As Europe looks to a durable economic recovery from the Covid-19 crisis, an emphasis on modern, sustainable supply chains will be key to ensuring greater resilience for the future.

 

Even before Covid-19 tested the resilience of Europe’s supply chains, the just-in-time delivery of finished goods and components in the region was under strain. From macroeconomic factors such as Brexit and trade tensions with the United States, to increased pressure from investors and civil society around human rights and environmental issues along supply chains, businesses in the region have had to adapt to new realities – and new risks.

Today, as Europe seeks to harness the power of trade to promote a durable economic recovery post-pandemic, opportunities are emerging to tackle inefficiencies in order to build back better for a more sustainable future.

“Corporates across the region are now much more focused on resilience,” says Michael Vrontamitis, Head of Trade, Europe and Americas, Transaction Banking at Standard Chartered. “The extent to which they are rethinking where they buy goods from, and where they sell to, was not on the agenda at such a scale before the pandemic.”

 

Maintaining and protecting supply chains

As the world’s largest importer of manufacturing inputs, the European Union has seen first-hand the cost of being unprepared for a black swan event like Covid-19.1 On the supply side, carmakers such as Fiat Chrysler were forced to close operations due to the sudden shutdown of component producers in China’s Hubei province, while Jaguar Land Rover reportedly resorted to flying parts in suitcases from Asia to the UK to keep production moving.2 Meanwhile, as demand for consumer goods dropped amid restrictions on movement, fashion retailers from Inditex to Asos were forced to cancel garment orders from Bangladesh, Vietnam and India as unsold inventory piled up.

As a result, trade flows across the region have faltered – the World Trade Organization is estimating a decline globally of as much as 32% this year – and corporates are increasingly seeking bank support to keep the channels of trade open.

“People are seeking that additional layer of comfort where they can,” says Michael Harte, Head of Trade Products, Europe, at Standard Chartered, who points to an uptick in letter of credit (LC) requests from clients that had not previously used the instrument.

Digitisation of documentary trade products has also become a new priority, as the inability to transmit trade documents during the worst of the pandemic saw goods held up at ports and finance agreements unable to be signed.

“Everybody is aware of the shortcomings of dealing with paper. But nobody really understood the full implications until Covid-19,” says Vrontamitis. “We have seen massive take-up of digital solutions by clients as a result, and I don’t expect that to switch back.”

Meanwhile, with firms from S&P to Coface warning of the rising probability of default among suppliers in industrial sectors, companies across Europe are taking decisive steps to safeguard their businesses, in many cases opting for open account trade finance to boost working capital availability along their supply chains.

“In the wake of the 2008 financial crisis, we saw corporates having to step-in and buy their suppliers. This time around, we are seeing instead a spike in interest in supply chain finance (SCF) as a solution that ensures that liquidity gets to suppliers, while maintaining the overall health of the supply chain,” says Harte.

Through SCF, which allows for the payment of a supplier’s invoices earlier than agreed while allowing the buyer to hold on to cash for longer, both sides can optimise their balance sheets to keep trade running smoothly – even as supply and demand shocks continue to disrupt markets.

 

A healthier environment all round

The health of suppliers is not the only priority on Europe’s corporates’ minds at the moment. The region’s policymakers have made clear that they want a sustainable recovery from Covid-19, with the European Union’s technical expert group on sustainable finance recently calling on governments to “ensure greater resilience to further environmental and social crises ahead”.

At the centre of this will be the European Green Deal, a set of policy initiatives by the European Commission with the overarching aim of making the EU climate neutral in 2050. As companies are being held increasingly accountable for the environmental and social impacts of their upstream processes, a window of opportunity has opened to leverage the disruption brought by Covid-19 to embed sustainable practices into every level of the economy.

“Covid-19 has brought the concept of sustainable supply chains into the frontal cortex, and we are having increasing numbers of conversations with clients in this respect,” says Vrontamitis. “We are seeing several retailers and fast-moving consumer goods companies raising standards on their suppliers as part of their efforts to ensure a robust supply chain, and we expect to see this activity increase in the months to come.”

 

An ecosystem approach

It is becoming increasingly clear that a sustainable recovery will not only be driven by corporates and governments. The EU taxonomy regulation, agreed at the political level in December 2019, seeks to enable investors to re-orient investments towards more sustainable technologies and businesses, and represents a recognition of the enabling role that finance can play in effecting transformative improvements in existing industries in Europe.

“Sustainable finance is not just a buzzword. It is an evolution in the treasurers, procurement managers and bankers thinking about sustaining supply chains,” says Harte. “Companies are not just looking at how to keep their supply chains flowing, but they are increasingly looking at how they can make a difference in terms of working practices in the communities where their supply chains operate, with the support of their banking partners. The opportunity to make a real difference is there in what will be almost a fresh landscape.”

However, he cautions that the entire trade ecosystem needs to commit to making changes that can weather future disruptions: “It is very easy to revert to less sustainable and potentially cheaper practices, particularly when the going gets tough. Investment will be needed around digitisation as well as sustainability, and in order for that to happen there will need to be partnerships between the banking community, the business community, regulators, lobby groups and governments as well.”

Another challenge is the development of reliable metrics to measure companies’ commitments to specific sustainability targets. “There are few recognised metrics in the market of what sustainability is enabling comparison across industries, and until that happens, efforts will remain ad hoc,” states Vrontamitis.

 

Recovery in sight

Home to some of the hardest-hit countries by the Covid-19 outbreak, Europe’s path to recovery is likely to be long. The IMF expects both UK and Euro area GDP to contract by 10.2% in 2020, with the potential of renewed lockdowns in many nations making near-term scenario planning a difficult task.3

Nonetheless, by drawing on the lessons learned through this pandemic, the region has an unprecedented opportunity to restore stronger, more diversified and responsible supply chains to stimulate a more sustainable future for trade.

 

1 Source: Intracen https://www.intracen.org/covid19/Blog/The-Great-Shutdown-How-COVID19-disrupts-supply-chains/

2 https://www.reuters.com/article/us-china-health-jaguarlandrover/jaguar-land-rovers-uk-output-at-risk-from-coronavirus-hit-supplies-idUSKBN20C1WP

3 https://www.imf.org/en/Publications/WEO/Issues/2020/06/24/WEOUpdateJune2020