Director of Strategic Partnerships
LSQ
By Brittany Hooper
In part two of a series on improving corporate social responsibility, Brittany Hooper of LSQ shifts the focus to environmental, social and governance initiatives in the supply chain and how working capital solutions like supply chain finance can provide benefits for all stakeholders.
No matter the name or acronym the initiatives take, companies across the world are investing heavily in being better global citizens. You don’t have to look too far down the organizational charts of large corporations to see titles relating to corporate social responsibility, primarily in the areas of diversity, equity and inclusion and environmental and social governance.
Customers, investors and government regulators expect companies to understand and manage the impacts their operations have on the environment, the communities they serve and society as a whole. Beyond that, there is an expectation that companies create greater value for the benefit of the collective. That is, they put more back into society than they take out. In part one of this series, we looked at a piece of the equation, examining how working capital can help improve DE&I in the supply chain. In this article, we’ll examine the ESG side.
Going beyond job titles, ESG-oriented investing has experienced a meteoric rise. The fifth Global Sustainable Investment Review, published in July 2021, found that across five major markets from 2018 to 2020, global sustainable investment increased 15% to $35.3 trillion.
Few companies operate within a vacuum; they require upstream and downstream partners to do business. From the manufacturers of inputs to distributors, there are other business enterprises relying on each other to be successful. From an ESG standpoint, however, those partners can be a liability if they are not socially responsible businesses.
ESG in the Supply Chain
Increasingly, enterprises are including the companies with whom they do business in their ESG initiatives. Beyond mitigating social and environmental risks within the supply chain, there are copious rewards offered by enabling responsible supply chain partners, as sustainable supply chains can be a strong driver of financial value for a business. However, as controlling every supplier in the supply chain is beyond a company’s direct influence, supply chains can open up businesses to risks like environmental damage, human rights violations and scandals. Beyond their obvious and more direct negative impacts at a societal level, these are issues that can damage the financial viability, reputation and operation of a business.
Being a responsible corporate citizen with a model ESG program is a great aspiration for companies globally, but achieving that goal is hard. It’s even more difficult in the supply chain. When studying suppliers of three multinational companies in 2020, The Harvard Business Review found that “many were violating the standards that the corporations expected them to adhere to” and that “the hoped-for cascade effect was seldom occurring.” The article specifically cited the backlash Apple, Dell and HP faced “for sourcing electronics from overseas companies that required employees to work in hazardous conditions, and the fallout that Nike and Adidas suffered for using suppliers that were dumping toxins into rivers in China.”
According to Principles for Responsible Investment, ESG failures in the supply chain can lead to “reputational concerns” as well as a breakdown in the delivery process of raw materials and goods, which can delay fulfillment to customers and lead to rising costs and lost business.
With those consequences (and others) looming, it is easily understandable why companies are making every effort to increase ESG initiatives into their supply chains.
The Benefits of ESG in Supply Chains
“We live in an increasingly resource-aware and resource-constrained world,” Kris Gopalakrishnan, CEO and co-founder of Infosys, says. “We need to live within our means and not borrow from the future. To build a sustainable tomorrow, we need to make our supply chain sustainable today. In fact, I firmly believe that increased sustainability in the supply chain reduces risks and increases profits for all organizations and stakeholders.”
Again, according to Principles for Responsible Investment, there are a litany of positive effects companies can benefit from by incorporating effective ESG initiatives into the supply chain, including lower costs, better regulatory and legal adherence, better relationships with suppliers and reputational improvement in the eyes of partners, stakeholders and customers.
Focusing on environmental and social governance in your supply chain — and business practices as a whole — is important to drive productivity and save businesses money. Companies are already experiencing the financial consequences of failing to act on sustainability, and the financial and banking sectors have integrated ESG rules into their funding criteria. Customers are demanding a higher level of consciousness from the companies they do business with, so ESG is no longer a nice-to-have for companies but an imperative that can dictate success or failure.
Solving ESG Challenges with Working Capital
At first glance, it’s hard to draw a direct line between a company’s ESG initiatives and an early-payment program. But digging deeper, there are multiple ways a well-implemented and executed supply chain finance program can help buyers and suppliers further their corporate responsibility initiatives.
The first way is simple: A supplier that is financially healthy is more likely to be able to take on environmental or social initiatives within their operations. With improved liquidity, there is capital to invest in things like more efficient equipment, more employee training programs and/or diversity recruiting opportunities.
Typically, supply chain finance programs offer the best rates to the largest suppliers, while small-to-medium-sized businesses pay more to use early payment. (This is the bucket minority-owned businesses fall into most of the time). With ESG-based programs, buyers and supply chain finance providers have the opportunity to provide suppliers with the superior rates reserved for larger sellers on their early payments. That is, if a seller meets certain ESG goals, they may qualify for a lower fee early payment, while those that don’t meet the goals pay a higher fee.
This was a tact recently taken by German athletic clothing and shoe manufacturer PUMA. Within the first year of starting a sustainable supply chain finance program, it provided $100 million in lower financing costs to 15% of its sellers that achieved high ESG scores. The program paid high dividends for PUMA, as the company estimated 94% of its environmental impact could be found in the supply chain.
Corporate social responsibility is important to every company, regardless of size or industry, or at least it should be. Customers, investors and governments expect businesses to play their part and be good global citizens and societal partners. That means creating equitable and inclusive opportunities for diverse groups of people, lessening their impact on the environment, supporting human rights and providing safe environments for their employees. Those values must be demonstrated in all aspects of a business, both internally and externally, and that includes within the supply chain. While there are no easy answers to ensuring your suppliers are responsible corporate partners, there are steps you can take.
