Corporates are increasingly focusing on CSR and sustainable growth objectives – and treasurers are discovering how supply chain financing will help.
An effective tool that a treasurer can utilise to contribute to those mandates is sustainable supply chain financing. Such solutions have proven to be an effective means of encouraging and rewarding improved environmental, safety and labour practices from suppliers. In fact, the June 2018 BSR report, Win-Win-Win: The Sustainable Supply Chain Finance Opportunity (see link below), predicts the sustainable supply finance market will reach $660 billion in the near term. As discussed in a recently published BNP Paribas article, How Bank Financing Solutions Can Support a Sustainable Supply Chain (see link below), supply chain financing solutions can be effective for achieving certain CSR objectives, most notably by providing corporates a pro-active tool that encourages their suppliers to abide by a supplier code of sustainable conduct.
Supply chain finance can also support corporate sustainability goals in other ways, notably by facilitating the trade of "sustainable goods." These goods are typically any equipment, appliances or machines that minimise the negative impact of a manufacturing process on the environment and which, as a consequence, result in cost savings, or sometimes additional revenues. A good example of this can be found in the case of a major automotive manufacturer who used sustainable supply chain financing to switch to energy efficient lighting in one of their manufacturing facilities in order to reduce the company's carbon footprint and lower energy expenditures.
Another example is a major beverage company that has committed to collecting and recycling one bottle or can for each one it sells. By using these bottles and cans as raw material in the manufacture of new bottles and cans, the company is saving on resources, while creating a highly marketable product that appeals to ecologically-minded consumers.
Sustainable supply chain financing solutions can be leveraged by the producers of ecologically-friendly goods and services offering an opportunity to market their products to customers, while purchasers of these goods and services can use medium-term supplier financing in a way that optimises balance-sheet structures.
Of course, many of these sustainable goods come at a higher cost than comparable traditional ones, which creates a challenge for both the producer and the potential user. While the argument can be made that such investments in sustainable goods often result in operating expense cost savings, the initial expenditures may be more difficult to justify. That said, as has often been the case in the past with other innovative best practices, the pursuit of such initiatives is well worth the long-term benefits.
Sustainable supplier financing programmes offer an alluring optionConvincing potential buyers that amortising the cost of sustainable goods over a certain period of time may be a compelling argument, but can prove impractical for a business with tight margins and working capital challenges. Lacking capital expenditure budget, and not wanting to tap into a medium term-funding line from a bank, many companies may be reluctant to embrace such sustainable objectives for purely practical reasons, despite the appeal of supporting a sustainable mission, even when it contributes to cost savings over time.
Supply chain finance programmes designed to address sustainable objectives can address this problem by offering options tailored to this unique mission. These types of programmes can enable suppliers to extend credit terms to their buyers as a means of marketing these sustainable goods, while continuing to offer regular credit terms for those clients buying traditional goods.
In order to be relevant for the buyer, such extended credit terms should match the period required for the cost savings (or incremental revenues) to amortise the initial cost of the sustainable goods. In most cases, this will take from three to five years.
" Sustainable supplier financing allows suppliers to successfully market sustainable goods to a much broader marketplace and are a win-win for buyers and suppliers."
It goes without saying that the supplier will not be favourably inclined to carry the burden of the additional working capital requirement that results from those extended payment terms. This is where sustainable supply chain finance provides a solution, where a bank offers either a non-recourse receivable purchase facility to the seller or, alternatively, a supplier finance programme to the buyer.
It can be tempting to think that incorporating CSR practices in trade is complicated and requires extended implementation. In reality, it can be as simple as bringing appropriate language or changing certain terms in purchasing agreements that clearly outlines what each party will receive if sustainable products are the goods being bought and sold. In parallel, the receivable financing programme supporting this sustainable trade may allow certain alterations (on tenors, full vs. non-recourse portion, rates, etc.) that we would not see in programmes backing traditional trade.
Shining a light on marketing sustainable goods
The sustainable goods in this case study were commercial-grade LED lights, a technology that combines high performance and significant energy efficiency compared to more conventional lamps and tubes. The conventional lights already in use at the auto manufacturer's factory were less expensive in terms of initial cost, but utilised more energy over the long-term and had a significantly shorter lifespan than their LED counterparts.
While the supplier provides both LED and conventional lighting to the marketplace, the business was inclined to promote the sustainable segment, as those products present more growth potential, as well as greater market recognition for their overall energy efficiency and ecological benefits. So, in order to incentivise buyers, such as the auto manufacturer to purchase these sustainable goods, the lighting company looked to compensate for the higher cost of these products, offering extended payment terms to potential buyers. At the same time, the lighting company would keep its usual payment terms for it conventional products. This programme was dependent on receivables financing with BNP Paribas, the supplier's core bank.
The challenge the lighting company faced was that the auto manufacturer had little incentive, nor budget and allocated bank credit lines to switch from a conventional lighting system to a more efficient LED system, even though this investment would generate significant energy cost savings in the future.
BNP Paribas worked closely with both the supplier and the buyer to implement a sustainable receivables programme focused on reducing energy waste, and consequently the emission of CO2, without necessitating any cash outflow for either entity, or bringing additional financial indebtedness to the balance sheet of the buyer and added receivables to the seller's books.
To make this work, the sustainable supply chain financing solution had to support a 5-year supplier payment term, which was the period needed for the energy savings to cover the cost of the new lighting system. As a result of this unique programme, the seller was able to offer a very competitive financing structure to the buyer. These energy and maintenance cost savings were successfully achieved without any up-front capital expenditures for the auto manufacturer.
A win-win approach for buyers and suppliersAs was illustrated in the previously described case, several important goals were reached and positive impacts achieved for both organisations involved. By utilising a sustainable supplier financing solution, both companies benefited in terms of corporate image and reputation. By reducing its carbon footprint, the auto manufacturer was able to reach critical CSR benchmarks. The financing programme was also able to deliver cost reduction over time, which ultimately benefits the bottom-line. Such a tailor-made financing solution enables working capital optimisation, allowing treasury to fulfil an important mission for the business.
At the same time, sustainable supplier financing allows suppliers to successfully market sustainable goods to a much broader marketplace. This type of programme offers a true win-win approach for buyers and suppliers.