Breaking Boundaries: Smart and Sustainable Supply Chain Finance

In an increasingly accountable business environment, corporates are looking for new ways to support their suppliers to adhere to sustainable and ethical standards. Alongside creative supply chain finance (SCF) solutions, treasurers are analysing how emerging technologies can assist them in making their supply chains more sustainable – in every sense.

Ignoring sustainability is no longer an option. Although treasurers may not be the traditional figureheads in this space, they are increasingly expected to play a more active role in ensuring the organisation’s sustainability goals are met – especially across the supply chain. 

James Binns Global Head of Trade and Working Capital, Barclays

But let’s be clear upfront about what we mean by ‘sustainability’, and what’s driving it. In its broadest sense, sustainability is defined as an organisation’s ability to conduct business in a manner that is beneficial (or not harmful) for people, the planet, and profits. This is often referred to as the ‘triple bottom line’.

Deniz Harut, Executive Director, Sustainable Finance, Standard Chartered, builds on this definition, explaining that corporates’ current sustainability focus falls primarily into four broad categories:

1. Environment, health and safety (EHS)
2. Climate change
3. Social
4. Business ethics and governance.

As for the drivers leading to increased interest in sustainable supply chains, Harut says: “Widespread recognition that risks from direct and indirect supply chains need to be better understood and managed; increased pressure from investors, shareholders and consumers to focus on the wider ESG agenda; and increased demands for sustainability reporting and transparency, have all encouraged this discussion.”

Traditionally, supply chain risk management has focused on areas such as environmental compliance, workplace health and safety and waste. “However, often driven by a shift in generational expectations, risks are now arising from new areas, such as gender equality and modern slavery,” notes Harut. “Corporates recognise that previous sustainability commitments did not go far enough and are increasingly aware of the reputational risk as well as the threat of litigation from not meeting acceptable standards,” she adds.

Geoff Brady, Head of Trade & Supply Chain, Bank of America Merrill Lynch, echoes this. “Sustainability is on almost every client’s radar today. Corporates are keen to address customer demands around environmental and ethical standards, especially when it comes to sourcing of materials and services. Building and maintaining a sustainable supply chain is also a proactive way of supporting additional sales – and treasurers are becoming increasingly aware of the potential business benefits of embracing sustainability.”

It’s important to realise, though, that sustainability in the supply chain is not a fad. Sriram Muthukrishnan, Group Head of Trade Product Management, Global Transaction Services, DBS notes: “There’s a tendency to think that sustainability is a relatively new trend. While it has grown significantly in popularity over the past few years, especially since the UN set out its 17 Sustainable Development Goals (SDGs) in 2015, some clients have been looking at this for almost a decade.”

Regardless of the timeframe of commitment, Jacques Levet, Head of Transaction Banking EMEA, BNP Paribas CIB, says that developing a sustainable supply chain can lead to:

Although the benefits might be clear, how can treasurers go about building more sustainable supply chains? What sustainable financing solutions are available to them?
 

Burcu Senel Global Head of Trade Finance Propositions, HSBC

Sustainable solutions

“Finance has a vital role to play in supporting businesses operating sustainably and more broadly in support of the UN Sustainable Development Goals,” says Burcu Senel, Global Head of Trade Finance Propositions, HSBC. And one example of a sustainable SCF solution, notes Harut, “is sustainable shipment letters of credit, whereby the buyer can request special documents that confirm the source of goods, with Standard Chartered checking that these documents are received, although not checking for authenticity. Another example is sustainable loans with a margin linked to performance against environmental, social and governance (ESG) metrics”.

Bank of America Merrill Lynch is also getting creative with solutions in this space. “One way we’re making SCF more sustainable is by supporting green initiatives, such as wind and solar projects, where financing is tied to confirmed receivables. While these aren’t typical SCF programmes, given the start and end dates associated with the confirmed receivables, it’s still a great opportunity for the bank to support sustainable projects that align with our own ESG goals,” Brady comments.

Meanwhile, in the trade finance arena, James Binns, Global Head of Trade and Working Capital, Barclays, highlights the bank’s green trade loan, which was launched in May 2018, and has become increasingly popular. “Green trade loans can be used for regular or one-off purchases of goods and raw materials to support a variety of sustainable purposes including energy efficiency, renewable energy and sustainable food production. Treasurers can leverage these loans to help advance the corporate’s overall green agenda, while reducing borrowing costs,” he explains.

“In the SCF space, we’re looking at ways to use existing SCF solutions in order to help clients incentivise or reward, ESG-compliant suppliers,” says Binns. One of the most obvious ways of doing this, he explains, is to offer another pricing tier on the SCF programme for suppliers that meet certain sustainability criteria. In its simplest form, this kind of arrangement will involve the buyer identifying qualifying suppliers and informing the bank that they should qualify for the incentivised financing rate.

Of course, there are challenges around this, Binns admits. “As a buyer, how do you know your suppliers are meeting the agreed sustainability criteria, for example? Currently, there are few widely accepted international standards to assist with this. We are, however, seeing progress in certain sectors, such as the food and clothing industries – where goods can carry the Fairtrade label. The packaging sector is also making headway, since consumer buying behaviours have already changed and single-use plastic is becoming less acceptable. But a single set of internationally recognised sustainability standards would be a huge step forward.”

Brady agrees on the need for standards, stating: “Right now, it is up to the corporate buyer to determine the sustainability traits that match its organisational goals. Naturally buyers would like to see a set of standardised credentials in this space.” But he is also sanguine about the prospect. “This is tough, however. We were, in fact, involved in an early-stage project to define sustainability criteria for small businesses, but even deciding on the definition of a ‘small business’ was a hurdle. So, introducing global standards around this is an incredibly difficult task.”

Spreading the love

Despite the current lack of standards, there is great potential for sustainable SCF – especially when out-of-the-box thinking is applied. According to Brady: “One of the mindset shifts that needs to happen in order to make the most of sustainable SCF is to focus not only on the main supply chain, but also the broader supply ecosystem. This means looking for ways to extend financing to smaller suppliers and even suppliers’ suppliers.”

Geoff Brady Head of Trade & Supply Chain, Bank of America Merrill Lynch

He continues: “At Bank of America Merrill Lynch, we are well positioned to work with corporate buyers to open up sustainable financing to their wider supply ecosystem, since many of these smaller vendors are also our clients. The bank acts as an extension of the buyer’s relationship with the supplier – and we can suit the needs of both parties. Buyers can benefit from adding new suppliers to their SCF programmes, ones that were perhaps previously seen as being too small; and suppliers that meet pre-determined sustainability goals can be rewarded with discounted financing, leading to better economic value for everyone.”

Binns also highlights this trend of SCF going much deeper into the supply chain – but credits technology as a major driving force. “SCF platforms are changing as a result of application programming interfaces (APIs). Corporates do not want to use multiple different proprietary platforms any more – they increasingly want a core platform that is cloud-based, API-enabled and for all of their banks to fund their suppliers via that platform. This means the corporate can use one platform, have one legal contract, and have one set of documentation – as well as picking a technology that suits them.

“At the same time, technology means the know your client (KYC) process is increasingly less burdensome, thanks to digital solutions making the process far more streamlined and automated. This has led to an improved on-boarding capability for SCF schemes, which until now has been a hurdle to rolling out SCF more broadly.” All that adds up to the ability to deliver SCF much deeper into the chain. “It’s becoming more about suppliers of all sizes, not just the larger ones. Moreover, we are now seeing SCF programmes filter down to suppliers’ suppliers,” he notes.

 Michael Sugirin, Head of Open Account and Trade Implementation, Standard Chartered, says that fintechs are also helping to make “deep-tier financing – the financing of tier 2 and tier 3 suppliers – possible”. This, he adds, is “an aspect of supply chain financing where we have seen increased interest”. He goes on to explain: “Fintech firms are becoming more firmly entrenched as key players in the SCF space with the value-added solutions they bring, such as digital on-boarding and data-based credit underwriting.”

Sriram Muthukrishnan Group Head of Trade Product Management, Global Transaction Services, DBS

DBS’ Muthukrishnan agrees that fintechs are becoming an important component of the SCF ecosystem. “We’ve recently partnered with LiquidX, which is working to make trade assets a more liquid asset class. Already, we have completed a primary receivables transaction on the platform with one of our relationship clients. I see platforms such as this opening up new avenues for SCF and trade finance and making the trade finance market accessible to a new class of investors, while making it easier for large corporates to deal with multiple financiers through a single platform.”

In Sugirin’s view, the rise of fintechs in this space highlights how, “technology continues to be the primary agent of change in the supply chain finance arena”. He goes on to explain: “The use of drones and 3D printing – along with geographic shifts – are reshaping client ecosystems and shifting supply chains. Third-party platforms are now a standard approach for corporates, with many of these offering global solutions across multiple markets. On the domestic front, new platforms and consortiums are also emerging.”

Elsewhere, “the use of data-led processing is delivering tangible benefits by shrinking working capital cycles,” he says. “And in what is often considered the ‘last mile’ of SCF – the pre-shipment and pre-acceptance leg – new opportunities are arising with the emergence of tokenisation, data and other digital applications,” Sugirin comments.

Buzzwords such as artificial intelligence (AI) and blockchain are also now making concrete changes in the SCF space, continues Sugirin. “Better risk management is probably the key contribution that AI brings to the table in supply chain finance.” AI, he says, enables the emergence of new data-based business models that can transform how banks assess and underwrite risk across supply chains, such as predicting performance risk, identify financing opportunities and new lead generation, among other tasks.

Blockchain also has a big role to play in risk management, he believes, by “helping eliminate the risk of double financing and fraud, and providing greater visibility on supply chain flows and risks. Indeed, blockchain’s ability to create transparency and trust combined with the use of tokens and smart contracts will help facilitate supply chain finance across all tiers of the supply chain, thereby providing financing to the suppliers that need it most”. Echoing Binns’ earlier observation, Sugirin also highlights that “blockchain plays a key role in streamlining on-boarding, leveraging distributed ledger technology (DLT) to create a KYC registry to reduce the time taken and costs associated with customer due diligence”.

Jacques Levet Head of Transaction Banking EMEA, BNP Paribas CIB

Meanwhile, DBS is involved in an interesting digital supply chain project in China with Zhongdu Logistics and Wanxiang Blockchain to create an automotive blockchain platform called YunLianMeng that connects car manufacturers, exporters, carriers and car dealerships. Through the platform, participants along the supply chain can access data on their order and delivery status in real time.

“Rather than pieces of paper being passed between small logistics providers moving the vehicles across the country, everything is now logged on the blockchain,” says Muthukrishnan. “This enables transactions to be completed seamlessly, and has cut down the time for trucking firms to be paid from 45 days to one, since everything is updated on the blockchain in real time. An important aspect is one of financial inclusion – when we are able delve deep into the ecosystems of our clients to enable financing to medium, small and micro enterprises.”

DBS also disburses trade financing to participants based on digital data stored on YunLianMeng. This removes the need for paper-based supporting documents and cuts short the credit approval process. As such, participants on the blockchain platform can benefit from a shorter working capital cycle, which translates to savings in supply chain costs.

More recently, DBS has also partnered with Rong-E Lian, a blockchain platform owned by SF Group, China’s leading logistics provider, to provide digital trade financing solutions to its multi-tier suppliers. “This is part of the bank’s initiatives to deepen and broaden its partnership with businesses in the Greater Bay Area. It marries digital with sustainability by developing solutions that build towards a future of financial inclusion. Cash flow is critical to the sustainability of any business, but even more so for SMEs. By leveraging technology and data patterns from transactions made on the blockchain platform, we are able to assess their credit history and offer them trade financing within the same day,” Muthukrishnan enthuses.

Michael Sugirin Head of Open Account and Trade Implementation, Standard Chartered

Reality check

With so much positive news, it is tempting to think that supply chains and trade finance flows are well on their way to being digital and sustainable. But there is still a long way to go on both fronts. Senel comments: “Whilst banks have developed all manner of digital solutions, trade finance has remained stubbornly paper-based. There are simply too many participants in a transaction to make a digital solution work – banks are only one part of the chain including shippers, insurers, freight-forwarders, customs authorities, and the importers and exporters themselves.”

And although she is clear that blockchain has actual value for trade finance, because it “allows all parties to maintain their own database, but one that is shared,” she says that “adoption is a slow process, especially as the technology lacks business standards or a legal framework. Until those things are in place, these projects will remain dominated by a few big corporations willing to experiment”.

Levet also cautions: “It is not one technology alone that will make a true difference but rather smart combinations of new technologies – like IoT, cloud, API, AI, and blockchain – which will be real game-changers. Think of new technologies as being just the ingredients of a complex recipe. But then you need to bake the cake.”

Similarly, it would be a mistake to think that sustainable SCF is already an off-the-shelf solution. “Because sustainable SCF is still nascent, I don’t believe this is the right time to be launching a product that carries a sustainability ‘label’, ” says Brady. “In the meantime, we have a very flexible suite of solutions that we can plug sustainability requirements into for our clients, on a case-by-case basis,” he notes.

Brady adds: “It’s important to remember that sustainable SCF is still in its infancy. Although it’s of increasing interest to clients, there is a long way to go before it becomes everyday practice in the industry.”

And reiterating why all this matters, Binns comments: “Treasurers have an increasingly strategic role to play in terms of achieving and adding value to a corporate’s broader goals, rather than purely financial goals. By getting sustainable SCF right, not only can treasurers help the company achieve its brand and ethical goals, they can also potentially gain access to cheaper finance for their supply chain.”As discussed, one of the factors that will help widespread adoption is sustainability standards. Until those are available, Binns says that “corporates can still look to make their supply chains more sustainable; starting with establishing a governance process and a set of sustainability criteria around which they assess their suppliers.” At the same time, “corporates ought to establish processes for auditing to those standards,” he suggests.

So, whichever angle you approach sustainable SCF from – people, the planet, or profits – there are compelling arguments for treasurers to get onboard. And technology is, slowly but surely, making sustainable SCF more of a tangible reality for buyers and suppliers of all sizes. In other words, there are no more excuses. It’s time for action.