Ugur Bitiren, Global Head of Sales and Advisory, Receivables and Supply Chain Finance at Crédit Agricole CIB, shares his views on how recent inflation trends are expected to accelerate the ESG transformation of working capital flows, given that commodity price increases are triggering a financing capacity issue and the appetite for non-ESG financing is shrinking.


With the world re-emerging from the pandemic, renewed focus has been put on environmental, social and governance (ESG) and working capital optimisation. For the first time in many decades, firms are facing the threat of inflationary pressure that is not only affecting their operations, but also their financial metrics.

The recent inflation trends, especially in commodities, have spurred unprecedented demand for working capital optimisation products on both the receivables and payables side. A major part of this demand is linked to commodity flows for which ESG compliance is sometimes less obvious. In addition, due to banks’ commitment to developing social and environmental aspects, the available supply of capital to finance these type of flows is rapidly diminishing. We believe that this situation will trigger an accelerated ESG transformation of supply chains. Not only will it help companies finance their working capital needs with increasingly ESG-compliant structures, but it will also assist corporates in aligning with their own stringent ESG objectives.

In the first graph, we can clearly see how banks’ exposure to traditional facilities is expected to rapidly diminish, from 90% in 2020 to a projected 60% in 2025-2030, in favour of transition and green finance facilities.

Inflation has expanded the balance sheets of firms in many industries.

The sectors that were the most affected tended to be those with direct exposure to commodities. Despite a dip at the beginning of the pandemic, the S&P GSCI Commodity Index has trended upward since the trough in 2020, reaching an all-time high in March 2022, following geopolitical events in Europe and continued logistical bottlenecks worldwide.

The metals & mining, power & utilities as well as the oil & gas sectors were especially affected by these price increases, which grew their net working capital outstanding. Although price hikes have led to record sales and profits for firms in these sectors, the trade-off has been that working capital efficiency metrics have degraded over the same time period.

As input prices rose, the inflationary pressures trickled into the economy, affecting the auto sector as well. The recurring supply chain bottlenecks affecting the semiconductor industry has also had this effect.

The ability of these firms to have higher trade payables by negotiating longer payment terms to offset their increased trade receivables and inventories has been mixed, either due to their suppliers’ unwillingness to extend terms or maxed-out payables financing limits. Adding more stress to the supply chain has been the trend of firms shifting from a just-in-time inventory holding model to a safety stock model, negatively affecting operating cash flows even further. These various factors have led to an overall increase in net working capital needs in absolute terms.

Moreover, with central banks increasing interest rates to fight inflation, firms that have traditionally utilised credit facilities to fund their working capital at near-zero rates can only do so now at a higher rate, increasing their borrowing costs and thus incentivising them to seek liquidity from complementary sources. Firms have thus been seeking to create lean balance sheets by increasing their demand for receivables and payables financing capacity.

The good news is, although lagging the debt and loan markets, ESG-linked working capital financing has emerged strongly in the last couple of years, so the basis for an acceleration of its use is there. In that regard, Crédit Agricole CIB has developed various working capital financing solutions to support this transformation for both existing and new facilities.

In the course of 2021 alone, Crédit Agricole CIB closed various ESG-linked payables and receivables transactions thanks to increased demand and expanded capabilities.

One of the major features of this type of a solution has been to tap working capital flows linked to green certificates. For many of those certificates, such as Renewable Obligation Certificates in the UK or Certificates of Energy Efficiency in major European markets, there is a time gap between the working capital need and payment linked to the certificate. Our solutions on a few separate transactions have helped to bridge this gap by providing financing in line with corporates’ balance sheet objectives.

With the same logic, another area that has emerged is financing attached to working capital that is undisputedly 100% associated with green assets. Crédit Agricole CIB has been successful at financing green working capital flows, such as electric vehicle batteries and certified agricultural products. In Europe, the definition of green assets will naturally evolve to align with the EU Taxonomy.

There are also other areas that are emerging, including key performance indicator-linked financing, which follows the ESG performance of the buyer and/or seller.

All in all, we expect the ESG working capital financing market to grow significantly. Although this may have been foreseen after the boom of sustainable debt and loans, few might have anticipated the speed at which ESG-linked receivables and payables financing is accelerating now as a result of inflation and the increase in commodity prices.