Taking Care of Business

ESG’s Role in Supply Chain Resilience

In the second of this three-part series taking a supply chain finance perspective on some of the foremost issues of the day, experts from Taulia – Blake Evans, Head of Sales for Americas, Alexander Mutter, Managing Director EMEA, and Steve Scott, Head of Sales APAC – consider how ESG elements are influencing supply chain activities and driving changes in working capital management.

The rise of ESG as a force for good could not have failed to escape the attention of the global treasury community. Yet bringing its practice into day-to-day treasury activities still has a way to go. It’s not that most treasurers don’t want to make a positive difference to the environment, to society, and to the way businesses conduct themselves; but that the current ESG-focused treasury solution set is perceived to be relatively limited in its scope.

That said, an increasing number of corporate treasuries are beginning to find that there is more to ESG than green bonds. Products such as sustainability-linked loans and deposits, energy transition finance, investments in ESG-focused funds (including MMFs), and sustainable project finance, are now supported by stronger ESG frameworks, new guidance and regulations, and greater standardisation and trust among ESG ratings providers.

These developments are a sign that ESG is slowly shifting to the centre ground in many aspects of treasury and finance. Even areas previously untouched by ESG are now being drawn into the discussion. One area where ESG is making its mark is supply chain finance (SCF).

“Most conversations we have today with treasurers involve an ESG element, with most companies having an ESG initiative,” notes Evans. “They are learning that the economic value of putting working capital into the ESG equation is a strong play.”

Blake Evans
Head of Sales for Americas, Taulia

Treasurers, he feels, have influence over the amount of spend and investment in their organisation’s supply chain, typically by offering working capital solutions to ESG-rated suppliers. “They’re collaborating with procurement, which is itself reaching out to treasury to explore ways to invest in supply partners through ESG initiatives,” he explains.

With this in mind, Evans says the main interest currently is to understand who the company’s ESG-focused suppliers are, to carve these out and begin providing them with economic benefits to encourage further adoption.

Many suppliers will already have been mandated to undertake certain ESG-related initiatives – such as certification for fair trade – to remain on the supplier roster. With the costs of doing so ultimately being borne by the supplier, he says treasury has more tools available now to help those investing in these initiatives to better manage their working capital flows. SCF is the primary candidate.

SCF in action

Supply chains are a global concern these days. Yet there is little material difference in how ESG-focused supplier support is delivered around the globe, notes Scott. But then SCF has a natural resonance with certain common ESG goals. Indeed, by exploring the whole supply chain with new clients, and ensuring transparency and stronger liquidity is offered for particular suppliers, he feels that it often brings about an ESG-related outcome. This happens without necessarily being able to officially brand it as such, but then, as Scott says, this is not about greenwashing current processes, but about ensuring the sustainability of the supply chain ecosystem.

Extending reach

ESG programmes are usually agreed at a corporate level and then cascaded down through the organisation, notes Evans. Naturally, treasury is involved in the financial aspects of these programmes. But if treasury can leverage some of the sustainable financing programmes with suppliers administered through early payments and supporting their cash flows, he says many more SMEs can stop existing hand to mouth and start placing an ESG lens over their own processes. They can even begin examining possible investments needed in those processes to make them more sustainable.

For this reason, says Mutter, “we are seeing an increasing number of projects where supplier finance has a very clear objective to jointly achieve specific ESG goals”. The range of projects, he notes, is broad, including achieving carbon neutrality, managing waste water treatment, and ensuring the fair treatment of the workforce. “Through finance, treasury can work with procurement to incentivise suppliers to work towards jointly set ESG goals, receiving better payment terms when they reach those goals.”

Alexander Mutter
Managing Director EMEA, Taulia

A programme such as Taulia’s Sustainable Supplier Finance solution can facilitate practical outcomes for suppliers. These may, for example, be an operational reduction in water usage, the deployment of more fuel-efficient machinery, or the digitisation of processes to remove paper consumption. For that corporate buyer to see the effect of its ESG engagement with its suppliers, there will need to be measurable and certifiable targets set, says Evans. “This ensures that real improvements are happening, and it avoids those accusations of greenwash.”

Currently, there is no standardisation for the application of ESG metrics. A number of ratings agencies operate in the space, which is helping to bring thinking into alignment. But, as Mutter warns, working with different agencies can still produce different sets of expectations. “While it’s good news that we are seeing a trend towards using agencies – that at least brings an organised and neutral perspective on activities – the challenge now is to map all these views into one rating logic.”

Mutter has high hopes. One day, he says credit and ESG ratings will be amalgamated. However, while the industry is still moving towards harmonisation, he believes that it is important for buyers to understand which suppliers in their ecosystem are not ESG rated. This enables them to take appropriate action. When individual ecosystems begin to share goals, he says standardisation moves closer to being a reality.

Reaching this state individually requires a corporate to have a view of its entire supplier base. “To reach harmonisation, first we need to achieve the scalability, then the transparency,” Mutter notes. “And for most corporate buyers, treasurers, logistics operations and even sales departments, an intelligent real-time data management system needs to be in place.” With ESG reporting regulations also tightening in Europe, he says this is where digitalisation and a platform such as Taulia really helps.

Treasury power

Notwithstanding variable goals and supporting metrics, the reality of suppliers becoming more efficient and ESG-amenable has a cash requirement, notes Scott. “Treasurers need to take steps to educate their procurement colleagues on the capital impact that doing so has on their supplier base,” he advises.

The confluence of purchasing and ESG presents a good example of where once siloed functions are now liaising to achieve the desired results, he says. “The different functions and their processes must be held together to deliver, with treasury serving the whole ecosystem through tools such as SCF, through its advisory capacity, and its expertise in managing and advising on financial risk.”

With cross-functional alignment within the corporate setting growing as ESG strategies are rolled out, Scott feels that treasury’s scope of influence is widening. The treasurer’s responsibility is clearly not just to create the green bond that supports ESG-related infrastructure investments. While this remains an important step in the journey, he believes that “treasury can have the same influence across the entire supply chain”. 

Indeed, in taking into consideration the working capital goals of the corporate, and those of its supplier base, alongside the creation of liquidity that achieves strategic ESG outcomes, he feels treasury is now set on a course to support the whole supplier ecosystem. “And putting in an ESG-linked early payment programme is one of the clear ways this can be achieved.”

Steve Scott
Head of Sales APAC, Taulia

It’s the kind of wider responsibility that saw the treasury team at Bridgestone receive a Highly Commended accolade in TMI’s Treasury4Good Awards 2021 for Best Sustainable SCF Solution. The Japan-based multinational tyre manufacturer worked with Taulia and financing partner J.P. Morgan to establish a sustainable SCF programme in Europe.

The solution uses a variable pricing matrix that links to data provided by independent rating agency EcoVadis. “The rating from EcoVadis is an important part of the programme because it enables Bridgestone to make conscious investment decisions with the suppliers that are onboard,” explains Evans. Indeed, more favourable pricing is offered to those that are verified as hitting certain sustainability goals, which may reflect any of the ESG components.

As well as providing financial incentives, the programme also encourages suppliers to improve their own EcoVadis ratings, and by extension, improve their Bridgestone offer. The rating is private but should the supplier choose to obtain its own rating, this will support its ESG credibility within the wider trade ecosystem. “It becomes a competitive differentiator,” comments Evans.

Global goals, regional differences

Within the components of ESG, different focuses per region are opening up, says Scott. He notes that these are relative to the marketplace, with each region or jurisdiction steered by a different style of governance, political will, and social construct.

“While wealthier nations have a responsibility to invest further in ESG, especially in environmental matters, the primary objectives of emerging economies is to create wealth. From a marketplace perspective, their ESG goals will be different.”

Indeed, Europe is often seen as being more advanced than other regions in terms of matching ESG criteria with finance products, notes Mutter. Here, a key driver for change is customer sensitivity to sustainability, and setting goals and agreeing targets with partners is a highly visible practice.

“The European region is the world’s pacemaker, but we’re also seeing even greater engagement in certain industries too,” he comments. The energy sector in particular has been visibly changing its business model. For example, Ørsted in Denmark has become the world’s largest developer of offshore wind power, producing 90% of its energy from renewable sources. Others will follow, says Mutter. “We’re seeing the same trend in the automotive sector, with the switch to electric vehicles and to synthetic fuel.”

Acknowledging regional variations in supplier ESG focus, Evans says that Taulia’s partnership with EcoVadis is designed to enable every client on an SCF programme – and it is a global operation – to be established with meaningful and sympathetic goals. “Some global standards are used,” he explains, “but the way targets are applied is necessarily based around local or regional industry or sector ESG challenges and interests.”

Of course, Scott is cautious not to suggest that a particular region should be following a specific ESG path. Instead, he argues that the important task for vendors such as Taulia is to make sure client organisations are equipped to deliver their desired outcomes.

“The toolkit that Taulia provides – and that includes our platform and our partnerships with specialist providers such as EcoVadis – gives treasury and procurement teams the centralised capacity to deliver on the objectives that their board and senior executives have decided is what they need to achieve, wherever they are.”

Connected world

Supply chains are complex ecosystems. They are often highly dependent upon cross-regional imports and exports. For this reason, says Mutter, “all ESG objectives have to be global in ambition”. He believes that a business can’t be focused on one geography when applying ESG targets, nor can it consider only the largest players. “Targets have to be holistic, ensuring they apply to the activities of the entire ecosystem; any digression puts your own business reputation at risk.”

This is a challenge, not least from a data management perspective. But as Mutter has already alluded to, an SCF platform such as Taulia can provide the insight and capability to deliver lower-cost liquidity to the suppliers that are making good progress with ESG, and incentivise others in the ecosystem to commit to a policy of sustainability.

For Evans, this enables those suppliers to invest in potentially capital-intensive development projects that will make them more attractive from both an operational and an ESG perspective, “and possibly drive more business their way”.

As part of a broader digitalisation strategy, Scott adds that Taulia’s SaaS platform is capable of driving API connectivity into an entire supply chain. This can give direct access into the range of tools that ESG-focused corporates use to manage their suppliers, answering Mutter’s call for a holistic approach.

“It’s about bringing best-of-breed tools together so that corporates can, for example, not only manage carbon-capture in their logistics channel, but also incentivise their logistics suppliers to aspire to and reach new ESG goals,” he explains. This reach can be replicated across entire global supply chains, enabling all participants, from the largest to the smallest suppliers, to adopt an ESG view that aims to take care of business, and the planet, far into the future.