Retailers are exploring innovative ways to address climate change and related sustainability issues. One emerging option is collaborating with banks to create additional financial incentives for retail suppliers to become more sustainable. Known as sustainable supply chain finance solutions, these financial instruments allow retail suppliers to get paid sooner and with more advantageous financial terms when those suppliers meet specific sustainability objectives.
What are sustainable supply chain finance solutions?
It is typical in many supply chains, including the interconnected retail supply chain networks, for suppliers to rely upon bank financing to get paid sooner than required for the goods they deliver. In return for getting paid sooner, the suppliers accept a slightly discounted payment from the bank rather than the full amount from the retailer or other buyer. When available, suppliers negotiate the finance charges directly with the bank. These finance agreements benefit the supplier by increasing immediate cash flow that they can use to improve their business while also generating revenue for the banks.
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With sustainable supply chain finance solutions, the buyer and the bank collaborate to improve the financial terms for those suppliers meeting specific sustainability objectives. Suppliers that meet a buyer’s requirements for carbon reduction goals and reporting, additional fair labor practices, or other environmental and social goals, for example, can access better financing rates from participating banks. It gives suppliers access to additional capital that they can use to continue improving their business, including investing in additional sustainability efforts.
Why are sustainable supply chain finance solutions important?
Sustainable supply chain finance solutions provide retailers with an additional way to reward retail suppliers for improving their sustainability efforts. Rather than switching business from long-term suppliers for not meeting sustainability objectives fast enough, retailers can work within existing financial markets to unleash additional capital for suppliers to accelerate the needed improvements. It is a way for retailers, working collaboratively with the suppliers’ banks, to help finance the transition toward more sustainable business practices across the retail supplier community.
What companies are using sustainable supply chain finance solutions?
Several retailers are working with HSBC and other banks on sustainable supply chain financing solutions. Three well-known examples include Walmart, PVH and Levi Strauss & Co.
Working with HSBC and CDP in 2019, Walmart created a sustainable supply chain finance program that integrated science-based targets as part of its Project Gigaton initiative to remove 1 billion metric tons of greenhouse gases from its supply chain by 2030. Suppliers that set and achieve the most ambitious sustainability targets receive the most favorable financing.
PVH Corp., best known for brands such as Tommy Hilfiger and Calvin Klein, launched its program in June 2022, becoming the first retailer to include both environmental and social objectives. PVH is benchmarking suppliers against metrics defining a healthy and safe working environment and the elimination of child labor, workplace harassment and abuse. Suppliers meeting its standards qualify for discounted financing through HSBC, DBS and Standard Chartered Bank.
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Levi Strauss & Co. also partnered with HSBC on a sustainable supply chain finance program. During the first 10 months of its program, launched in February 2021, 16 of the 21 suppliers participating in the program earned lower interest rates by meeting sustainability performance metrics outlined in the company’s Supplier Code of Conduct. As a result of the program, suppliers received payments 71 days earlier, on average, than their customary payment schedule.
Retailers are committed to reducing greenhouse gas emissions within their own operations and encouraging their suppliers to do the same. Retailers are reducing energy and fuel use, transitioning to renewable energy, mapping the carbon footprint of the products they sell, and working with suppliers to improve products, materials and packaging.
Sustainable supply chain finance solutions are another tool retailers are using to promote sustainability by incentivizing their suppliers to address climate change and broader sustainability issues. It is a way to finance a better future for everyone.