Strategies for Incentivizing Powerful Change at the Scale of Global Business
There is a revolution in sustainable business finance on the horizon. Now is the time to rethink the mentality around the concept from constraint to opportunity and rebuild as the pieces begin to fall into place - we must leverage finance to influence positive environmental and social action in business and value chains. Harnessing finance as a beneficial force in sustainable transformation has become a major topic of conversation, particularly at EcoVadis’ March 2021 Sustain conference, as well as the GreenBiz hosted online event for sustainable business leaders in February.
For too many years, the finance function was a source of restriction within operations and supply chain, limited to cost-cutting and cash flow protection. But that is changing as new digitally scalable tools and sustainability indicators combine with global-scale financing partners, a clear path is emerging to achieve the reach and velocity of scale-up needed for global impact. And organizations are taking note as they roll out sustainability initiatives - from decarbonizing to improving working conditions and assuring protection of human rights - within businesses and their value chains across the globe.
While ESG in finance practices - such as inflows to ESG funds, ratings of large public companies, etc. - are mostly well developed, this is only the tip of the iceberg. The vast majority of the value chain sustainable finance has struggled to scale up, leaving a gaping need to reach, serve, and incentivize the ‘unlisted’ and SME companies -- who are 70%+ of global value chains -- to participate.
So how exactly can organizations tie in ESG initiatives and incentives into finance that can reach the rich variety of businesses in the value chain? What is driving them to take action now? Let’s explore.
Stakeholder Power – and Pressure
The staggering $1 trillion climate change-related costs anticipated in the coming years if proactive actions are not done now has put all eyes on sustainable steps being taken by enterprises around the globe – and the attention of investors, in particular, has been caught. With stakeholder pressure mounting, financial companies recognize the need to act, or get left behind. Improving environmental efforts is good for business from a social and brand reputation perspective, but it is also increasingly becoming a sound financial strategy. Incorporating sustainable practices into investments has on a consistent basis demonstrated 20% less volatility from a risk perspective than traditional strategies, further piquing investors’ interests – and wallets. Investors now regularly require disclosures on environmental, social, and corporate governance (ESG) before even considering engaging with an organization.
Reaching Global Scope
In order to significantly scale up to achieve global scope requires standardized indicators for sustainability that can adapt to the complexity of global supply chains. These indicators must be able to measure SME’s in any category as well as geographic region, based on technology and digital systems that can easily integrate and scale quickly, yielding the most effective results. A prime example of this is demonstrated in JP Morgan’s selection of Taulia, a financial technology solution provider, as their FinTech partner for their sustainable supply chain finance program. Having the right technology and partners in place can radically accelerate progress and tangible results.
Paving a New Path
The pieces to the sustainability puzzle are coming together as brands are taking innovative approaches to enact change at scale. “You will see a lot of innovation and creativity going towards that,” says Ana Carolina Oliveira, head of sustainable finance at ING during a recent finance and supply chain panel at Greenbiz. “They pretty much go hand-in-hand”. ING is among the many brands implementing sustainable finance solutions, leveraging EcoVadis’ ratings to offer sustainable business loans for non-listed companies.
Brands are looking to a higher level to elevate climate society goals, fully integrating sustainable incentives across solutions. “The concept of ESG is emerging as a part of pretty much most client conversations,” stated another panelist, Davida Heller, senior VP of sustainability & ESG at Citi. As a part of their $250 billion environmental finance goal and 2025 sustainability progress strategy, Citi is working on a variety of solutions – from commercial banking to bond offerings to supply chain finance – tied to ESG goals and benchmarks.
To watch the full GreenBiz discussion here.
Corporates Prioritize Integration of Sustainability and Finance to Create More Value for Suppliers
EcoVadis has seen growing interest from corporates to partner with the banking and investment community to integrate sustainability ratings into their commercial relationships, with the goal of creating new sources of value and incentives by attaching sustainability metrics to capital flows across the value chain. At Sustain 2021, sustainable finance was a central point of discussion as many of our partners have already made strides in aligning their strategies. Expert panelists across a variety of industries from brands such as EDF (a large electric utility), L’Oreal (beauty/cosmetics) and Bridgestone (tires/automotive), detailed some of these new programs , from reverse factoring of invoices to commercial loans. Watch the full session here.
It starts with supplier commitment across the value chain, according to Carine de Boissezon, chief sustainability officer at EDF. “We need to ensure they are committing themselves to carbon neutrality and to ensure that everybody is getting better.“ EDF now carries $7 Billion in green bonds. It is critical that brands continue to work together to accelerate the commitment to combating climate change.
At L’Oréal, the commitment to sustainability was strengthened with Régine Lucas’ appointment to chief sustainable finance officer – a newly created role for the company. “At L’Oréal, we truly believe there is no economical performance without corporate responsibility,” she shares. This dedication has been demonstrated in L’Oréal’s close partnership with EcoVadis, used to engage suppliers to help them meet sustainability goals, and through the creation of the Responsible Beauty Initiative where they collaborate alongside other industry leaders on improving sustainability of the entire beauty value chain.
Looking to the banking industry, Landesbank Baden-Württemberg was one of the first to provide ESG financial solutions tied to sustainability to their customers. However, their services are much more than just monetary. “Our clients require more advisory services, leading us to create a sustainability advisory team comprising senior experts with sustainability consulting backgrounds,” Joachim Erdle, heads the corporate finance division, shares, showcasing the holistic dedication of the bank in pursuing – and achieving – their goals.
The commitments have been made, and now brands are making the necessary moves to make tangible change. But one thing is certain, greenwashing is a risk to beware of, according to Alessandro Camporeal, Bridgestone’s raw material procurement director. “It’s of paramount importance not to let any angle of this program to be felt like mere greenwashing,” when speaking to Bridgestone’s sustainable finance program. The program launched in December of last year in partnership with JP Morgan, Taulia and EcoVadis. The program provides supplier financing programs with rates that are linked to sustainability performance via EcoVadis ratings of that supplier. The sustainability standard has been set – and it is full steam ahead into the future.
A Look Ahead
This is much more than a trend – this is a fundamental shift in the way financial institutions will conduct business. Ambiguity must be eliminated and ESG related initiatives must be heavily regulated to ensure accurate and relevant information is being given to showcase progress is being made. Working together with regulators to drive forward sustainability goals is key - a concept we are already beginning to see come to fruition. We are grateful to be a part of this movement and look forward to continuing to help propel the sustainable initiatives forward with our valued partners.
Contact us to learn more about EcoVadis and our Sustainable Finance programs.
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