Trends and Drivers in Corporate Banking: Supply Chain Finance and ESG

Trends and Drivers in Corporate Banking: Supply Chain Finance and ESGIn my latest blog post, I covered Banking-as-a-Service, one of the two main trends driving the ongoing service evolution in corporate banking. We discussed these factors earlier in the summer as part of a webinar hosted by NTT DATA that I moderated. I’ll be discussing the other main trend in this post: supply chain finance (SCF) and environmental, social, and governance (ESG) issues.

SCF today blends its traditional portfolio of finance instruments (e.g., payables finance and receivables finance) with new factors that are rebooting the whole model. One of those new factors is sustainability. Sustainability is embedded in everything that a firm (banks included) does.

There are no global banks that do not have a sustainability angle. They are all committed to achieving net zero carbon emissions soon to support the goals of their business ecosystem partners, either corporate client, retail consumers, fintech and financial institution partners, local and national communities, government, and supra-national initiatives, just to name a few.

SCF renewed characteristics allow companies to enhance the sustainability levels for their supply chain in a capillary way, with dedicated products that reach the company’s suppliers and clients, when needed. The overall goal of SCF innovation is to support banks in providing tailor-made solutions to clients that want to expand sustainability principles and best practices across their commercial ecosystem.

Sustainability in Action

An exemplary case study is the collaboration between Banco Santander and Tesco (the U.K. retailer): The firms created a joint solution to incentivize the retailer’s suppliers to enhance their sustainability levels and allow Tesco to reach its scope 3 emission target. With the solution, the bank can classify Tesco’s numerous suppliers based on the respective sustainability targets prepared by an external partner of the project.

Tesco, through the bank, incentivizes its suppliers to increase their levels of compliance to sustainability targets by providing them with a more competitive cost of funds in return for the sustainability target achieved. The model also creates mechanisms for suppliers to go from one level to the other and benefit from further cheaper SCF funding. This is an important milestone for SCF, as Tesco became the first U.K. retailer to deliver a sustainability-linked SCF program to its supply base.

Moving to a wider corporate audience, sustainability-linked SCF requires additional preparation and effort because not all enterprises are ready for it from a financial point of view. These companies can think of other products, less sophisticated but still focused on moving the user to a more environmentally friendly approach. For example, in treasury (just as in any company’s department) there are contracts to be signed. If all these documents could be signed with an e-signature, the result would be a very quick win that adds value and supports a company in its first efforts to become environmentally friendly.

Strategic SCF Systems

The SCF market is evolving, with banks dividing into two main groups. The first group wants to use their own SCF platform and primarily go with their business model, their product features, and their capabilities directly to the client. The second group has decided to be the financing source of a partner’s SCF platform. In both cases, the SCF strategy for banks is to help corporate clients make life easy for suppliers, and this requires blending technology with strong service and support teams.

Having IT systems in place and automation at the right level are the prerequisites for a company to drive toward more sustainable solutions. Removing manual and paper-based operations are the small, seemingly insignificant changes that accumulate at the end of the day and actually have a significant on overall sustainability behavior.

While corporations tend to be slow to move in this space because the change to sustainability requires support from technology and relative budget investments, sustainabililty-linked SCF can be a valid support to the transition. To learn more about how banks are working to make their SCF efforts more sustainable, clients can watch the full recording of the NTT DATA webinar here.

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