Increasing Sustainability Performance with Supply Chain Finance

Sustainable Supply Chain Finance can improve the environmental and social balance of supply chains. The principle “those who produce more sustainably benefit from better payment terms” was discussed by experts from over 30 countries at the second Supply Chain Finance Hub of the Technical University of Munich (TUM) at the Heilbronn Campus from May 19 – 21, 2021. The digital hub was designed to be highly interactive via innovative networking formats.

Environment, Social, Governance (ESG) criteria have gained acceptance for assessing the sustainability of supply chains. This assessment method, utilizing environmental and social criteria and compliance aspects, has also extended into the financial markets for evaluating the sustainability of investments, a topic of increasing importance for investors. This connection is significant considering the instruments of supply chain finance that can be deployed to improve the sustainability of suppliers in the long term as part of targeted Sustainable Supply Chain Finance (SSCF).

Using financing instruments

The second Supply Chain Finance Hub at the TUM Campus Heilbronn highlighted the fact that sustainability, working capital, and risk management in supply chains can be mutually beneficial; the networking event focused on “Increasing Sustainability Performance with Supply Chain Finance” and attracted 250 registrations from over 30 countries. “The international response proves the enormous global interest in this topic,” explains Prof. Dr. David Wuttke, Professor of Supply Chain Management at TUM Campus Heilbronn and organizer of the event.

Thousands, perhaps even millions, of supply partners may be involved depending on the complexity of the supply networks. The further down the partners are located in the supply chain, the more demanding it is for purchasing companies to monitor and exert direct influence. Nevertheless, the German Due Diligence Act begins with direct supplier relationships with the expectation that the requirements will be passed on. “Structures will likely change, even among companies that are not directly affected by the law, but whose customers are. This is even more the case if the European plans will also be implemented as they shall apply to the whole supply chain, i.e., to all indirect suppliers as well,” says Dr. Thomas Voland, partner at Clifford Chance, one of the leading international law firms, describing the upcoming changes. Dr. Alexander Regelmann, Global Category Manager at the chemical company Clariant, emphasizes the holistic approach to sustainable procurement: “If we as a company want to be credible to our customers, we have to include all products and commodity groups in our consideration.” As an approach, Dr. Anna Grobecker, BearingPoint, recommends, “Think about where your key levers are for a more sustainable supply chain. Among them are ‘quick wins’ and, of course, fields where you need to invest more.”

Creating incentives for suppliers

What concrete options are there for purchasing in terms of sustainable procurement? Is supply chain financing via reverse factoring based on the principle “Those who produce more sustainably are paid sooner and at more attractive rates (by a financial service provider commissioned by the purchasing company)” a suitable instrument for improving the ecological and social performance of suppliers? Do suppliers respond to such incentivization? Do they invest money in the right places? Prof. Suvrat Dhanorkar of Penn State University compares sustainable transformation to the push for quality management seen in the 1980s/1990s. “There were very similar debates then,” he explains, expressing confidence despite the complexity of the task given by research findings. Nonetheless, he is not the only one to consider the measurability of the criteria alone to be a challenge.

Financial markets play a role

For the financial markets, sustainability has long been considered a gamechanger. “The demand for and potential of sustainable investment opportunities are huge,” explains Katharina Michael, Managing Director and co-head of Global Transaction Banking Germany at HypoVereinsbank – UniCredit Bank AG. However, she clarifies with regard to verifiability: “ESG assessment is the responsibility of the buying companies themselves and/or rating agencies, but we are here to support and accompany our clients toward their pathway to green even during their transition.” Tom Dunn, CEO of London-based supply chain finance provider Orbian, knows how difficult many companies still find this topic: “Sustainable supply chain finance is about closely supporting both customers and suppliers in their transformation,” he emphasizes. After all, factors such as optimizing the company’s own working capital continue to play a role in supply chain finance.

Collaboration in purchasing/treasury

In any case, the requirements placed on these programs are high. In addition to proven financial expertise, sustainable supplier financing requires an in-depth knowledge of the company’s own procurement markets, commodity groups, and suppliers, resulting in highly individualized concepts. Only then will the levers fit, and the desired effects be achieved. Frank Wächter, Head of Treasury, has developed such a concept for Puma. Since 2016, the sporting goods manufacturer has been successfully promoting the social and environmental performance of its suppliers via ESG-driven reverse factoring. Frank Wächter emphasizes, “Treasury and procurement must work together closely for SSCF to cluster suppliers in a meaningful way and find metrics that are the right ones from a finance perspective, from a procurement perspective, and with a view to the company’s sustainability strategy.” This ultimately indicates the need for procurement, finance, and treasury to leave their towers and collaborate.

Leverage for risk countries too

“Sustainable supply chain finance needs dedicated management so that suppliers follow the path and needs to be implemented carefully” is Prof. David Wuttke’s summary of the discussions from the various networking sessions. In other words: develop slowly instead of rashly changing suppliers. After all, abrupt changes in suppliers also creates social effects that should be considered from a holistic perspective. Concomitantly, this is precisely where an opportunity lies: suppliers from developing countries often do not have their own access to the financial markets. As such, especially in critical procurement markets, preferred financing linked to ESG criteria can provide decisive impetus for sustainable development.

Another outcome of the second digital hub at the TUM Heilbronn Campus was the positive reception by participants regarding the short format with digitally equipped panel sessions, expert talks, interactive discussion rounds, and ample opportunities for personal exchange. The third TUM Supply Chain Finance Hub at the Heilbronn Campus will also take place digitally. Topic and date: “Blockchain and Supply Chain Finance” from October 26 to 28, 2021.   

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