Making sustainability a differentiator in global trade finance (part 3)

In this four-part blog series, we’ve been exploring the move toward sustainable finance. In part 1, I covered the increasing linkage between banking and sustainability, and in part 2, I dove into what’s motivating banks and others to participate in the emerging finance eco-space.

In part 3, we get to the fun part—a look at current practices and expected outcomes through two real-life examples.

Alibaba Group

The Alibaba Group is a Chinese multi-national technology company specializing in e-commerce, retail, the Internet and technology. The company brings technology and other services to different industries and business areas to improve performance and outcomes. One such area is agriculture. In this space, Alibaba Group offers supply chain financing (SCF) programs through a third-party vendor that give its agricultural suppliers favourable access to financing if they choose materials (e.g., pesticides) that comply with corporate sustainability standards. Many argue that this practice enables companies like Alibaba to ensure suppliers’ sustainable behaviour.

In other words, it seems that using SCF as a reward—“the carrot”—can motivate suppliers, buyers and retailers to take sustainable actions, e.g., reduce waste and pollution by switching to less harmful chemicals. Their motive is financially-driven; they realize they need to perform the requested actions or lose out on favourable SCF terms and/or credit lines.

Puma

Athletic footwear manufacturer Puma initiated a sustainable supply chain financing (SSCF) project (Puma Vendor Financing Program), which offers favourable financing to suppliers that achieve high sustainability ratings. This practice has enabled Puma to better assess and collaborate with suppliers.

Puma also is using trade credits to promote supply chain efficiency and sustainability. Although trade credits are not considered SSCF solutions, they still help to link SCF and sustainability achievement. If a supplier of raw rubber for tennis shoes doesn’t qualify for a Puma SCF program, Puma’s credit manager can still grant a small credit line to the supplier and monitor it closely to see if it makes payments on time. This credit line extension is commonly referred to as a “trade credit.”

A basic credit line can allow buyers to increase the amount of each shipment to Puma (as compared to a cash-only situation), increasing truck capability utilization. By reducing the number of trucks used for shipment, carbon emissions along the supply chain are lowered.

Do we need to re-think the way we’ve been looking at SCF programs and offerings? Should they be the rewards for “good behaviour”? The answer is yes and here’s why. All buyers, suppliers and retailers wanting to participate in an SCF program have to pass a credit check to participate. This is done by both the corporation running the SCF offering and the bank or financing institution offering the financing.

So, maybe the participants will need to pass a type of “green” credit check, too? Stay tuned for the answer in part 4.

In the meantime, feel free to reach out to me for further discussion on this topic.