Reinventing reverse factoring for the era of ESG
A radical makeover of supplier financing is proving a win-win for companies and their suppliers as they look to reduce their carbon footprints
A radical makeover of supplier financing is proving a win-win for companies and their suppliers as they look to reduce their carbon footprints
A novel supply chain financing solution from working capital finance platform CRX Markets is helping to address one of the biggest challenges to achieving net zero: how to encourage companies and their suppliers to work together much more closely in controlling emissions across their value chains.
Frank Lutz, CEO of Munich-based CRX Markets, says the solution integrates ESG criteria into reverse factoring programmes in the form of sustainable supply chain finance (SSCF). By meeting ESG criteria suppliers benefit from better financing terms, while financing partners, through their investments, promote the sustainability of global supply chains and open up alternative sources of financing.
“It’s a virtuous circle, a win-win for all parties. Through reverse factoring based SSCF, buyers actively combat the effects of climate change that pose a direct and indirect financial and material risk to their production line. It also enables companies to mitigate reputational risks by strengthening their external and internal public image,” says Lutz.
“We believe the application of reverse factoring in SSCF via a multiparty financing platform is an elegant, efficient way for buyers and sellers to support each other in achieving their low carbon targets.”
The crucial importance of getting organisations and their suppliers to collaborate more on cutting emissions is made clear by the Greenhouse Gas (GHG) Protocol, the most widely used corporate accounting standard for assessing emissions. The protocol classifies emissions into ‘Scopes’ or groups.
Scope 1 covers direct emissions from company owned sources, such as boilers and vehicles, while Scope 2 addresses indirect emissions from, for example, generation of electricity purchased by the reporting company. These two groups of emissions are largely under organisations’ control and lend themselves to accurate tracking and, in principle at least, effective control. Scope 3 represents a far bigger, much more complex challenge for organisations, covering as it does all other indirect impacts from company activity, ranging from the goods it purchases to the disposal of the products it sells. The UN says Scope 3 emissions account for more than 70% of a business’ carbon footprint and tackling them is a “crucial” task for organisations if the aims of the Paris Agreement are to be met, global warming is to be limited to 1.5°C and net zero achieved by 2050. Greater collaboration between organisations and their suppliers in measuring, monitoring and controlling emissions will be key to achieving those ambitions.
Currently, green bonds and sustainability-linked bonds (SLBs) are two of the most popular forms of sustainable debt financing used by corporates. Green bonds, where the capital raised is used on environmental initiatives or projects, such as investing in renewable energy, make up the largest share. SLBs are more focused and are issued with specific sustainability performance targets (SPTs), which contain KPIs, for example, a specific target for the percentage of renewable energy to be used in manufacturing a product by a target year of 2030. If the SPT is missed, there can be penalties in the shape of a “step-up” clause whereby the bond interest increases.
Unlike green bonds and SLBs, whose requirements are outlined by The International Capital Market Association (ICMA), there are currently no comparable standards for SSCF. But rather than this being a drawback for SSCF, Lutz argues it gives sellers the flexibility to choose from a broad list of financing parties: “That flexibility is an essential benefit of SSCF. Given the differing sustainability challenges across industries and individual entities within those industries, it is important for companies to be able to work with as numerous financing partners as possible with different perspectives on ESG criteria. We have nearly 50 financing partners, including banks and institutional investors, which is a unique offering in Europe. It enables us to provide the best possible diversification, achieve tailor-made solutions.
“Using objective KPIs, ratings or certifications, financing partners can evaluate sustainability and offer individual financing structures based on their assessments. It allows for the best SSCF solution to be composed for each individual case – not only in respect to pricing but more importantly, with respect to the structures.”
In practice, the CRX’s platform enables companies to access or upload ESG certifications, ESG ratings or KPIs developed in-house by the issuer. Companies make supplier invoices available for third party financing by uploading them onto the CRX platform. Invoices can be marked with an “ESG identifier” that channels them into CRX’s ESG-specific reverse factoring programs.
Nestle is one of CRX’s most notable SSCF success stories. The food and beverage giant won the 2020 SCF award for a solution that involved CRX helping it to on-board 84 of Nestle suppliers legible for ESG financing. To date CRX Markets has arranged $500m in financing under the programme, backed by invoices for goods produced by Nestle suppliers according to strict ESG criteria linked to certification from independent ratings agencies. Participating Nestle suppliers typically see financing costs reduced by 25-30%.
Lutz says the Nestle programme is an example of one of three solutions supported by the CRX platform for SSCF. The distinguishing feature between the three is the type of ESG rating provider employed. He says: “There are many excellent independent ratings providers and, in general, each has particular strengths, offers certain features that lend themselves more to certain industries or applications than others. It is a case of horses for courses.”
The Nestle project falls into a CRX SSCF solution category that features focused ESG rating providers like Rainforest Alliance and ISO who have a record of high acceptance in supply chains and tend to be better suited for industry-related initiatives, for example agriculture or manufacturing.
Another major category – the most popular one on its platform – caters for solutions that leverage established but more broad-based ESG ratings providers. They include EcoVadis, which in April formally partnered up with CRX Markets to provide and display supplier related ESG scores/ratings directly on the platform. Lutz says this category is proving especially attractive to the financial industry and numerous procurement organizations though the broad based, standardised characteristics of assessments by ratings providers mean limited room for individual strategies to be developed.
The last and most recently introduced SSCF category is focused on ESG related KPI´s in supplier contracts and employs the kind of principles already well established with green bonds and SLBs. Solutions can be linked by the seller directly to projects, investments or large, tier 1 suppliers.
Already boasting the biggest stable of financing partners for a one stop shop for working capital finance on both sides of a company’s balance sheet in Europe and a footprint that covers 55 countries, Lutz believes CRX Markets now also has early mover advantage in the rapidly growing ESG supplier finance space.
He says: “We see more and more companies wanting to map ESG criteria on to working capital finance – demand from our existing clients as well as potential new clients is immense. It is not just a trend and will become an integral part of corporate financing going forwards.
“Those organisations wanting to secure broad access to liquidity on attractive terms in the future will not be able to avoid introducing and continuously expanding ESG components in their financing arrangements.”
To learn more about how supply chain finance can support your ESG initiatives, register now for The Global Treasurer and CRX Markets webinar