Green money: financing scheme rewards suppliers who champion sustainability
Although supply chain financing schemes have been around for a while, ING is now using the tool to enable buyers to reward suppliers who prioritise sustainability.
When companies look to become more sustainable and make their operations greener, their attention quickly turns to their supply chains, because this is often where their biggest social and environmental impacts lie.
“In most cases, only 10-30% of a company’s footprint lies within its own operations. The majority of impacts lie in consumer use and the supply chain,” says Martin Chilcott, CEO of 2Degrees Network, a supply chain collaboration network.
According to CDP, on average, for every tonne of greenhouse gas emissions a company emits, another four are emitted by its supply chain. It’s a similar story when it comes to other sustainability concerns – such as water use, worker rights and the use of child labour – many of the impacts to society and the environment are engineered in the supply chain.
Companies encourage their suppliers to improve their sustainability performance in a variety of ways – from ensuring that they report on their impacts, which raises their awareness and ability to make changes, to setting concrete targets to reduce emissions or water use.
Such “stick” approaches are costly, difficult to verify and do not always work, meaning that more collaborative methods are needed, says Chilcott.
Financing sustainable supply chains
Today there is a “carrot” to encourage suppliers to become greener – supply chain finance. Although this tool has been around for awhile, until now, supply chain finance has not been used to drive sustainable behaviour.
It is a way for companies to strengthen their relationships with their suppliers while reconciling two apparently incompatible trends – the desire of suppliers to be paid as quickly as possible, and the desire of buyers to pay as late as they can get away with to improve cash flow. The London Institute of Banking and Finance says this issue is common and often means that suppliers are left without the funds needed to meet ongoing expenses and have to borrow to plug the gap.
The benefits of supply chain finance for suppliers include the ability to raise working capital on the strength of their customer’s credit rating rather than their own, and improved cash flow management. For customers, it can make the supply chain more resilient while streamlining the processing of payments.
Dutch bank ING has offered supply chain finance to buyers since 2010, explains Marc Huijben, a member of the bank’s global supply chain finance team. “We offer a website platform on which both buyers and suppliers can see the invoices. As soon as a buyer approves an invoice, ING buys the invoice – at a discount – from the supplier. Then the buyer pays us when the invoice is due. That means the risk of non-payment has switched from the supplier to the bank. The discount is based on the credit rating of the buyer.”
“The more sustainable a company’s supply chain is, the more secure it is and the more sustainable the business is.” - Armand Ferreira, ING.
Now, as part of its commitment to sustainable finance, the bank is offering buyers the opportunity to build in to the scheme incentives, which encourage suppliers to be more sustainable. “It’s not just about what ING can do to become more sustainable itself but about how we can stimulate our value chain, including our clients, to become more sustainable, too,” says Armand Ferreira, director of sustainable finance for ING Wholesale Banking.
“The more sustainable a company’s supply chain is, the more secure it is and the more sustainable the business is,” Ferreira adds. “Buyers want this because their own clients are demanding it and investors want to put their money into companies that behave responsibly, as these tend to be less risky.”
The ING initiative allows buyers to reward suppliers with an enhanced focus on environmental, social and governance (ESG) issues, by reducing the discount on invoices paid through supply chain finance schemes.
The bank is talking to several companies in a range of sectors including clothing, retail and engineering about offering green supply chain finance. It expects to have its first programmes in place by the end of the year. While a conventional scheme takes between three and six months to set up, green supplier finance takes a little longer because those taking part need to be assessed on their ESG performance, by independent sustainability consultants.
In many cases, buyers already have a procurement assessment programme of their supplier base in place so isolating ESG factors should not be too much of a problem, says Ferreira. “Companies don’t need to extend this to all their suppliers and it doesn’t have to be obligatory – they can start with those that want to join the programme,” he adds.
“I think that once the first programmes are set up, other buyers and suppliers will see that it’s a good idea. Those looking to set up supply chain finance programmes for the first time will want to go sustainable and those that already have programmes will want to amend.”
Photo: ‘For retailers, 90% of the impact is in the supply chain.’ Photograph: Stephane Mahe/Reuters.
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