Sustainable Financing to Enable International Growth

By Deniz Harut, Head of Sustainable Finance, Europe & Americas

According to the second edition Standard Chartered’s Borderless Business research conducted in December 2020, building sustainability (ESG) into global supply chains is a priority for 23% of corporations as they pursue their international growth ambitions, an increase of 5% since the first edition which was conducted in June 2020. With sustainability now a key strategic priority across industries, and growing reputational risk associated with suppliers’ unsustainable business practices, this figure is set to rise. Financing plays a key role in this, through sustainable trade finance solutions and increasingly, and longer-term financing to both direct and indirect (deep tier) suppliers to help incentivise and facilitate investment in sustainability.

Corporate commitment to sustainability

Sustainability is now at the core of corporate strategy, driven by regulation, consumer and stakeholder pressure, corporate values and a growing awareness of the need for environmental and social change. Over the past few years, large businesses have been proactive in defining ambitious sustainability strategies and commitments, and exploring the implications across energy efficiency, travel, community engagement, diversity and inclusion. For example, net zero carbon has been an ambition for many large corporations for the past five years or so, but we are now seeing these companies raise their game, committing to negative carbon, or accelerating their timescales.

Sustainable finance is playing a significant and growing role in enabling companies to meet these ambitions. Sustainable finance brings money and purpose together, creating a virtuous circle: corporations are seeking to finance their sustainable business strategies, while investors wish to reflect their concerns about issues such as climate change, clean water, ethical treatment of communities and employees in their investment choices. Sustainable bonds, such as green bonds, blue bonds, ESG bonds etc. enable treasurers to finance specific sustainability goals and projects.

Supply chain responsibilities

In addition to the business activities under a company’s direct control, and therefore that they can finance directly, both direct and indirect suppliers play a significant role in enabling companies to meet their sustainability targets. Regulatory requirements in a growing number of markets also oblige large corporations’ obligation to report on the environmental and social impact of their value chain. In the European Union, for example, the European Parliament recently recommended new rules that require companies to identify, address and remedy ESG risks in their supply chains, replacing existing voluntary guidelines and industry or market-specific regulations.

As a result, treasurers are approaching Standard Chartered for innovative solutions on how to establish or increase visibility over their ecosystem as they pursue international growth. By doing so, they can better understand where the greatest risks are, including reputational risk, and where financing could best be targeted to create a positive environmental or social impact. There are a number of initiatives underway to achieve this; for example, our innovation business, SC Ventures, is exploring ways to increase transparency across the supply chains, helping companies throughout the value chain to identify risks and target financing precisely.

Treasurers often consider introducing or extending supply chain financing (SCF) programmes to incentivise sustainability performance amongst suppliers; however, this can be challenging in practice:

First, there remain some difficulties in defining, measuring and monitoring sustainability metrics;

Second, the suppliers that have the greatest need for financing are often indirect or deep tier suppliers, which are not typically (with some exceptions) included in SCF programmes;

Third, and most importantly, SCF is short-term financing linked to invoices, as opposed to providing the long-term financing support that many suppliers need to make a meaningful impact on ESG performance.

A strategic view of sustainable financing

To create sustainable supply chains that will facilitate future growth and help deliver on sustainability targets, treasurers therefore need to look to the longer term to fund their wider ecosystems. This includes looking beyond current business funding requirements and exploring the capital implications of their long-term sustainability vision.

For example, we are seeing a growing number of corporations, particularly in the technology sector, investing in impact vehicles and ESG funds that have a mandate to invest in ecosystems. In January 2020, Microsoft announced its ambition to be carbon-negative by 2030, and unveiled its $1bn Climate Innovation Fund, noting, “We understand that this is just a fraction of the investment needed, but our hope is that it spurs more governments and companies to invest in new ways as well.” Starbucks’ $50m Global Farmers Fund was one of the first financing programmes to enable farmers to invest in improvements in agronomy, restoration and infrastructure, commenting, “This work directly influences coffee quality, sustainability and overall profitability for the entire specialty coffee industry.”

Closing the knowledge gap

One obstacle to impact investing and other forms of sustainable financing is a knowledge gap. Not all treasurers – or investors – are aware of sustainable financing and investment opportunities, and what the benefits could be. According to Standard Chartered’s Sustainable Investing Review 2020, 90 per cent of investors are interested in sustainable investing, but only 42 per cent of investors across the UK, UAE, Hong Kong, and Singapore expected to invest between five and 15 per cent of their funds in sustainable investments over the next three years.

Better awareness amongst both corporations and investors is therefore an essential prerequisite to encouraging financing and investment to support sustainable ecosystems. At Standard Chartered, we work with large companies from both east and west, and bank their suppliers across emerging markets, therefore providing a bridge between corporations and their suppliers. In addition to demands from corporate customers, suppliers are directly motivated to improve ESG performance, both to reflect their own values, and to build a robust business in the future that can retain and attract customers.  We educate small and medium-sized businesses on what international businesses require in ESG terms, and how to become more responsible businesses.

According to Standard Chartered’s Borderless Business research, understanding regional regulations is the single biggest challenge for companies as they progress their overseas growth ambitions. To help overcome this risk, we leverage our experience and presence across emerging markets to help corporations understand differences in environmental and social standards between their home markets and the countries in which their suppliers operate. By combining education and advisory services with innovative financing opportunities, we help companies across our footprint to build robust, sustainable supply chains, and create a measurable positive impact on the environment and societies in which they operate.

Click here to read the second edition of Standard Chartered’s Borderless Business Report