Treasurers can help to lower emissions and build resilient supply chains. Here’s how

CFOs and Corporate Treasurers have traditionally been confined to solving short- and mid-term financial concerns. In some cases, companies’ top finance positions have acted as a brake on the green transition, considering it a cost, not an investment.

Those times are behind us — particularly when it comes to building resilient supply chains and improving sustainability.

Increasingly, treasury corporates are achieving a triple win. They are improving the resilience of their suppliers, bolstering their balance sheets and improving their sustainability efforts. Much of this success is the result of technology innovation and forward-thinking leaders.

This is possible by reimagining an “old” tool: Supply Chain Finance (SCF) through tri-partite and more cooperative approach. The idea behind SCF is simple: a supplier sells invoices to a financial institution to receive early payments before the original due date at a small discount. Global SCF volumes have grown from $330 billion in 2015 to $1.8 trillion in 2021, with 2021 seeing a 38% growth on 2020 volumes.

New programmes have been exploring a specific type of SCF called “reverse factoring.” This tool was first established in the 1980s with the buyer coming in as third party to provide an ultimate payment obligation for the invoices to be financed. This approach leads to pricing advantages as the credit risk is assigned to the often bigger and more solvent buyer. The capital needed to accelerate this payment usually comes from a financial institution working in concert with the buyer, and less commonly from the buyer itself.

SCF programmes improve resilience by providing suppliers with earlier payment. The anticipated capital can be used for vital functions, such as paying employees or acquiring the raw material needed to produce more goods. This is particularly helpful for small and medium-sized enterprises, which often have limited working capital available. The large buyer also benefits from having healthier suppliers. The pandemic has shown that companies that have been able to keep their traditional supply chain links were able to better navigate the disruptions of the past three years.

The big buyer improves its balance sheet by developing an SCF programme as it usually involves paying the involved financial institution later than it would otherwise pay the supplier. While this has traditionally been seen as the main incentive for corporates to run such programmes, regulation is shifting towards demanding more clarity from corporates on how programmes are structured. Companies that have successfully navigated the new regulatory requirements have been able to keep their programmes, while also being seen as more credible by their investors and authorities.

The need to transition to net-zero and sustainability provides SCF programmes an additional purpose. Scope 3 emissions — those indirect emissions not included in Scope 2 that occur in a company’s upstream and downstream value chain — account for up to 11 times direct emissions. As much, reporting and reducing carbon footprint is quickly becoming a key performance indicator for many companies.

To this end, the International Finance Corporation, Puma, Nike and Levi’s kicked off efforts to use SCF to tackle this challenge through in 2015 by extending the ‘standard’ programme with one extra component: the fee charged to suppliers is higher or lower depending on the sustainability rating of the supplier itself. The goal was to incentivise suppliers to reach higher level of sustainability through lower financing costs. They called it Sustainable Supply Chain Finance (SSCF) — and it is becoming increasingly successful.

A series of international privately-owned banks — HSBC, Standard Chartered, BNPP and Santander to name a few — jumped on the model. Existing programmes, such as Puma’s ForeverBetter Vendor Financing Program, have also grown in size. Since 2020, new programmes are also being added and being acknowledged for their achievements. The 2022 Global SCF award, for example, went to German giant Henkel for implementing a successful sustainable programme.

SSCF is not without its challenges, however. New standards must be designed in a way that does not exclude smaller suppliers due to increased compliance costs. SSCF programmes have largely been limited to tier 1 suppliers so far, but a significant amount of emissions come from other layers of the supply chain. Deep-tier SCF is the next frontier and recent research has come up with clear action points from all the stakeholders in the ecosystem to move it forward. Those include exploring new models to address supplier concerns and adopting legislation to enable trade digitalisation.

Overcoming these obstacles is not easy — but it is achievable. SCF is a powerful arrow in the buyers’ quiver. It is available now and has the potential to make a significant impact by providing incentives for suppliers to have more sustainable operations.

Implementing these programmes depend on CFO’s and treasurers’ ability to cooperate between themselves and to be true business partners to their colleagues in procurement, supply chain and legal teams and, importantly, their suppliers.

Treasurers also need to be open to technological innovations and hold dialogues with regulatory agencies to ensure new regulation creates an enabling environment for scaling SSCF. We count on them to jointly test and improve options, such as sustainable SSCF programmes, and to become key stakeholders in the sustainability transition — a mission too important to ignore.