Making sustainability a differentiator in global trade finance (part 1)

Throughout 2020, we watched as major economies across the globe struggled with the effects of the COVID-19 pandemic—and they continue to struggle today. At the same time, countries are striving to meet increasing climate change objectives, such as those laid out in the Paris Agreement. Overall, sustainability is growing in importance across industries. Finding ways to reduce carbon emissions and make a positive impact on climate change is moving up the priority list of companies.

In this first of a four-part blog series, I’ll delve into the topic of sustainability as a differentiator in global trade finance, starting with the trend toward sustainable supply chain finance.

Where do banks fit in?

Interestingly, banks have a critical role to play in this climate transition process by ensuring the efficient, sustainable flow of financing. From a supply chain finance (SCF) perspective (and from an examination of financing mechanisms in the SCF context), the shift of SCF toward sustainability has been minimal to date. It mostly has focused on the relationship between trade credit (a specific type of SCF solution) and sustainability.

However, over the past year, there has been a lot of exploration related to sustainable trade credit in the context of carbon-emission regulations, and some researchers have demonstrated that these types of regulations are a good thing because they help to shorten the time for reducing carbon emissions. As a result, we see an increasing number of large-scale global businesses integrating sustainability into SCF.

Reducing or alleviating cash flow pressures

SCF programs help to relieve the cash flow pressures of both buyers and sellers. However, can they really make an impact when it comes to sustainability? The short answer is yes. Researchers around the world have been digging into the “interface” between SCF and sustainability since about 2018, and many have looked at it from the perspective of SCF providers.

They argue that banks and other corporations should include sustainability performance as part of their evaluation and decision-making process. For banks, in particular, sustainable SCF attempts to achieve the right balance among the competing interests of "people, planet, profit.” It expresses the idea that we should measure the success of finance companies using societal and environmental criteria, not just economic criteria.

Another term to describe sustainable SCF is the triple bottom line (TBL). TBL not only can help balance “people, planet, profit,” but also help SCF providers reap benefits in terms of risk control. In addition, for buyers and suppliers, it can provide evidence of their sustainability efforts and successes.

Changing motives

Researchers have found that when banks apply TBL, their motivations tend to align with three categories or orientations:

1. Sustainability-oriented motives

2. Finance-oriented motives

3. Moral-oriented motives

In my next blog in this series, we’ll take a deeper look at these three motives and whether some SCF offerings, such as reverse factoring, are more effective than others in improving supply chain efficiency and sustainable development for buyers, suppliers and retailers.

In addition, in part three, we’ll dive into what a bank’s future role really should be when viewed from moral and ethical considerations, the tactical implementation of sustainable SCF, and its expected tangible and measurable outcomes when it comes to carbon emission reduction. Finally, in part four, we’ll talk about the strategic and tactical ways that sustainable SCF can be added to existing SCF software and banking systems.

In the meantime, if you’d like to discuss this first blog, sustainable finance in general, or CGI’s work in this area across the globe, please contact us.