The ESG or Environmental, Social and Governance is a framework to judge three crucial criteria for how well a corporate entity is conforming to best practice for sustainability. ESG seeks to rate companies on how well they perform in protecting the environment, protecting society and putting in place governance structures that respect human dignity in the workplace and promote accountability and transparency.
The supply chain is a complex web of mostly small to medium-sized enterprises (SMEs) that support manufacturing and the service economy with materials, parts, fresh goods etc. as well as with logistics. The supply chain is the glue in many ways that holds an economy together. As we saw in 2022, disruptions to supply chains cause shortages and price inflation. This in turn causes a downturn in economic performance and can trigger a recession.
It is in this context that factoring and trade receivables finance can play its part in promoting the adoption of ESG standards.
At current there is no one set of standards for a company to follow regarding protecting the environment, workers and society. The EU has notably passed directives to legislate for sustainability. The SEC or Securities and Exchange Commission have proposed rules on climate-related financial disclosures by US listed companies. If these become law, they will impact on supply chain carbon emission levels.
It should be noted that ESG refers to three distinct aspects of an organisation. What helps employees might not be good for the environment. Looking to reduce the impact of climate change, improve working conditions and promote diversity and transparency in governance structures while not fundamentally in conflict are nevertheless, competing values.
Corporates who are championing ESG values are looking at their supply chain sustainability as a key part of their strategy. This approach has been about balancing ‘environmental’, ‘social’ and ‘governance’ values not with just tier one suppliers but in the larger ecosystem that includes deep-tier suppliers.
Addressing the Problem
It is mostly SMEs that are involved in supply chains. The financial size of these companies often inhibits their ability to put sustainability ideas into practice. They don’t have the access to finance to say replace their fleet of petrol and diesel vehicles with electric ones.
One solution is for large corporates, banks and governments to collaborate and co-invest to provide liquidity and share knowledge to push forward sustainability ideas and green technologies across supply chains.
ESG goals like electrifying the fleet, using renewable sources of energy, sourcing recycled materials and providing employee training can all be financed by improved factoring terms.
Part of the challenge is for large corporates to not only reach out to their direct suppliers but to look beyond at the myriad of indirect suppliers. Sharing data, technology and ideas with the wider ecosystem of supply chains sets up a collaborative effort to improve environmental protections, workers’ rights and high standards of governance. The attitude of large corporates hearing no evil, seeing no evil and saying no evil has to be replaced with corporates being acutely aware of what environmental and social costs are embedded into their products. Just as ‘farm to fork’ looks at the entire food process, so large corporates should look at the entire process that ends with their product for sale.
With this new attitude must come a desire to work with the various tiers of the supply chain. Corporates should fund training for ESG-oriented programmes as well as provide funding for ESG initiatives. Part of this funding can be done through offering better factoring and reverse factoring rates for companies participating in ESG initiatives.
This change in attitude will naturally attract the interest of pension funds and investment funds bound by ESG or ESG-similar rubrics that determine their investments. There is already the money available for funding trade receivables finance that promotes and rewards green and ESG compliant trading.
The rewards of ESG style improvements are self-evident: cleaner air and water, less climate disruption, healthy and rewarding working places, more democracy at work and so on. The world faces an existential crisis if global warning is not tackled.
From a business point of view, those corporates that embrace the ESG revolution that seeks a greener and fairer workplace will naturally benefit in terms of profit and market share. The public want action on ESG issues and will support those companies seen to be doing something. ESG is already a massive part of many companies marketing and branding. The more success stories that a corporate can foster throughout their supply chain the better the company image.
