The Next Generation of Sustainable Supply Chains
Filipe Mossmann, Managing Director, Heads of Trade Finance Sales, Americas
Three out of four supply chains were disrupted during the COVID-19 pandemic (source: BCI), but fewer than half of companies had supply chain business continuity plans in place. At the start of the crisis, finance executives’ immediate priority was to mitigate the impact of supply chain delay and disruption. By the end of 2020, many businesses had taken steps to address the most immediate challenges. Although supply chain risks remain pressing in some industries and regions, treasurers and CFOs are now starting to look ahead at ways to boost resilience, automation and sustainability in their supply chains over the longer term.
A flight to liquidity
The initial COVID-19 lockdowns in March 2020 marked the start of a period of uncertainty that eclipsed even the global financial crisis of 2008-9. Treasurers quickly became risk averse, drawing on credit facilities quickly to protect their businesses from the effects of a possible liquidity crunch. Trade plummeted as demand patterns shifted, while global supply chains were significantly disrupted.
In response to the crisis, many companies approached their suppliers to extend payment terms. While this approach would appear to offer initial benefit to large buyers, it simply moved liquidity stresses further into the supply chain, often to suppliers with less access to financing, leading to further instability. To avoid this, there has been a huge expansion in the number of corporations setting up or expanding supply chain finance (SCF) programs, and the use of platforms to access credit from multiple providers.
Many companies were keen to extend access to financing more widely, such as to tier two and three suppliers, to increase resilience across complex supply chains. This has been challenging to achieve in practice. Companies often lack visibility across their supplier ecosystem, making it difficult to target suppliers. Setting up new programs, and onboarding suppliers, can take time. Throughout this period, banks helped to overcome obstacles and provide liquidity by expanding existing SCF programs, maximizing credit capacity and simplifying and digitizing supplier onboarding.
A digital approach to sustainable supply chains
As the year progressed, supply chain disruption started to ease as people better understood the new reality. With the exception of industries that were particularly hard-hit by the pandemic, such as travel, tourism and hospitality, treasurers started to repay facilities, leading to high levels of market liquidity. Nevertheless, with the experiences of the pandemic still fresh, managing supply chain risk has remained a priority.
What has changed, however, is how treasurers choose to manage these risks. In particular, treasurers and CFOs are looking to digital tools to accelerate and reduce friction and delay in supply chains and identify risks more precisely. For example, implementing digital channels, whether web-based or host-to-host, for cash and trade has become a higher priority. Likewise, solutions to replace ‘wet’ signatures, and digitize physical documents such as bills of lading, certificates or origin and custom forms are now more compelling then pre-pandemic days.
There remain challenges in achieving a fully digital trade finance agenda, not least the need to ensure rigorous controls against fraud and cybersecurity. Hard copy documents with physical signatures are still required in many jurisdictions. Furthermore, the benefits of digitization may not be fully realized unless digital solutions are adopted from end-to-end, which involves multiple stakeholders. As opportunities for efficient, dematerialized processes become clearer, however, the trend towards digital technology to create efficiency and mitigate risk is likely to continue, enabled through banks’ digital solutions, third party partnerships or industry-wide platforms.
Sustainable supply chains through an ESG lens
Treasurers’ and CFOs’ focus on sustainable supply chains extends beyond their financial resilience. Companies did not compromise on their values during the pandemic, particularly when looking at environmental, social and governance (ESG) issues. In fact, these issues became more prominent. As noted in Standard Chartered’s Borderless Business Study, the importance of ESG grew by 5% in only six months during the second half of 2020. During the pandemic, which emphasized social inequalities and the positive environmental impact when production and travel was reduced, consumers’ focus on environmental and social issues increased. This additional consumer focus, which is shared by investors and the wider stakeholder communities, is proving instrumental in helping to drive corporate behavior.
However, it is not only the relative importance of sustainability and ESG that has changed over the past year, but also the way that companies reflect these priorities in their supply chains. Twelve to eighteen months ago, companies were looking for trade finance solutions that offered preferential financing rates to suppliers that met sustainability criteria, but this was often difficult to achieve in practice.
Today, the majority of large companies have made public commitments to defined ESG targets, particularly around carbon emissions, and are looking for ways to achieve them. Trade financing can play an important role in this, by connecting funds from investors interested in supporting ESG initiatives with companies that are part of supply chains that can meet ESG targets. This applies not only to private investors, but multilateral agencies too, who are looking for financing opportunities that enable them to meet their sustainability objectives. The outcome of this is the potential for more competitive terms and pricing.
What will be crucial for sustainable supply chains in terms of both financial resilience and ESG values in the months and years ahead, is not just the intent, but the delivery. For both ‘anchor’ companies in global supply chains, and investors in them, it is important to be able to monitor suppliers’ key performance indicators (KPIs) around ESG and sustainability in a consistent and auditable way. Digital technologies will help to achieve this, while also helping to achieve greater visibility across supply chains, accelerate transactions and reduce friction. Collaboration will also be essential to establish these KPIs, and to set common goals, both across supplier ecosystems, and with banks, regulators, rating agencies and wider stakeholders. With digitization, collaboration, targeted financing and common purpose, the opportunities for building the sustainable supply chains of the future are encouraging.