Treasury functions are increasingly recognising the relevance of supply chain initiatives. When surveyed during a presentation at the ACT ESG Conference in November, 46% highlighted the relevance of supply chain ESG goals to their business strategy while 32% noted investor questions on this topic and 28% regulatory pressure.
This is not surprising. As more firms and indeed financial institutions set net zero goals, they grapple with the importance of Scope 3 emissions (the indirect emissions that occur in the upstream and downstream activities of a company). According to the Carbon Disclosure Project (CDP), corporates’ supply chain emissions (Scope 3 upstream emissions) are, on average, 26 times greater than their operational emissions (see Fig 1) – meaning that companies must work with their supply chains to drive meaningful emissions reductions.
Even those without a clear decarbonisation pathway should take heed as there are many associated financial risks; CDP estimates that climate-related risks in supply chains could cost nearly three times more than the actions needed to mitigate them.
Legislators in the UK and Europe recognise the need to push for supply chain accountability: Legislation – such as the European Union’s Corporate Sustainability Reporting Directive and the Corporate Sustainability Due Diligence Directive – is driving an expectation from regulators for greater transparency on the actions businesses are taking to identify, manage and mitigate sustainability-related risks in the supply chain.
Treasurers are becoming cognisant of the important role they can play in addressing supply chain sustainability topics in tandem with other functions, such as procurement and sustainability. Of those surveyed at the ACT ESG conference, 68% were open to embedding ESG KPIs in supply chain finance programmes and 40% wanted to look at bank partnerships to support their suppliers’ sustainability ambitions.
For many financial institutions, including banks, a large component of their Scope 3 emissions will come from financed emissions. Many will be seeking opportunities to support their customers and suppliers in the transition, in part to meet their own decarbonisation and sustainability targets. In Fig 2, we set out several key solutions available to treasury teams. Pending the overall strategy of a treasury function, a subset of these will be suitable.
Asset finance can be a useful product if companies or suppliers need to invest in specific assets to support their transition. In 2023, McCain launched a first-of-its-kind partnership in the UK with NatWest, which provided asset finance directly to farmers to finance the equipment needed to move to more sustainable agricultural practices.
Similarly, Use of Proceeds financing can be used towards projects with clear environmental or social benefits, and this can be applied at the purchaser or supplier level. For example, EDF issued a social bond where the proceeds were focused on expenditure with small and medium-sized suppliers in areas of low employment.
Sustainability-linked instruments support a company’s commitment to transition by linking pre-agreed ESG KPIs and associated targets to a pricing incentive mechanism applied at either the purchaser or supplier level. At the purchaser level, these instruments can be used to advance supply chain sustainability by using KPIs such as Scope 3 emission reductions.
Sustainability-linked supply chain finance programmes adopt the same pricing incentive mechanism with KPIs applied at the supplier level. Alongside these financing products, many banks offer additional tools and solutions to support their customers’ transitions, many of which will also be relevant to suppliers.
While no single financing solution will drive supply chain sustainability and reduce Scope 3 emissions, many tools can be considered as part of a treasury plan. Treasurers cannot afford to be bystanders. It is important for them to be involved in the delivery of the business’s sustainability strategy and to engage with their banking partners to find the right sustainable finance solutions.
Dr Arthur Krebbers is Head of Corporate Climate and ESG Capital Markets, Helen Ferguson is Director, ESG Advisory, and Roze Farmer is Associate, ESG Advisory, all at NatWest
