Explained: Sustainable supply chain financing

It is a financial tool that can help businesses manage cash flow between buyers and suppliers.

It uses the financial strength of large buyers to provide early payments to suppliers with pricing based on the credit strength of the buyer to improve cash flow for all involved in the supply chain.

Supply chain finance works when a supplier delivers goods or services and issues an invoice, including the amount and due date, which is approved by the buyer. The supplier can choose to receive early payment for the invoice via a bank or wait until the invoice is due and receive the remittance from the buyer. If early payment is selected by the supplier, the buyer is then debited the invoice value by the bank on the original due date.

Clair Smith, sustainable trade finance associate director at HSBC, said: “Supply chain financing is a facility set up by a buyer to help their suppliers access liquidity.

“Rather than waiting 60 or 90 days for an invoice to be paid, suppliers can access working capital much quicker.”

Supply chain financing does not cost the buyer anything and is a way to directly support suppliers. A key benefit of this programme is that suppliers can access finance at rates typically only available to large corporations with a high credit.

The financing made available under supply chain finance is therefore significantly cheaper than suppliers would be able to access if they were to approach their own bank for funding.

Sustainable supply chain financing is an enhanced version of supply chain financing that rewards and incentivises suppliers for adopting environmentally and socially responsible practices.

Sustainable supply chain financing allows a buyer to engage its supply base on their environmental, social, and governance (ESG) objectives. Through this wider collaboration buyers can work on more ambitious ESG goals and explore ways to reduce carbon emissions across its wider supply chain and hence drive greater impact.

A supplier can also improve its own sustainability profile competitive advantage and compliance with regulatory requirements and improve its cost efficiency when implementing sustainability into its supply chain.

“By improving their ESG performance, suppliers can access finance at more preferential rates and demonstrate delivery against these goals to prospective clients,” Clair said.

“Buyers can use sustainable supply chain programmes to align their ESG goals with those of suppliers and create a stronger relationship between the two. They can also improve cost management and help support responsible procurement.”

Supply chains operate across all markets and geographies, serving as a cornerstone of global trade. In our transition plan we estimate emissions can be 10 times higher when including the whole supply chain, rather than just direct emissions.

A company’s own direct emissions are those within their immediate control. For example, energy usage, the machines they operate etc. So, transitioning supply chains toward more sustainable practices is critical.

Companies are increasingly looking to decarbonise their supply chains for several reasons. “By exploring sustainable supply chain programmes, organisations can build better relationships with suppliers, understand business practices and can help guide future strategic decisions while advancing on wider sustainability ambitions,” Clair said.

Sustainable supply chain financing helps businesses to enhance resilience and meet regulatory requirements, while building trust with its suppliers.

Our expertise in the area allows us to support businesses’ efforts to reduce carbon emissions across their supply chain to support efforts to decrease indirect greenhouse gas emissions, known as scope three reductions.

We offer tailored sustainable financing solutions designed to meet needs across a broad spectrum of industries, e.g. healthcare, consumer and retail, transportation. In addition to assisting buyers, our global presence enables us to provide on-the-ground support to suppliers worldwide, ensuring a cohesive and impactful approach to sustainability across geographies.

HSBC can support clients through our international footprint. “We're best placed to bring together buyers and suppliers from across the world to work with one another,” Clair said.

“As the world’s largest trade bank, we are well placed to support our customers and the communities in which we operate.”