you talk to a consumer company, often that conversation is much more around the ‘S’ in ESG, be that looking at working conditions in the supply chain or supporting minorities.”

Banks can play a key role in helping turn these aims from talk into action. Last year, J.P. Morgan set a target to finance and facilitate more than US$2.5tn by 2030 to advance long-term solutions that address climate change and contribute to sustainable development. Trade finance represents an important part of this commitment.

“Different clients are coming to us with very specific targets, and that enables us to customise our structures to serve them,” says Condon. “The conversations we are having have become enormously more concrete. We’re not talking about the theory any more; we’re moving right into practice and creating financing solutions that will help them to achieve their objectives.”

Further down the chain

To ensure that supply chains around the world can become more sustainable, fairer and more inclusive, smaller players need to be able to access the same kind of support.

“The majority of carbon emissions in the world sit in the supply chain, with SMEs, so if we want to open up the possibility of sustainable development, we have to find a way of letting them take advantage of these trade and supply chain finance structures,” says Condon.

However, that is easier said than done. The global trade finance gap – the mismatch between supply and demand of products such as letters of credit and supply chain finance – surged during the pandemic and is now at an all-time high of US$1.7tn, with SMEs the hardest hit.

One of the reasons behind the ever-growing trade finance gap is that large global banks simply can’t reach these smaller businesses. From cumbersome KYC requirements to expensive onboarding processes, servicing SME clients is quite often cost-prohibitive.

J.P. Morgan’s partnership with working capital technology solution provider Taulia seeks to address this. By combining the experience and resources of the bank with Taulia’s technology platform, data and analytics, the strategic initiative enables suppliers of all sizes across the globe to access the finance they need, no matter where they are in the supply chain.

“We are now reaching out to all the suppliers of the buyer, which is vital for the health of the full supply chain,” says Heather Crowley, global head of supply chain finance at J.P. Morgan. “Pre-Covid, you tended to see about 80% of working capital release with 10% of the suppliers – the tier one. The disruption caused by the pandemic really brought home to corporates that you can’t make a product with 80% of the parts; you need a healthy supply chain right the way through.”

Build it so that they can come

Another factor standing in the way of SMEs getting the finance they need is ease of access. Unlike large firms with dedicated finance departments, typical SMEs operate with limited resources and do not necessarily have the capacity to collate the manual records required for applications – and a day’s lost time for a company of 10 employees could mean the difference between staying afloat or losing out to the competition.

“If there is one thing that we have learned in the last two years, it is that the answer to democratising access to almost anything at this point is digitisation,” says Condon. “From a J.P. Morgan perspective, we have digital tools, and increasingly we are thinking about how we can make those digital tools available to smaller companies. Historically you might have had your online banking platform and that was for your large corporates, but we are looking at other digital platforms as a way to democratise access to our own trade business.”

The Taulia partnership is one example of this, explains Crowley. “Frictionless supplier onboarding is critical to both the SMEs and buyers looking to scale to all suppliers in their supply chain. Our fully digitised experience meets that industry need.”

Using data to make it count

By combining financial robustness with sustainability objectives, supply chain finance offers the opportunity to embed ESG improvements all the way down the chain, but only if done right.

“KPIs and reporting are really fundamental,” says Crowley. “As regulators start to crack down on greenwashing, corporates need their programmes to be transparent. Our role as banks is not just around setting up a supply chain finance programme to meet their goals, but also ensuring we have the data that can support its impact.”

Inclusion for a better future

Not all SMEs face the same challenges when it comes to accessing the benefits of trade. Minority-led small businesses often find themselves doubly disadvantaged, and banks play a key role in helping to level the playing field.

In the immediate aftermath of the police killing of George Floyd in 2020, J.P. Morgan made a US$30bn pledge to advance racial equity over the next five years to address what CEO Jamie Dimon referred to as “systemic racism” in the US’ economic system, and the bank is now focusing efforts on greater inclusion of minority suppliers.

“Minority-owned businesses often have fewer channels to access bank lending, and they face underlying issues that challenge their ability to run at scale. To address both of those aspects, J.P. Morgan has developed a pre-shipment finance programme specifically focused on minority suppliers,” says Crowley. These loans will not require an underlying purchase order or invoice, which means that suppliers can achieve increased financial stability even earlier in the cash conversion cycle.

“We are providing liquidity to the suppliers that need it most. We have started this programme in North America and we are seeing buyer after buyer asking us how they can implement this because there really is a market need,” adds Crowley.

The UN categorically singles out SME development as a critical priority area for achieving the SDGs. In effect, the future depends on the ability of even the smallest suppliers to continue to participate in global trade.

Democratising access to sustainable trade finance enables every company to evidence their ESG performance improvements no matter their size, driving sustainable development for a better future for all.