Reducing Scope 3 emissions with Sustainable Supply Chain Finance programs

Transform to Net Zero, with member HSBC, has published its recent research into the design, uptake, and benefits of current Sustainable Supply Chain Finance (SSCF) programs, to help companies considering introducing the programs as part of their transformation to net zero emissions.

SSCF programs can be used by companies to engage suppliers on reducing Scope 3 emissions in their supply chains. Through SSCF, buyers provide suppliers with access to improved financing rates, offered through a partner financial institution, if the supplier achieves certain sustainability and climate-related standards set by the buyer.

The analysis of 10 current SSCF programs identified that SSCF programs offer suppliers financial incentives ranging from early payment terms and lower interest rates to funding for lower carbon operations. Programs cover multiple sustainability and ESG topics, can be tailored to sector and buyer priorities, and only some set constraints regarding the suppliers’ use of capital. For example:

• PUMA’s SSCF program with financial partners HSBC and IFC provides tiered pricing of short-term working capital through early payments and lower interest rates for suppliers that achieve high scores in PUMA’s supplier rating system based on social and environmental standards. Since its launch in 2016, the program has grown from 19 to 72 suppliers, with financing totalling $800 million for FY2022.
• Coca-Cola Europacific Partners SSCF program with Rabobank, established in 2022, rewards suppliers who improve their ESG performance with incremental discounts against initial funding rates. The program considers a combination of the suppliers’ Ecovadis scores and two custom KPIs to determine financing levels: 1) setting and validating an SBT, and 2) committing to using 100% renewable electricity across operations.
• Microsoft’s partnership with IFC, launched in 2021, works with Microsoft’s suppliers in emerging markets, primarily in Asia, to identify technical solutions that reduce emissions, provide implementation assistance, and help them invest in more efficient and low-carbon operations. Loans offered through the program are for a minimum of $5 million USD, and at least 60% of the total loan must be provided for projects that reduce emissions.

Whilst there are implementation challenges such as limited bandwidth to establish the programs among buyers, low supplier uptake, and difficulties measuring and ensuring decarbonization impact, buyers who have engaged in SSCF programs reported that the programs strengthen buyer-supplier relationships.

Following the research, Transform to Net Zero has identified how buyers, banks, and suppliers can further increase the impact of SSCF programs.

• Buyers can select participation criteria and rating mechanisms aligned with existing climate goals and actions, and target programs towards small- and medium- sized suppliers who may have a higher need for capital, and suppliers who produce high emission materials.
• Banks (and buyers) can strengthen impact by increasing supplier engagement in the program co-design process, with a view towards maximizing uptake, and standardizing ESG/sustainability ratings frameworks and metrics to evaluate supplier performance.
• Suppliers can approach their buyer and/or bank to start a SSCF program, suggesting what financial mechanisms would meet their needs, and then direct capital received from the program to finance decarbonization initiatives and in turn qualify for increasingly better terms.

Transform to Net Zero analysed SSCF programs used by Coca-Cola Europacific Partners, Levi’s, McCormick, Microsoft, PUMA, PVH, Sonae, Tesco, and Walmart. The financing banks of the SSCF programs researched were BNP Paribas, Citigroup, DBS, HSBC, IFC, Rabobank, Santander, Standard Chartered, World Bank. All research was conducted using publicly available information.

The Sustainable Supply Chain Finance Transformation Guide was launched at GreenFin in New York City, the premier sustainable finance and investing event, and is available to download here.