Mainstreaming ESG and resilience through supply chain finance

Through supply chain finance, improvements can be made to promote healthier & more sustainable supply chains, and future-proof trade against emerging risks.

Hastened by shocks over the last year, companies are rethinking supply chains, presenting a historic opportunity to build back better. Through sustainable supply chain finance, improvements can be made in environmental soundness and financial robustness, creating flexibility and adaptability throughout the ecosystem to face new challenges ahead.

In recent years, societal and cultural shifts combined with regulatory imperatives have brought sustainability across all its dimensions – environmental, social and governance (ESG) – to the fore. But after Covid-19 exposed vulnerabilities deep in the supply chains of firms worldwide, ESG risks, which up until now had been seen as reputational and regulatory issues, took on operational-level importance.

This has given new impetus to corporates, which are increasingly broadening their supply chain goals beyond cost efficiency to sustainability and resilience commitments.

“A massive mindset shift is underway, and it is gaining momentum at an incredible pace,” says Roshel Mahabeer, executive director of sustainable finance at Standard Chartered. “ESG has changed from a side topic to something that is now very mainstream, and we have been pleasantly surprised by how quickly things are starting to change. We’re seeing multinationals making commitments around emissions reduction and recycling to social issues like labour standards or employment equality, and corporates are becoming a lot more thoughtful in their procurement strategies. However, there is a lot to do to turn commitments into reality, especially in supply chains.”

Building in resilience

ESG is not the only operational risk that corporates must now focus upon. After the pandemic upended supply chains, bolstering the financial resilience of suppliers also became a strategic imperative.

“Nearly three quarters of businesses experienced supply-side disruptions due to the pandemic. Often this was due to lower tier suppliers being unable to access adequate financing which meant that their production levels were constrained, or in some instances procurement was paused, causing strain on their weak cashflows,” says Pradeep Nair, head of trade structured solutions at Standard Chartered.

However, while there is near-universal agreement about the importance of making supply chains both sustainable and resilient, putting this into practice is more difficult.

A new survey carried out by Standard Chartered polled over 900 companies globally on key supply chain indicators, and found a major gap between their performance today and what they need to do to achieve more viable supply chains. Although the vast majority of respondents said that the environmental soundness and financial robustness of their suppliers was important to them, nearly two thirds said their actual performance lags the importance they place on meeting these indicators.

The gap is due in large part to the complexity of today’s supply chains. A large multinational’s supply chain ecosystem can extend to hundreds of tier-one suppliers, which in turn rely on thousands of tier-two and tier-three suppliers. With these tiers spanning the globe, achieving transparency throughout the ecosystem becomes a serious challenge. Indeed, recent Standard Chartered research found that only 6% of firms said they had full supply chain visibility, and this is likely to have been exacerbated even further as a result of the pandemic.

This lack of visibility creates higher risks for companies, who find themselves unable to identify ESG risks and measure financial robustness of their suppliers – until it’s too late.

Setting the right targets

In recent months, progressive corporate leaders in numerous industrial sectors have set ambitious targets to improve their sustainability performance. In order to achieve these, however, they need to be able to better identify and address sustainability and labour rights risks and abuses in their supply chains, or potentially face serious financial and social risks.

“Clients ask us how they can get the right set of commitments, and how we can help them understand the right set of methodologies,” says Mahabeer. “We are increasingly co-creating new solutions. Instead of simply looking to protect themselves from risks, companies are looking at the positive impact they want to encourage and how best to go about it.”

To help companies carry out a “health check” on their operations and highlight which areas they need to focus on to achieve their aspirations, Standard Chartered has launched a sustainable supply chain benchmarking tool based on the following indicators: environmental soundness and transparency of direct suppliers and of indirect or deep-tier suppliers; financial robustness; flexibility and adaptability; and collaboration and connectedness throughout the ecosystem.

“With this tool, companies can now benchmark the resilience and sustainability of their supply chains, based on comparisons with peers across regions and sectors,” says Michael Harte, global head of receivable finance at Standard Chartered, who adds that this is part of a wider shift in the role of the bank.

“We are no longer and haven’t been for some time just a source for credit lines, limits and currency. We are moving towards an advisory and consultancy capacity, where we can give advice and solutions to clients as they rethink their supply chains,” he says. “And by combining this with encouraging better practices for access to finance, we are facilitating real change.”

Supply chain finance as an enabler

While point solutions exist to improve the transparency of supply chains, connecting appropriate financing to ESG performance means that corporates can reach beyond direct suppliers to the indirect suppliers that may be the greatest source of vulnerability, and thereby increase robustness.

“Corporates need and want their supply chains to be sustainable. To ensure that their supply chains are healthy and viable, they need to ensure that their suppliers have liquidity,” says Harte. “Supply chain finance has become a tool to enable all of this to happen.”

Recognising the scale of both the challenge and the opportunity that building sustainable and resilient supply chains poses, an increasing number of corporates are taking up buyer-led supply chain finance programmes, which shore up liquidity to suppliers while cascading consistent standards, says Nair.

“Supply chain finance as a product and a proposition is already mainstream but it is getting broader,” he explains. “During the pandemic, we saw how sovereigns and governments used the structure to push liquidity down to smaller companies, which was a key use case for the product. We are now seeing a huge increase in interest around linking it to ESG.” He adds that climate risk in particular is gaining more traction: “Our report indicates that about 62% of our multinational corporate clients will remove suppliers that endanger their carbon transition plan in just three years’ time.”

Because of its deep reach, supply chain finance is ideally suited to supporting trade for suppliers who meet acceptable thresholds against ESG ratings or metrics, such as gender equality, responsible sourcing criteria and labour practices.

“Global supply chain activities are estimated at US$19tn by the World Trade Organization,” says Nair. “The scale is immense, and as investors look to finance more sustainable activities, this is leading to clients wanting to put programmes in place which can tap into those pools.”

A holistic view of supply chains

The results of Standard Chartered’s survey reveal the extent to which corporates are seeking to take a more holistic view of supply chains to make them more flexible and resilient. Covid-19 demonstrated the speed at which ESG risks can propagate across the entire economy, and while a global pandemic is seen as a black swan event, the likelihood of future risks magnifying the weaknesses and fragility of today’s complex supply chains is high.

“The direction of travel is clear: if you are not conscious about ESG and the management of issues such as climate and labour risk, you might not be financeable in the future, and you certainly won’t be relevant to your customers,” says Mahabeer. “This shift is a market opportunity. Early movers that show leadership managing the sustainability of supply chains will gain a serious competitive advantage.”

The advent of new technology such as blockchain and smart contracts is already helping to improve transparency, finality and verifiability of transactions across long value chains. Of the companies polled in Standard Chartered’s Critical Indicators of Sustainable Supply Chains survey, 80% said that they used data to address supply chain optimisation challenges. They report using a range of solutions – from standard process automation solutions to more cutting-edge tools that facilitate tracking and tracing, to financial tools and platforms provided by their banking partners. This, in turn, is reinforcing the ability of supply chain finance to reach further down the tiers of suppliers.

“Supply chain finance will continue to evolve, and the real crux of this is the data,” says Harte. “By capturing the quantitative and qualitative data points that corporates have on their suppliers, we can take supply chain finance from post-shipment and post-approval potentially to the purchase order, getting liquidity into the supply chain at an earlier stage of the working capital cycle.”

He adds that Standard Chartered has already put this into practice in some markets. “We are not just financing the buyer’s supplier; we are seeing examples where the supplier’s supplier, and further, are also benefiting from this really broad ecosystem,” he says.

As the scope of supply chain finance continues to broaden, it is fast becoming a conduit for far-reaching transformation. The result is quicker and targeted financing solutions that bolster suppliers’ financial robustness, promote healthier and more sustainable supply chains, and future-proof trade against emerging risks.

The article was also published on Global Trade Review.

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