Saving the Planet and Boosting Profits

How Treasury can Support ESG in the Supply Chain

An organisation’s commitment to ESG – environmental, social, and governance – must go beyond lip service, extending into real behavioural and cultural changes both within the organisation and its external partners. Treasurers can facilitate the transition to sustainable practices by providing payment incentives to deserving suppliers through solutions such as dynamic supplier finance and by encouraging the reporting of ESG data through innovative technology platforms.

The days of a company’s annual report being the major yardstick for its performance and progress are now in the rearview mirror. Organisations are increasingly being measured by much more than pure financial data, with ESG performance becoming a critical barometer.

As Colin Sharp, Executive Vice President at C2FO, notes: “ESG reporting is of great interest to shareholders and other stakeholders including customers, employees, banks, and business partners.”

Increasingly, these stakeholders will no longer do business with, or work for, organisations that do not meet their sustainability and diversity expectations.

As such, organisations that do not embrace ESG and DE&I will likely experience damage to their share price and severely restricted access to capital, and this trend looks set to intensify as ESG regulation increases, supply chains become more competitive, and banks clamp down on corporates who are not driving ESG. “From the treasurer’s perspective, this makes the need to embody ethical, sustainable, and equitable business practices even more critical,” continues Sharp.

The potential business benefits of ESG in the supply chain are also significant. Research shows that around 80% of an organisation’s greenhouse gas emissions come from its supply chain^[1], rather than its direct activities. And companies that have implemented sustainable supply chain practices:

• Increased their revenue by 5-20%
• Reduced supply chain costs by 9-16%
• Increased their brand value by 15-30%
• Reduced their carbon footprint by 13-22%^[2]

But the question on the majority of treasurers’ lips is: ‘Where do I start with ESG?’. For Sharp, the answer is, “just start somewhere!”. Putting off the decision to embrace ESG and DE&I could be costly, he believes. “It’s important to get stuck in. Research is a great place to start – look at what your peers have achieved in this space, for instance." This was highlighted in a OECD/B20 report presented recently at the G20 in Indonesia.^[3]

Leading by example

For best practice in DE&I in the supply chain, Sharp points to North America as the leading light: “Whereas the ‘E’ aspect of ESG has been pioneered in Europe, the ‘S’ side – including DE&I – has traditionally been more of a focus among our North American corporates.”

One of the major success stories around supply chain diversity comes from a large US retailer, which has committed to spending huge sums with diverse and minority suppliers, providing the option of low-cost early payment through C2FO in order to support their working capital needs.

Indeed, in 2020, the retailer sourced more than $13.1bn in goods and services from diverse suppliers and has committed $100m over the next five years. And in April 2021, the company announced a commitment to an expanded early payment programme, in partnership with C2FO, that provides diverse and minority-owned suppliers with access to the capital they need to grow.

Often the biggest challenge to achieving growth, as cited by diverse and minority-owned businesses, is the ability to gain access to working capital.

Building on existing early payment programmes at the retailer, this programme aims to make access to working capital affordable, transparent, and more equitable by offering qualified diverse or minority-owned suppliers faster payments at lower rates. The interface provided by C2FO enables suppliers to select the invoices for which they would like to request early payments – a solution called dynamic supplier finance (DSF – see box 1).

Initially, the retailer independently funded this programme, but the company has now teamed up with leading global banks to provide additional funding capabilities.

While the technology behind C2FO-led DE&I DSF programmes (such as large retailer's) are easy to implement, one of the toughest parts of these projects is determining which suppliers qualified as diverse or minority-owned.  Here too, C2FO has a unique solution.

“We use data science in the C2FO platform to help categorise suppliers,” explains Sharp. This ensures that those suppliers that deserve or need it get access to finance at attractive rates. Women-owned businesses are particularly in need of this type of financial support. Data from two Bank of America studies showed that almost 60% of “women entrepreneurs [surveyed] say they do not have the same access to capital as their male counterparts, and nearly a quarter believe women will never have equal access to capital”.

Against this backdrop, the retail giant's sustainability programme “is the ultimate demonstration in action – supporting DE&I while also strengthening the organisation’s supply chain,” believes Sharp.

Transitioning to a greener future

Meanwhile, in Europe, the cutting edge of ESG is focused on environmental improvements, in particular the reduction of greenhouse gas emissions. These are categorised into three ‘scopes’ by the Greenhouse Gas (GHG) Protocol (see Fig.1). And Scope 3 includes all indirect emissions that occur in a company’s supply chain.

Dutch health technology company Philips is one of the leaders in this area. The multinational’s supplier sustainability programme has ambitious goals to see at least 50% of its suppliers committing to science-based targets for CO2 emissions reduction by 2025. This ambition is matched by an equally powerful sense of responsibility to consider the financial health of all of its suppliers.

Fig 1 - GHG Protocol Classifications

Source: https://www.carbontrust.com/resources/briefing-what-are-scope-3-emissions

Philips was looking for a solution that engaged suppliers of all sizes – from SMEs to large companies. The multinational therefore worked with C2FO to deploy DSF across 133 countries, with more than 20,000 suppliers.

Sharp comments: “Within a programme such as this, it’s easy, for example, to set up a ‘gold’, ‘silver’, and ‘bronze’ merit system, which rewards suppliers that are making efforts towards the reduction of carbon emissions with lower rates of financing. Obviously, the gold tier gets the lowest rate, but the idea is to help those in the silver and bronze tiers to transition over time to gold. So, the programme incentivises positive behaviours and creates a virtuous circle.”

Such a system requires suppliers to be ‘scored’ for their ESG activities. The buyer can either choose to perform this task themselves, or work with a third party such as EcoVadis. “This is one of the evolving areas of ESG, and one that is important in the context of combating greenwashing,” notes Sharp.

At present, the questionnaires used to score suppliers are filled in by those same suppliers – even when a third party is involved. “This means that the buyer, like Philips, needs to be transparent with suppliers, encourage them to disclose the challenges they are facing, and make it clear that all parties will benefit from clarity and honesty.”

Indeed, to avoid suppliers feeling that they needed to be perfect from day one [and therefore potentially not being totally honest about issues], Philips took the stance of  ‘doctor’ rather than ‘police officer’ in the process. “By working together and identifying areas to improve on, the suppliers feel better supported, and can set clearer ESG goals with concrete targets, which brings benefits for all parties,” notes Sharp.

Tech to the rescue

Despite the potential wins, ESG scoring and reporting can be burdensome for suppliers, especially SMEs. Fortunately, reducing the workload associated with ESG scoring is one area where technology development can assist. Sharp elaborates: “In 2021, Eni – the Italian-based oil and gas multinational – launched Open-es, a digital platform for sharing data on the sustainability of supply chains, in partnership with Boston Consulting Group and Google Cloud. This is an innovative and open tool for all energy companies engaged in the transition towards more sustainable practices in their own organisations and their suppliers.”

In order to encourage inclusivity and maximum sharing of ESG data, the Open-es platform is free to use for all participants. It can assist with improving ESG data collection and performance measurement, especially for SMEs, and also uses well-known industry ESG metrics for scoring, helping to work towards standardisation in a space that is currently lacking a consistent approach.

Collaboration is key

The Open-es initiative also demonstrates the power of collaboration when working towards ESG goals. Sharp concludes: “Working with others will help organisations to reach their sustainability goals more rapidly and more efficiently. The same goes for treasury departments – putting in place effective partnerships with internal stakeholders such as procurement, as well as working closely with suppliers, banks, and fintechs, will build a solid foundation from which to begin or progress treasury’s ESG journey.”