SCF to take bigger share of sustainability-linked loans that hit $119 B in 2020

• Buyers and their financing partners are rewarding sustainability efforts of suppliers by providing financing at competitive and discounted rates 
• ESG-related criteria and metrics are being rolled out to track progress of suppliers
• New technology such as blockchain and smart contracts will improve transparency, finality and verifiability of transactions across long value chains

Multinationals and corporates are primarily focusing and working to improve their supply chains’ sustainability as well as of their partners. This is especially true due to the rising pressure from investors, consumers, regulators, and other stakeholders, as well as greater transparency of global business practices and tightening social and environmental standards. This has culminated into looking at business strategies, models and investments through the lens of environmental, social and governance (ESG) metrics. Corporates monitor their performance through supply chains in a bid to manage risks and opportunities from rapidly changing global business conditions.

Following the launch of Green Loan Principles (GLP) in 2018 and especially the publication of the Sustainability-Linked Loan Principles (SLLPs) in 2019, the sustainability-linked loan (SSL) market has picked up at an impressive pace, surpassing green loan volumes in 2019. SSLs link their rate of interest to the borrower’s performance on environmental or sustainability criteria to motivate the borrower to improve their work. According to BloombergNEF (BNEF), volumes of SSL stood at $119.6 billion as of 2020, up from $49 billion in 2018 and mere $5 billion in 2017.  Since then, more entities have adopted initiatives aimed at incorporating sustainability principles into their corporate affairs, encouraging their financial service providers becoming increasingly attuned to their role of financing companies and their suppliers in a more sustainable way.

Acceleration of sustainable supply chain finance programmes

To create long-term value for companies that seek sustainable suppliers, international banks have incorporated sustainability into their trade and supply chain finance (SCF) programmes. Various international banks have also embedded sustainable supply chains by rewarding efforts on the part of their customers through improved loan rates or access to SCF programmes at competitive rates.

Standard Chartered Bank recently launched its sustainable trade finance proposition offering a range of initiatives that support sustainable goods, suppliers, and end-use and transition industries. It has embedded ESG factors in its SCF solution for an international sportswear manufacturer, financing working capital while incentivising sustainable practices. Simon Cooper, CEO of Standard Chartered’s corporate, commercial and institutional banking and CEO of Europe and the Americas, said, “Trade finance has an enormous opportunity to help make global supply chain activities more sustainable by offering companies the products and solutions they need to achieve their sustainability agendas”.

ING’s sustainable supply chain programme facilitates improvements in financial efficiency while promoting sustainability by offering more desirable payment conditions for suppliers with clearly laid-out ESG practices. HSBC’s sustainable supply chain financing solution similarly adopts variable pricing to encourage sustainability.

Deutsche Bank looks at sustainability not only from a strategic imperative but also as a core growth driver that runs across the whole of its offering to clients. To cater to the growing demand for ESG deals, a dedicated team of ESG subject matter experts and trade champions in each region including Asia Pacific was appointed to drive sustainable deals for the trade finance business.

Collaboration between financial service providers and national authorities is key to propagate and incorporate sustainable goals into business practices. BNP Paribas piloted a sustainable SCF framework in November 2020 which was backed by the Green and Sustainability Linked Loan Grant Scheme of the Monetary Authority of Singapore. This is a leading effort in Singapore that seeks to support large multinational corporations in carrying out ESG practices across their wide supply chain networks.

Notably these supply chain networks extend not only to the tier 1 but to tiers 2, 3, and 4 which is critical for enterprises to understand who these suppliers are, where they are located, where they source materials and resources from, their risk exposure, and so on. Joris Dierckx, CEO of BNP Paribas Singapore, said, “Banks that pioneer best practices in sustainable SCF can help to facilitate a cascade of positive change that will flow throughout supply chain and global trade networks”.

Incorporating ESG criteria to extend funding

Sustainable SCF typically involves incorporating ESG criteria into the funding conditions. Primarily, suppliers are rewarded if they perform well against certain ESG goals such as better rates or access to the financing programme. Sustainable financing for such qualified projects have soared. As a proportion of total customer lending in our sample banks (see Figure 1), sustainability-linked loans cumulatively grew by an average of 8.5% in 2019, compared to 6.1% in 2018 and 4.9% in 2017. Sustainability-linked portfolio as a proportion of total customer lending for UK-based lenders Barclays Bank and Standard Chartered outpaced others by a significant margin, representing 18% of their lending portfolios predicated on sustainable practices. 

Standard Chartered’s sustainable trade finance proposition supports trade for suppliers that meet acceptable thresholds against ESG metrics such as gender equality and water use. It is focused on trade financing in sustainable industries including renewable energy, energy efficiency, the blue economy, sustainable infrastructure, water management and clean transportation.

For example, HSBC recently broadened its ESG position by committing to reduce financed emissions from its portfolio to net zero by 2050 or sooner. The bank aims to provide between $750 billion and $1 trillion in sustainable finance by 2030. Deutsche Bank introduced green supply chain frameworks for various sourcing categories such as power from renewable energy, paper, multifunctional printers and servers. It is currently financing solar and wind power generation projects in China, Taiwan, and Thailand.

With greater than 5% proportion of ESG-driven business portfolio, Bank of America’s global transaction services business has been diversifying and deepening its suite of ESG and paperless/ digital solutions to its clients who increasingly perceive ESG as a strategic imperative and are reshaping their operations and practices to support sustainable development goals.  

Citi announced its five-year 2025 sustainable progress strategy to help accelerate the transition to a low-carbon economy of which climate risk analysis forms the core alongside client engagement. This strategy includes a $250 billion environmental finance goal to finance and facilitate climate solutions globally. This builds on the bank's previous $100 billion goal announced in 2015.

In 2020, Rabobank and Dutch Development Bank provided a $50 million loan to global agricultural supply chain company Agricorp, which procures directly from over 4,000 farmers. Karen Yu, head of trade and commodity finance, Agri, Southeast Asia of Rabobank, said, “It’s hard for any company to monitor and control the supply chain and farmers’ processes using its own resources. But when you pair up with banks and external sustainability consultants, companies gain knowledge and are able to take clear steps to get things done”.

New technology as enablers of sustainable supply chains

Akin to bottlenecks that impede end-to-end digitalisation of trade finance, implementing sustainability measures in SCF faces barriers including a lack of standards, limited outreach and awareness of digital solutions. Heavy reliance on paper-based documentation provides little or no transparency over value chains, often making it easier to forge documents linked to a lending programme. The answer to sustainable supply chains lies in digitalising trade, making it easier for banks and buyers to monitor transparency across their supply chains. Leveraging cutting-edge technologies, smart contract solutions facilitate sustainable SCF programmes by enhancing transparency of transactions and data collection for tracking.

In a pilot, players such as BNP Paribas, Barclays, Rabobank, Standard Chartered, Sainsbury’s, and the Unilever Group tested how blockchain technology can be used to collect and record ESG data on suppliers as part of a sustainable SCF programme. They run on Trado, a consortium-based project led by the University of Cambridge Institute for Sustainability Leadership (CISL). The group includes BNP Paribas, Barclays, Rabobank, Sainsbury’s, Sappi, Standard Chartered, Unilever, as well as technology companies such as Provenance, Halotrade and Meridia, and IDH, a sustainability NGO. Through provision of direct data from first mile producers, there is greater ease of verifying sustainable practices and companies are incentivised to produce more sustainably. A pilot of Trado was launched in Malawi where blockchain technology was used to track tea from farmers sold to Unilever and financed by BNP Paribas. This accelerated supply chain financing by 35 days and generated up to 3% increase in farmers’ income.

DBS launched a digital supply chain project for the automotive industry in China. With all transactions logged on HeveaConnect, the digital marketplace that runs on blockchain for farmers, rubber producers, tyre manufacturers and other participants were all connected in a single integrated ecosystem. Raof Latiff, head of digital, institutional banking at DBS Bank, explained, “By integrating our application programming interfaces (APIs) to facilitate trade financing to both upstream and downstream rubber players through HeveaConnect, we are also able to deepen our understanding of our customers’ needs, allowing us to provide innovative advice to best position their businesses for a sustainable future”.

The pandemic as a wake-up call to accelerate sustainability into supply chains

The COVID-19 pandemic has put sustainability into the spotlight as investors and stakeholders look for ways to reinvest into more ‘future-ready sustainable companies and industries.’ Oscar Kollman, global lead of containers logistics at ING, noted, “The sustainability agenda has really accelerated, probably more than we anticipated, and this is partly happening because of COVID-19 and also because of social change”. One obvious candidate to depart soon appears to be the fossil fuel and global emissions industry, driven by the plummeting demand and prices of archaic fossil resources and collective push by world governments to weed out resources that will generate considerable environmental footprint.

This serves as a wake-up call to all participants and highlights the fragility of supply chains that prioritises cost and efficiency over sustainable practices. Inadvertently, this has translated for companies such as British Petroleum, Shell, and Total to make commitments to go net-zero on carbon emissions. With supply chains being the mechanism by which businesses can create positive impact, those looking to change their supply chains should consider how to integrate elements and practices around human rights including ethical management of labour resources, environmental protection, product sustainability and inclusive economic growth.