Alvarez & Marsal: Unlocking Sustainable Supply Chain Finance
Supply chain finance (SCF) can broadly be described as a financial solution that optimises cash flow within a supply chain by leveraging the creditworthiness of a buyer to provide early payments to suppliers.
Professional services giant Alvarez & Marsal (A&M) calls SCF the use of financing and risk mitigation practices to optimise the management of working capital and liquidity invested in supply chains.
The benefits on offer to both buyers and suppliers are clear: buyers can extend payment terms and maintain good relationships with suppliers by ensuring their financial health; suppliers receive faster access to cash without having to resort to expensive loans, improving liquidity and reducing financial strain.
Now, thanks to a variety of technology advancements, SCF platforms have become more accessible, offering greater transparency, efficiency and cost savings.
Aligning finance with supply chain sustainability
In a new report, A&M highlights that companies globally face mounting pressure to comply with specific ESG disclosure requirements and are increasingly formulating green and sustainable strategies, integrating them into their overarching business strategies and establishing associated sustainability commitments.
They are not only aligning financing mechanisms with these sustainability plans, but also beginning to incorporate sustainability into their supply chains by applying relevant criteria in supplier and distributor selection processes.
Financial institutions are key players in driving this shift by channelling funds into sustainable supply chains. With sufficient financing and a solid understanding of ESG practices, both suppliers and buyers can strengthen operations and enhance their competitive edge.
Sustainable supply chain finance has, therefore, become a significant trend in global banking, offering a valuable business opportunity for financial institutions.
Why banks have a golden opportunity
Outlining sustainable SCF and the opportunities it presents for financial institutions, A&M points out that technology platforms can enable finance providers to see underlying trade flows in supply chains – an essential element of such financing arrangements
While businesses are, of course, the primary beneficiaries of SCF, the ecosystem involves a range of participants including funders, technology providers, data providers and logistics companies, while regulators shape policies, multilaterals and the development of financial institutions when it comes to funding and expertise.
According to Trade Finance Global, supply chains facilitate the movement of more than US$22tn worth of goods each year, contributing to around 80% of the global economy’s carbon emissions. This means trade and SCF can play a pivotal role in facilitating decarbonisation.
Incorporating sustainability principles into supply chains can drive this shift, with estimates suggesting US$100tn in investments is needed by 2050 to achieve net-zero emissions – up to half of which will be required by SMEs.
As a result, banks have a golden opportunity to promote ESG compliance through ESG-linked SCF solutions, encouraging sustainable practices among corporate clients.
Valued at US$1.3bn in 2023, according to Astute Analytica, the global sustainable SCF market is projected to exceed US$5.7bn by 2032.
Benefits for banks
A&M says tapping into sustainable SCF has the potential to provide numerous benefits for banks, including:
- Market differentiation: By developing robust sustainable SCF propositions, banks can distinguish themselves from competitors as many have yet to develop sustainable SCF propositions
- Expansion opportunities: Banks can tap into the underserved SME financing segment at a comparatively lower acquisition cost by extending SCF to suppliers and distributors, particularly through deep-tiered SCF
- Credit risk mitigation: Enhanced visibility of supply chain operations and adherence to ESG standards enables banks to improve credit risk management
- Relationship building: SCF initiatives often foster stronger relationships with corporate clients, leading to additional funded and non-funded business opportunities
- Reputation enhancement: By aligning with sustainable finance goals and providing ESG-linked solutions, banks can enhance their brand value and reputation
- Client support: Banks play a pivotal role in assisting clients in achieving their own sustainability objectives through tailored SCF solutions.
Building blocks for sustainable SCF
A&M goes on to offer six fundamental building blocks for developing sustainable SCF:
- Business strategy and model: Develop programme objectives and a business plan, aligning sustainable SCF with broader bank-wide sustainability strategies and ensuring the allocation of relevant resources and processes.
- Product: Design ESG-linked SCF products to enable companies to transition towards sustainable, low carbon activities that may include incentives in the form of preferential pricing for suppliers compliant with sustainability criteria.
- Client focus and ESG awareness: Introduce a client selection and onboarding approach; devise ESG rating methodologies; and develop account planning and sales KPI monitoring. Additionally, advise and train corporates and SMEs on ESG integration within their supply chains and possibilities to capitalise on sustainable business opportunities.
- Risk management and operational processes: Integrate ESG factors in KYC due diligence, risk assessment and underwriting. Additionally, integrate ESG into operational workflows and reporting mechanisms and establish internal programme monitoring procedures using transactional and ESG-related data.
- Technology: Automate onboarding and financing processes and ensure visibility of trade and financing transactions by utilising specialised digital platforms dedicated to SCF. Alternatively, use internal platforms to enhance the efficiency of SCF operations.
- Talent management: Recruit new talent that is passionate about sustainability, form a dedicated team responsible for managing sustainable SCF initiatives and grant this team a certain level of independence. Improve knowledge and performance through training, clear target-setting and incentive schemes.
An ‘economic necessity’
In summary, A&M’s experts emphasise that collaboration among stakeholders is imperative for the success of sustainable SCF initiatives.
Financial institutions, large corporations, SMEs, technology firms, data providers, multilateral agencies and regulators share a common goal of achieving net-zero emissions and “must embrace collaborative partnerships to attain success”.
The report adds: “Banks carry a large responsibility for the successful shift towards a sustainable future by enabling financing, facilitating awareness and fostering digital innovation through well-structured sustainable SCF programmes.
“Sustainable SCF is not just a moral imperative – it’s an economic necessity. With trillions of dollars at stake and ambitious net-zero targets on the horizon, banks have a unique opportunity to influence the transition to a more sustainable economy by incentivising sustainable behaviours and driving impactful change.”
Check out the latest edition of Supply Chain Magazine and sign up to our global conference series – Procurement and Supply Chain LIVE 2024.
Supply Chain Digital is a BizClik brand.
- BMW's Move to Sustainable Logistics with Electric TrucksSustainability
- Pentagon Accelerates Sustainability Journey with RippleSustainability
- DP World's Commitment to Supply Chain TransparencySustainability
- How Optera Helps Big-Name Businesses Cut Scope 3 EmissionsSupplier Relationship Management (SRM)