Building sustainable ecosystems: The role of Sustainable Supply Chain Finance

It is clear, as major contributors to climate change, that companies have a responsibility to take action to reduce their environmental impact and help address this global challenge. This includes reducing greenhouse gas emissions, promoting renewable energy, conserving natural resources and minimizing waste, among other issues.

Currently, more than a-third (752) of the 2,000 world’s largest publicly traded companies have net zero targets, which represents a 50% increase since 2020. However, when diving into these targets, it is important to highlight that out of these 752 companies only one third cover scope 3 emissions and only half of them have these targets embedded in their annual reports, while the remaining companies only announced a target without a clear implementation strategy.

Limited data availability, inconsistent data collection and lack of transparency and traceability make measuring scope 3 emissions a challenge, specifically those coming from the supply chain. However, identifying the magnitude of GHG emissions from the value chain to set a baseline, identify reduction opportunities, costs and opportunities associated, is mandatory to comply with set net zero targets.

Moreover, due to the size and influence of the bigger companies, it is their responsibility to foster transition of smaller businesses in their supply chain. Fostering sustainability should be leveraged on two main components: on one hand influencing, and on the other providing small suppliers the necessary tools to finance this much needed transition.

According to a study published in the journal Climatic Change, 100 companies have been responsible for 71% of global GHG emissions since 1988. Therefore, in addition to their environmental impact, the biggest companies in the world also have a responsibility to address climate change because of their significant economic and social influence. These companies have the power to drive innovation, influence consumer behavior, and shape public policy. By taking action on climate change, they can help accelerate progress towards a more sustainable future and inspire smaller companies to do the same.

Also, financing is essential to achieve a sustainable transition as it provides the necessary resources to invest in new technologies, incentivizes sustainable practices, facilitates the transition, encourages innovation, and supports developing countries.

Financial institutions can play an important role in designing solutions to support corporate clients in creating tools to boost this transition throughout the supply chain

Financial institutions can play an important role in designing solutions to support corporate clients in creating tools to boost this transition throughout the supply chain, leveraging on both financing and sustainability education. However, the involvement of all company areas beyond sustainability departments is essential and this is where we call the Financial and Treasury department to action through a powerful and efficient tool banks can provide, such as Sustainability Linked Supply Chain Finance.

Through a sustainability linked SCF program, buyers are able to:

• Set a baseline and targets for supply chain GHG emissions.
• Track performance of supplier GHG emissions and/or other ESG KPIs.
• Facilitate supplier transition, which is often costly and requires significant changes to existing systems. Financing can enable this transition by providing the necessary resources to invest in new technologies and infrastructure.
• Encourage sustainable practices throughout the supply chain by offering financial benefits to suppliers which demonstrate compliance with GHG emission targets and/or other ESG KPIs.
• Consequently, meet set net zero targets.

The so-called sustainability linked supply chain finance (SCF) programs apply a pricing benefit to suppliers who meet predefined sustainability criteria, which backs the idea of turning supply chain finance into a tool to finance and help buyers incentivize this much needed supplier transition.

This seems ambitious but if one-third of the 752 companies that have committed to Net Zero targets including Scope 3 emissions are willing to reach it, they necessarily need supplier engagement. Moreover, when the resource-rich and powerful companies, such as big corporate clients and financial institutions take responsibility to influence other stakeholders’ transition (supply chain, consumers, investors…) this forms a cascade effect which enables the shift from sustainable companies into sustainable ecosystems, mandatory to reach a net zero economy.