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INSIGHT


Bringing sustainability into supply chain finance

Supply chain sustainability is growing in visibility and importance as companies with international operations increasingly put environmental and social responsibilities at the centre of their product procurement and distribution strategies. This comes amid changing expectations around sustainability linked issues from investors, customers and regulators.

According to independent group the Carbon Trust, up to 90 per cent of an organisation’s environmental impact is a consequence of their end-to-end supply chain. It is clear a collaborative up- and downstream approach is essential to reduce trade’s environmental and social footprint.

In addition to improving environmental and social outcomes, developing and operating a sustainable supply chain strategy is likely to improve investor and consumer perceptions, manage costs and drive innovation, as well as build a resilient supply chain that leads to long-term financial viability.

Taking a broad approach to the definition of sustainability suggests a range of positive actions throughout the supply chain that encapsulates sustainability: from the natural environment to suppliers, workers and customers in areas of diversity, human and animal rights.

The post-COVID landscape provides a good opportunity for business to reassess their supply chain approach. As well as the location and the structure of supply chains, how participants are financing their activity is also in flux.

Optimise

Supply chain finance (SCF) provides a range of working capital and risk-mitigation solutions, designed to optimise working capital and liquidity in domestic and international supply chains.

SCF is a relatively recent development in financing on open-account terms, particularly when compared the traditional trade financing instruments such as letters of credit and documentary collections. SCF techniques focus on optimising working capital on the sales leg, typically through receivables purchase, and the purchase leg through payables financing.

It’s well known global trade faces a funding gap of roughly $US1.5 billion, with smaller businesses making up a disproportionate share. Properly structured buyer-led payables finance programs can address a part of this cash flow challenge by providing suppliers prompt access to funds at an affordable price point, without the need to provide security or enter into loan agreements.

But while having a strong and viable supply chain is essential to ensure a reliable source of goods and services, the greater strategic undertaking is ensuring a sustainable supply chain.

 

Support

In what we believe to be a first by an Australian bank, ANZ has launched a framework to support customers pursuing sustainable supply chain management, which includes incorporating a sustainability performance linked pricing (SPLP) mechanism into our supply chain finance (SCF) products.

The SPLP intends to incentivise a company’s supply chain to improve their sustainability performance by offering a lower cost of capital to suppliers where there are improvements in their sustainability ratings.

From this, ANZ is able to build on our existing capabilities and proficiency in providing SCF solutions while adapting to the environmental and social expectations of sustainable supply chain management.

As managing the supply chain’s environmental and social impacts gain greater focus and strategic importance, it is imperative for the public and private sector to support innovation in product and process.

Doing so creates an ecosystem throughout the supply chain, required to address a major contributor to environmental and social impairment.

In a first for ANZ, the bank collaborated with one of the world’s largest food and beverage companies located in Europe to provide lower cost capital to suppliers of sustainably produced and certified raw product.

 

Visibility

 

What is payables finance?

Sustainable SCF’s foundation lies in payables finance products, however its principles can be equally applied to receivables finance solutions.

According to the Global Supply Chain Forum, Payables Finance is “provided through a buyer-led program within which sellers in the buyer’s supply chain are able to access finance by means of receivables purchase... typically at a financing cost aligned with the credit risk of the buyer.

The purpose of such finance is to provide sellers with the ability to receive the discounted value of receivables due from the buyer prior to invoice due date.

 

Imperative

There is a strategic imperative for companies to innovate towards sustainable supply chains, particularly due to the introduction of defined emissions reductions in the Paris Agreement and subsequent pledges, increasing consumer demand for eco-friendly products and the expected growth in spending of consumer goods.

McKinsey provided an illustrative test case of this in the consumer packed goods (CPG) industry in their report ‘Starting at the Source: Sustainability in Supply Chains’.

The report argues with a projected 5.3 per cent annual market growth rate, the CPG industry will need to reduce greenhouse gas emissions, or carbon intensity, by 90 per cent by 2050 to meet the Paris target.

Supply Chains, it concluded “hold the biggest opportunities for breakthroughs in sustainable performance”.

It’s not hard therefore to see the opportunities for service providers (such as financial institutions) supporting supply chain participants pursuing sustainability objectives.

Iain Slatter is Head of TSC Innovation, Institutional at ANZ

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