In this four-part blog series, we’re exploring the move toward sustainable finance. In part 1, we examined the increasing linkage between banking and sustainability, and, in part 2, we saw what’s motivating banks to participate in the emerging finance eco-space. In part 3, we took a look at current sustainability practices and expected outcomes through two real-life examples.
In this final installment, we examine a few of the strategic and tactical issues arising from the integration of sustainable supply chain finance (SSCF) with existing supply chain finance banking systems and software. We also consider the potential upside of this integration and start looking toward potential outcomes.
As shared in our 2021 CGI Voice of Our Clients findings, 59% of executives who are achieving results from their digital strategies feel strongly that environmental sustainability is core to creating value for customers. With sustainability a growing point of differentiation for digital leaders across industries, it’s important to document the key questions that need to be answered to plan how you will assess and measure your sustainability objectives.
Measuring a supplier’s carbon emission reductions
First, to help plan how sustainability becomes a differentiator, it is important to understand how a supplier’s carbon emission reductions can be measured. How does a company learn about its supplier’s business at that level of detail? How does the company’s own bank learn about its sustainability efforts with suppliers?
In part 3, we talked about the SSCF efforts of Puma, the athletic footwear manufacturer. Puma initiated an SSCF project (Puma Vendor Financing Program) that offers favorable ﬁnancing to suppliers that achieve high sustainability ratings. But, how does Puma track and rate its suppliers’ sustainability efforts?
As an example, let’s assume Puma’s rubber manufacturer can trade in its fleet of old, gas-powered trucks for hybrid-electric vehicles. Because fossil fuel releases a lot of carbon when it is burned, any effort to reduce consumption should score major sustainability “points.” An energy efficiency engineer can calculate actual carbon emission reduction, but how this information is captured and used is my first focus.
Here are key questions to consider:
- How can the carbon emission reduction information be validated? Puma can ask the rubber supplier for documentation, such as a copy of its purchase agreement for hybrid vehicles.
- How can this information be aggregated? Puma can ask all of its SSCF-participating buyers and suppliers to provide verifiable examples of their carbon-reduction activities. This tracking and tallying can be done pretty simply using a spreadsheet or database.
- How can this information be shared? Puma can share its collective carbon-reduction efforts with its entire global buyer and supplier base via press releases, marketing campaigns, annual reports to shareholders, etc.
Preparing for “green” tax incentives
Measuring suppliers’ carbon emission reductions is important, along with preparing for “green” tax incentives. These incentives are one of the most important financial motives for driving sustainability behaviors—and making sustainability a differentiator for your organization. While the prospect of government incentives is promising, it spawns more questions regarding how these incentives will be handled.
Here are key questions to consider:
- Does a company offering an SSCF program receive a tax break or only entities that actually make a tangible shift in their operations—or both?
- Will tax authorities want to know where a company is today regarding carbon-generating activities, i.e., its carbon footprint?
- Where does carbon-reduction data come from and who’s going to organize and analyze it?
- How will new applications and tooling for managing incentives be integrated with legacy systems? Further, how soon will that integration happen?
I don’t expect any notable "green" tax incentives to start going into effect until near the end of 2022. With this timeline in mind, we have a bit of time to get ready for a wave of green initiatives and new related technology solutions before they hit the market.
Our collective SSCF journey
We, as global citizens, have a lot of hard work in front of us. As we begin building direct connections between existing SCF programs and solutions and sustainability efforts, I believe we will realistically tackle climate change during our lifetimes, and that we can collectively hit the 2030 net-zero carbon emission goal.
After all, 2022 is just around the corner.
For more discussion on this topic, feel free to reach out to me.