An increasing area of focus for treasury is the need to operationalize and embed environment, social and governance (ESG) into their daily activities as ESG investing becomes mainstream. Supply chain finance has been a natural starting point for procurement teams in particular as they look to integrate a buyer’s sustainability goals into the stability and resilience of their supply chains.
There are currently two common approaches in terms of developing a sustainable supply chain finance program. The first approach is an “ESG-linked structure” where a sustainable section of the supply chain is earmarked for a certified sustainable supply chain finance program. This can either be in the form of a ring-fenced set of buyers that are looking to improve their ESG performance or a segment of SME small- and medium-sized suppliers such as minority-owned businesses where cost-effective financing is needed.
Alternatively, in a “tiered pricing” approach, a larger scope of the supply chain is included in the total spend. As such, the pricing methodology is structured in a way that incentivizes suppliers to obtain an ESG rating and qualify for incremental discounts if they score highly on their ESG assessment. For companies that may not currently be rated highly on their ESG scorecard, any incremental fees captured as premiums can be reinvested into environmental protection programs, social development initiatives and company foundations to create a net zero outcome and continue advancing the company’s sustainability goals.
When you measure your suppliers ESG performance against an external rating framework and develop scorecards to visualize and track performance, this can help ensure supplier resilience. Meanwhile, you can manage Scope 3-related climate risks beyond the direct purview of your products and processes.