With ESG becoming a priority for investors, regulators, customers and wider stakeholders, corporates are increasingly looking at how to ensure that sustainability is embedded fully across their operations. This effort extends to counterparties within a firm’s supply chain, with companies implementing sustainable supply chain financing arrangements designed to incentivise supplier adoption of ESG.
Sustainable supply chain finance has traditionally been focused on payables programmes, through which suppliers are offered financial incentives to improve and or maintain environmental, health, safety and social standards. As the supplier improves its own E, S or G rating, they become eligible to receive financing at a more competitive rate. For example, PUMA’s unique vendor finance programme, which BNP Paribas helped launch in 2016, tied its suppliers’ financing terms to compliance with PUMA’s own ESG standards.
Today the space is evolving to support corporate buyers’ ESG ambitions as well.
Driving sustainability through payment terms
In a payables programme, a buyer gives its suppliers the option to sell receivables (that are due from the buyer) to the bank at a competitive rate based on the buyer’s credit rating, which is typically better than that of the supplier. This provides suppliers the option to receive payment sooner than the original maturity date and often allows buyers to hold on to their working capital for longer.
BNP Paribas recently structured a sustainability-linked payables programme for a corporate client, focused on KPIs for reducing CO2 emissions. Whereas previous programmes have focused on suppliers’ ESG compliance, this particular initiative was designed to incentivise the buyer (client) with longer payment terms if it consistently meets its own defined emissions KPIs. If, at the next evaluation, the buyer does not meet its KPIs, payment terms will be reduced, impacting the buyer’s liquidity or working capital.
When it comes to sustainable finance, we’re trying to reconcile our clients’ economic performance with positive social and environmental impact. By engaging in these types of programmes, we can serve as a catalyst for our clients’ sustainability transformations.Dorene Martinez, Head of Hispanic Latin America, Trade & Treasury Solutions, BNP Paribas
“This evolution represents how corporates are looking across the entire organisation for opportunities to accelerate their ESG goals,” says Dorene Martinez, Head of Hispanic Latin America, Trade & Treasury Solutions, BNP Paribas. “This transaction also demonstrates that clients are looking to align their ESG ambitions with their financing – and not just in traditional debt financing, but in trade finance too – an area ripe for further growth.”
Latin America emerges as a pioneer
While Europe has long been a leader in all things ESG, there is potential for significant uptake of sustainable supply chain finance in Latin America, as regional and multinational firms shore up ESG standards in high carbon-emitting industries.
Latin America is particularly vulnerable to climate change, where the region’s poorer populations are most at risk for being displaced as a result of increased natural disasters, and non-sustainable land use continues to decrease biodiversity. The need to proactively address ESG issues has led to innovation and growth in sustainable bonds and loans in Latin America, such as Chile’s first-of-its-kind sovereign sustainability-linked bond offering in March 2022, and Peru’s debut sustainability and social issuances in late 2021.
Often government and public funding covers only a fraction of the costs associated with ESG uptake. These sustainability-based financing programmes are therefore viewed by corporates and offered by banks as important levers to promote decarbonisation.
“When it comes to sustainable finance, BNP Paribas is trying to reconcile our clients’ economic performance with positive social and environmental impact,” says Martinez. “That means partnering and incentivising companies that are being truly proactive around ESG, whether it’s reducing the firm’s carbon footprint or addressing social inequities within the community. By offering these types of programmes, BNP Paribas can be a catalyst for sustainability transformation.”