Organisations today find themselves increasingly focused on the issue of sustainability and for good reason. Environmental, Social, and Governance (ESG) have evolved from being a nice-to-have to being a central strategic requirement demanded by investors, shareholders, and consumers.
The pandemic has demonstrated how critical sustainability is particularly as organisations were hit by unprecedented challenges to their operations last year. For many businesses, only 10 to 40 percent of their footprint lies within their own organisations, the rest sitting within their often complex and geographically dispersed supply chains. As such, a key concern resulting from this crisis has organisations now focused on the urgency of assessing ESG within their supply chains and developing sustainable practices to ensure the overall sustainability of their operations and reducing reputational risks of environmentally damaging and unethical practices.
At the same time as global supply chains were disrupted globally, organisations were also faced with the critical task of shoring up cash to ensure adequate working capital to carry them through the situation. Faced with a lack of liquidity in the market, businesses soon realized the importance of supply chain financing (SCF) programs as a viable solution to support buyers and suppliers through uncertain periods.
In particular, with an increased interest and demand in supply chain financing programs, there was a corresponding accelerated pace of change towards digitalization in this area. Not only does digitalization help improve efficiency, but it also enhances accessibility by lowering entry barriers for suppliers to participate and access the liquidity. Supply chain finance programs are, therefore – in and of themselves – a tool to drive sustainability through enhanced liquidity and risk management, strengthening relationships between organisations and their suppliers, and helping smooth the impact of market disruption.
As well as being a source of flexible and sustainable financing, supply chain finance is increasingly being used as a tool to help organisations achieve their broader ESG objectives. For example, by introducing features that incentivize suppliers to meet certain ESG standards through tailored approaches to payment terms or cost of financing, organisations can deliver against their own sustainability objectives, but also drive those practices down through their supply chain participants.
As organisations deepen their focus on sustainability, having reliable data sources against which to benchmark their counterparties across different sustainability measures is crucial. Some will develop their own approaches to this, but many are looking to the increasing number of market sources – institutions that are developing industry-standard benchmarks to measure sustainability. As ESG continues to increase in prominence, adopting a commonly recognized set of measures will be critical as analysts, shareholders, and increasingly regulators seek to accurately assess an organisation’s performance in this regard.
Corporate treasurers and procurement teams are fundamentally important in achieving an organisation’s sustainability goals, given how much of a company’s footprint and associated risks lie within its supply chain. It is clear that many organisations today already have sustainability firmly on their radars and are already actively incorporating it into their strategies and operations. Building a sustainable supply chain finance program, which incorporates ESG-related incentives is one key way that many are seeking to drive the right behavior.
Technology will play an increasingly important role in this journey – the data created within supply chain finance programs through digitalization will allow companies to increase visibility and transparency of their supply chains, providing valuable insights enabling them to better manage risks around unsustainable practices. Distributed ledger technology is one innovation that, over time, is expected to help not just organisations but also end consumers gain greater insights into the sustainability of the businesses with which they engage.
As organisations emerge from the pandemic and seek to rebuild their businesses, it is anticipated that the recovery will drive significant changes within their supply chains. These include re-evaluating sourcing locations to diversify their supplier base, managing costs, responding to geopolitical shifts, re-shoring manufacturing to markets closer to end-consumers, and implementing supply chain finance programs to provide greater flexibility to suppliers during future market shocks. As these changes occur, there will be a unique opportunity for organisations to integrate sustainable best practices into their evolving business models.
In conclusion, implementing a supply chain finance program and sustainable practices within supply chains more broadly, are no longer just about driving efficiencies and managing working capital. Although those benefits remain high on the agenda, organisations now recognize that without integrating and incentivizing ESG practices within their supply chains – including through structuring financing arrangements to promote this – it will be increasingly difficult for them to achieve their own sustainability objectives and ultimately the long term success of their businesses.