3 ways to finance sustainability

Logistics and Supply Chain News

By George Kitchen, Founder, Do It Properly.

The supply chain is in the spotlight. Global networks are stretched and scrutiny is higher than at any other time in the last 10 years. Future concerns about operating licenses, cost reduction and ratcheting customer and media expectation mean that accountability for ESG has reached the board. Surveys suggests this won’t be going anywhere anytime soon.

Some companies are taking action. In 2019 Danone saved EUR 700m by implementing the UN’s Sustainable Development goals, in part by focusing on the supply chain to achieve tough targets. Danone has now committed EUR 2.5 billion over the next two years to invest in climate action and a changed business model.

Here’s the problem. Most companies aren’t Danone, and they don’t plan to be. It takes time to even decide where investment will make the biggest impact. New initiatives cost money, and require support from buyers, investors, supplier and distributor.

As ever, meaningful change only happens when it is both on a global level, and is made real on a micro, product level. The complex network effect of supply chains means finance is in a good position to drive real change, and it would seem that the industry is responding.

Innovative use of supply chain finance reduces buyer capital requirements to implement SDG driven measures, whilst providing a valuable incentive for the supplier community.

Financing sustainability – 3 ways

  • New investment in new projects

Financed projects and initiatives are nothing new, as long as a clear business case and reasons for financing can be made. In addition, supply chain financing as a buffer for cash flow has been a solution for centuries, but has seen a particular boom since 2008. Institutional lenders are already seeing the opportunity in providing supply chain finance based on certification or a commitment to sustainability, and are effectively making investment decisions considering sustainable credit-worthiness.

In addition, newer providers are utilising a Greensill shaped gap to take this a step further. Prime Revenue, a financial technology company that specialises in supply chain finance, identifies that new investors are specifically looking for buyer driven initiatives that support the supply chain.

New factories, new distribution centres, and analytics initiatives are all within scope, because they offer a clear, defined ROI, and the opportunity to displace institutional backers.

2.Use existing frameworks

From September, Tesco will be offering grants and better payment terms for suppliers with good ESG credentials. The buyer driven approach appears particularly attractive for purchasers who don’t want to look outside of their existing supplier and distribution models.

This is something most SMEs in particular will be more comfortable with, and is an increasingly popular approach. Suppliers and buyers are able to communally offer more flexible payment terms, better credit, and lower fees to companies that align with their goals. There are other benefits too. Scott Galloway, an investor, professor and entrepreneur, notes that verticalisation and localised distribution have a huge role to play in differentiating competitors as we come out of the pandemic. It looks like having the ‘finger on the pulse’ of how you supply and distribute will generate more value and make a bigger difference to the planet. Financing better behaviour could just be a first step.

3.Smart contracts

Finally, new technologies like blockchain provide data, governance and action outside of Tier 1 buyers. The Malawi Tea Sector is piloting an innovative solution to bring smaller suppliers onside without hefty regulatory and buyer driven initiatives. In exchange for adding sustainability metrics to the blockchain, something important to proving environmental footprint at a product level, suppliers gain access to supply chain finance and business support.

These aren’t, and will not be, the end of the options available. Public institutions are already backing supplier finance, in the hope that this will drive new initiatives, and individual organisations are actively gaining accreditation to gain access to a more diverse pool of financing. With this much activity, it’s important to remember that these projects happen within a network, and all stakeholders need to be bought in. Strategically, finance is a key part of delivering action, and serves as a great place to start planning. ✷

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