At BNP Paribas, Viktor Ivanov, Head of Sustainability for Transaction Banking EMEA, and Bruno Lechevalier, Head of Supply Chain Management EMEA, share their insights on the intersection of supply chain finance and environmental, social and governance (ESG) objectives, as companies rethink and rebuild their post-pandemic value chains with an increased focus on sustainability issues.
Q: Back in March 2020, about a month into the first lockdowns in Europe, we spoke about how companies had been working to make their supply chains more resilient, and how ESG and sustainability are likely to emerge as stronger priorities in a post-Covid world. How has this played out?
Ivanov: Very rapidly after the start of the pandemic, the resilience of supply chains became a key theme, and it has remained so for the last 18 months. Since then, we have also seen the emergence of a number of other issues that have impacted on supply chains. Geopolitical tensions have affected companies’ strategic decision-making; juxtapositions between strict lockdowns and loosening of restrictions have contributed to an uneven recovery across geographies; and delays in the production and transportation of goods have led to global shortages of key components, such as semiconductors for instance, and to inflationary pressures. All of these factors have converged to build tensions across value chains. As a result, it’s no surprise that the topic of supply chains has moved to the top of corporates’ agendas.
At the same time, as we had suggested last year, ESG has emerged as a much stronger priority than ever before. For many companies, Covid has acted as a catalyst for their ESG considerations.
We have started to see this play out in several ways. Companies are rethinking their supply chains from a resilience standpoint by, for example, diversifying their suppliers to avoid concentration risk, implementing ‘China plus one’ or similar strategies. We have also seen companies looking to strategically reshape their supply chains and reduce their ESG footprint, by doing things such as changing the design of their products to embed circularity, or making supply chains shorter to ensure better visibility and control and to cut down on transportation-related emissions. We’re seeing this happen with different degrees of intensity across a number of sectors.
Lechevalier: It’s important to note that while this is the trend, it’s more of a gradual shift, and not something that happens overnight. Reshaping supply chains – especially during a pandemic – takes a lot of time.
Q: What’s driving this greater shift towards ESG considerations in the supply chain for companies, and how have they been taking this forward?
Ivanov: Consideration had been given to ESG factors in supply chains long before Covid, although the pandemic has amplified companies’ awareness. We’re now starting to see more of a structural shift as companies realise that when it comes to sustainability, it is not only about their own footprint and performance, but also that of their suppliers, their suppliers’ suppliers, and beyond that.
Historically the focus has been on social issues, such as labour standards and human rights, but a much greater attention is now also being given to environmental considerations related to climate change and pollution, for example. Multiple factors support this trend, including stakeholders’ activism and pressure from investors, as well as regulations.
Many of our clients have embarked on ambitious supplier engagement programmes – or are planning to do so. Through these programmes they address elements such as sustainable sourcing, traceability, carbon and water footprints and risk assessment, and ultimately are working with their suppliers to transition towards more sustainable value chains.
This has really moved the conversation to a whole new level. Whereas in the past, suppliers were generally expected to adhere to certain minimum standards of behaviour, now buyers are actively asking them to change their operations to ensure strict compliance with policy commitments – and sometimes over relatively short periods of time. This can include measuring their carbon footprint, or switching to renewable energy, for example. These are the steps that corporates are taking now to ensure the relevance of their business into the future.
Lechevalier: When it comes to implementing these programmes, buyers are not just restricting themselves to selecting only the suppliers that tick all of the ESG boxes today. Instead, their approach is to accompany their suppliers on their ESG journey to ensure they reach an acceptable level which is better than their current status.
Q: BNP Paribas last year launched the Sustainable Supply Chain Finance Framework to measure the sustainability performance of corporates, as part of the Monetary Authority of Singapore’s Green and Sustainability-Linked Loan Grant Scheme. How did this framework come about, and what else is the bank working on in this space?
Lechevalier: We are very proud of our collaboration with the Monetary Authority of Singapore (MAS) in the area of sustainable finance. For instance, BNP Paribas is one of the founding partners of the Singapore Green Finance Centre, Singapore’s first centre of excellence, which is supported by the MAS and dedicated to drive Asia-focused green finance research and talent development.
With the launch of their Green and Sustainability-Linked Loan Grant Scheme, the MAS wanted to support corporates of all sizes to obtain green and sustainable financing. BNP Paribas and the MAS have partnered to create a Sustainable Supplier Finance Framework in order to promote sustainable supply chain practices in corporate supply chains. The framework includes a KPI matrix that measures the sustainability performance of suppliers and provides them with more favourable terms linked to their performance. This should ultimately drive companies to take more decisive action in terms of managing the ESG footprint of their supply chains. The framework has been reviewed by V.E (formerly Vigeo Eiris) and was formally launched by the bank at the end of 2020.
This is an example of just one of the initiatives that the bank has been involved in to address the sustainability impact of supply chains. It is all part of a much broader conversation that we are having with our clients that goes beyond supplier financing to also include other, more blended types of financing solutions, as we work with them to identify ways to help transform their supply chains.
We are seeing the emergence of a multiplayer approach between the buyer, the financier, the technology providers and other industry experts, who are all working together to tackle this issue.
Q: Are there any particular deals or success stories that you would like to highlight in the sustainable supply chain finance (SCF) space?
Ivanov: We are certainly seeing a renewed interest in sustainable SCF. The rollout of supplier engagement programmes often comes with significant expectations for suppliers to transform their businesses. Creating financial incentives is an important way for buyers to encourage progress and to create positive momentum, and this is where sustainable supplier financing has a significant role to play.
That said, these deals remain quite complex to execute and only a handful of transactions come to fruition every year. The sustainability component brings specific hurdles around measuring the ESG performance of suppliers or transforming an existing programme into a sustainable one.
As a pioneer in sustainable SCF, BNP Paribas has been committed to help its clients overcome such obstacles. A good example is the recently launched pilot programme with France’s EDF, a global leader in low-carbon energy, whereby our factoring teams are helping it to transition its existing reverse factoring programme to a sustainability linked one. This involves working with EcoVadis, a leading global provider of business sustainability ratings, which is responsible for undertaking sustainability assessments of the suppliers. We are gaining very useful insight from this large-scale pilot, and believe this sort of transition will be a significant trend going forward.
Lechevalier: Away from sustainability linked programmes, we are also seeing an increase in requests for financing related to companies’ energy transition, where our support would be for the underlying project or activity. There has been a substantial increase in demand.
Elsewhere, we have been expanding our approach to sustainable solutions to the short-term working capital space and have rolled out a few sustainability linked transactions to finance trade receivables.
Q: What role do data and technology play in facilitating ESG initiatives?
Lechevalier: Data is a key element to the entire process: it facilitates greater transparency across entire value chains, and corporates can use this information to manage supply chain risks more effectively.
Clearly, all parties – banks, ratings providers, etc – need to be equipped with technology that allows their platforms to connect with one another seamlessly by means of APIs, so that the sustainability related data that has been gathered can be transferred and applied.
Ivanov: Enabling traceability and transparency across the full breadth of the supply chain is a very important objective but is also a long-term endeavour. We have seen a number of early-stage initiatives – many of which BNP Paribas has been involved in – that have been designed to address this, such as the Trado project, for instance. There is certainly a lot more work to be done, and I think we can expect to see many interesting developments in this space.
Q: What future trends might we see coming out of the SCF space in terms of sustainability?
Ivanov: We’re likely to see increased collaboration between multilateral institutions – the likes of the IFC, EIB and EBRD – and the private banking sector with regards to supporting sustainability. Many multilaterals have long had robust agendas on sustainability related matters. They have expertise in key suppliers’ geographies. They are now willing to scale up their climate finance and are prepared to deploy additional capital and funds. We are having a number of conversations with these institutions to see where we can join forces and deploy those funds in a meaningful way.