The ability of supply chain finance to extend liquidity to small and mid-tier companies made it a vital tool during the Covid-19 crisis. Today, as ESG considerations take centre stage, it offers a unique opportunity to help corporates manage climate risks, working conditions and carbon emissions, providing increased access to finance while helping economies build back better.
The events of the last 18 months have demonstrated the vulnerability of supply chains to global shocks, but also the extent to which banks and corporates can work together to strengthen them amid epoch-defining disruption.
During the worst of the pandemic, supply chain finance came into its own, helping companies secure critical liquidity and get the working capital they needed to survive. Now, as corporates seek to future-proof themselves against potential new threats, a growing number are exploring its use as a means to accelerate sustainability initiatives.
“There is a huge cost of doing nothing, and those companies who haven’t already done so are now making a move,” says Sibel Sirmagul, regional head of product and propositions, global trade and receivables Europe at HSBC.
Sustainability-linked supply chain finance addresses the working capital needs of buyers and their suppliers while helping them meet sustainability objectives that may impact environmental or social aims, with pricing differentials based on the buyer’s own sustainability metrics of supplier performance. While a relatively new proposition, a 2019 programme rolled out for US retail giant Walmart by HSBC has helped raise awareness of the product in the market at a time when the Covid crisis has driven a growing number of corporates to look further along their supply chains when considering sustainability.
“What started with big global names like Walmart is now going another step down to smaller names, who are now much more cognisant of their suppliers and reputational risk,” says Sirmagul.
In a typical programme, supplier pricing improves as their sustainability rating increases, incentivising improved performance, and working capital is released with supply chain efficiency and compliance improvements. However, the benefits of creating more sustainable supply chains go beyond better access to finance.
According to research from McKinsey Global Institute, supply chain disruptions lasting a month or longer are now expected to happen every 3.7 years. By implementing a sustainable supply chain finance programme, therefore, companies can reinforce the stability of their operations, by attracting suppliers with good overall management practices, as well as strengthening the financial robustness of the entire chain.
“The stress within supply chains as a result of the pandemic has revealed the importance of a sustainability focus,” says Andrew Robison, regional head of sales, GTRF and CSTF, Europe at HSBC. “If you are already on a sustainable journey, by definition you know much more about your suppliers, and your suppliers’ suppliers. You will know whether their workforce housing has sufficient sanitation and social distancing, or which of them are located in a water or power stressed environment. Through sustainable supply chain finance, buyers can go deeper with their key suppliers to make them healthier and more flexible.”
Accounting for more than 80% of greenhouse gas emissions and more than 90% of the impact on air, land, water, biodiversity, and geological resources, supply chains are responsible for far greater ESG impacts than the internal operations of a typical company – presenting both a risk and an opportunity to be managed. And with increasing regulations around supply chain transparency and disclosure, considerations about sustainability and resilience in the supply chain are no longer optional.
“The market is changing, and if corporates aren’t taking action on ESG then they present a higher risk to their stakeholders,” says Robison. “We are already seeing more of an activist approach driving that agenda in certain industries.”
The latest HSBC Navigator report, which surveyed over 2,600 businesses across 14 countries, shows that the vast majority now see sustainability as a priority, with 91% agreeing on the need to rebuild on firmer ESG foundations.
Overall, 70% of companies want to improve control over supply chains, half seek more transparency, and a third want to accelerate making them more environmentally sustainable, planning investments over the next 12 to 18 months to do so.
Demand is also coming from consumers, with 86% of companies surveyed by HSBC saying that they expected sustainability performance to boost sales – demonstrating the extent to which solid green and social credentials are now being seen as an opportunity to win new business rather than simply meet regulatory requirements.
But with over 200 different global standards on environmental protection, labour rights, economic development and ethics, knowing what indicators to tackle in order to effect meaningful change – rather than simply greenwashing operations – can represent a major challenge.
“It’s not always straightforward,” says Robison. “One person’s idea of a sustainability agenda is often completely different to someone else’s.”
“A collaborative approach is vital,” says Sirmagul. “Large multinational corporations likely know what they are doing and have very clear KPIs, but then there is a large number of corporates out there who don’t know where to start. There is a lot of advisory needed, and for that, banks need to collaborate with ESG agencies. We need to collaborate with the industry and regulatory bodies to help companies on this journey.”
It isn’t just the corporate buyers who need support. As businesses seek to drive better performance among not only their direct suppliers, but their suppliers’ suppliers and beyond, ensuring that capacity exists along the chain to track provenance, validate performance and change practices cannot be accomplished unilaterally.
“You need to have a franchise to support suppliers in the journey,” says Sirmagul. “The incentive of preferential pricing is only half of the story; you can’t force them to improve if they don’t have the resources to do so.”
Here, data can provide the answer.
As supply chain networks shift from linear, sequential operations to interconnected, open systems enabled by technology, collecting and analysing information on a supplier’s sustainability performance has become possible, enabling companies to identify areas for improvement.
“For many corporates that have embarked upon a sustainable journey, ESG permeates everything that they do. They are looking at their sourcing, their production, and how they interact with society, and using all the tools available to them to do so,” says Robison. “It’s important to note that, while we as banks can support this, this is a whole ecosystem effort. Businesses need a partner with the understanding, the capabilities and the resources to help them make the transition to a sustainable model, and banks have an opportunity to step up and assist with the financing, the insights and the advisory.”
A step closer to the future state of trade
The movement towards embracing sustainability as a core value within supply chains has been some time coming, and as corporates increasingly recognise the importance of managing sustainability challenges within their supply chains, results from sustainable supply chain finance programmes are demonstrating that the product is a useful tool in mainstreaming positive practices. However, financing is the enabler rather than the end goal, as Robison points out.
“The stance that we have taken is that we feel that clients should do better because it’s the right thing to do,” he says. “This isn’t about unduly rewarding a company for doing the right thing, but seeking to offer solutions, encourage best practice and facilitate trade finance that helps to build a more sustainable future.”
“I believe the future state will be that eventually ESG performance will go without saying. It will become similar to anti-money laundering checks; it would be inconceivable to think of certain suppliers not meeting requirements,” adds Sirmagul. “However, we are not there yet, and until we get there, the ecosystem needs to do everything in its power to make progress, which is why sustainable supply chain finance is so valuable today.”
In partnership with GTR, HSBC is producing a series of articles taking a closer look at some of the crosscutting issues impacting global trade.
This second instalment showcases the views of Andrew Robison, HSBC’s regional head of sales GTRF and CSTF Europe, and Sibel Sirmagul, regional head of product and propositions, global trade and receivables finance Europe.
In this episode of the GTR Trade Insights podcast, Robison and Sirmagul speak to GTR senior report Eleanor Wragg about the growth of sustainability-linked SCF and how this type of product can contribute to supply chain resilience.