How ESG enhances the supply chain
French fashion firm Pimkie is using ESG reporting to enhance the supply chain
ESG (environmental, social and governance) has already made positive strides in the areas of green bonds and ESG-guided investment, and is now also being used to enhance supply chain financing solutions, as in the recent case of French accessible-fashion company Pimkie.
Implementing ESG into the supply chain, also known as sustainable supply chain management, requires companies to re-evaluate their contractual relationships with their suppliers, to ensure that supplies are meeting ESG targets and disclosing ESG data.
Following the signing of the Paris Climate Accord in 2016, there has been increasing pressure on companies to demonstrate their green credentials. Within fixed income, there has been a rapid increase in companies issuing green bonds (bonds issued to finance sustainable assets), with green bond issuance forecast to reach US$250 billion in 2018, according to the Climate Bonds initiative.
While ESG has evidently made traction in investing and the capital markets, it has yet to have a similar impact in the supply chain finance space. However, this is set to change. Last year, Pimkie established a supplier finance (also known as reverse factoring) programme enabling their suppliers to get paid earlier, contingent upon adhering to certain CSR (corporate social responsibility) standards, which took into account social and environmental factors.
The programme was initially offered to sixty of Pimkie’s suppliers, representing 85% of the company’s purchases and amounting to 190-million-euros (US$226 million). Each of the sixty suppliers represents an annual contract of at least 0.5 million euros. The company does a semi-annual external audit on factories producing items for Pimkie and generates an internal score.
The company has five levels of CSR ratings ranging from platinum (highest rating) to wood (lowest rating). Suppliers with a score of less than 40 out of 100 will be given the rating “wood” while companies with a score of over 85 out of 100 are rated as “platinum”. Suppliers scored under the wood category would not be able to take part in the supplier finance programme. High-scoring suppliers of Pimkie are able to get paid up to 14 days earlier if they qualify for the programme.
In addition to Pimkie, there are other companies including IKEA, Michelin and Volvo that have aimed to fuse ESG/CSR values into their supply chains. Ikea, for instance, has acquired forests in areas such as Alabama in an effort to sustainably monitor the supply of wood it uses to make its furniture. IKEA reports that 60% of the company’s overall procurement volume was in wood. Similarly, tire manufacturer Michelin has made investments in rubber plantations in Indonesia, partnering with petrochemical company Barito Pacific in creating eco-friendly natural rubber.