Sustainable financing scales up as Tesco targets supply chains
You've heard of 'green' loans and 'sustainable' finance... But what do these terms mean in terms of real accountability, behavioural change and progress? And what has Tesco got to do with it?
Green loan basics...
'Green' or 'sustainable' loans allow businesses to borrow at favourable rates - conditional on whether they meet specific pre-defined sustainability metrics or KPIs. This has proven to be an effective mechanism through which lending institutions can deepen engagement with borrowers and incentivise more sustainable behaviour in the economy while also incentivising themselves to carry out strict due diligence. This is a key feature - the lending institution has a financial motive to ensure that sustainability KPIs are evaluated rigorously - providing a natural buffer against lax standards and greenwashing tendencies.
The strength of green financing as an incentive framework fuels its deployment even in notoriously “difficult to reform” sectors. In 2019 for example, Société Générale agreed a bilateral sustainability-linked credit facility with Polymetal International – an Anglo-Russian mining company – to support continued reform of mining operations in line with a defined set of sustainability targets including (but not limited to) climate management, health & safety, tailings storage and water management.
Targeting the supply-chain...
However Tesco’s announcement (29 April 2021) will represent the first time that a UK retailer has linked sustainability incentives directly to its supply chain. Tesco suppliers will be offered preferential financing rates through a market leading supply chain finance platform run by Santander. This will reward suppliers who make measurable positive changes to their business while also creating a structure that tracks performance and drives continuous improvement.
According to their press announcement, Tesco will “regularly update the scope of the sustainability data requirements” – acknowledging the need to co-evolve with market standards as public understanding of sustainability risks and solutions becomes more sophisticated.
Ashwin Prasad, Tesco’s Chief Product Officer, said:
“This programme not only provides suppliers with a real incentive to set science-based emissions reduction targets, it will help embed sustainability goals throughout our supply chain and support the UK in realising its climate change targets.”
These comments were echoed by Sarah Wakefield, Head of Food Transformation at WWF:
“We welcome this latest leadership by Tesco, to be a part of the solution by incentivising their suppliers to report on their emissions and take action to align with 1.5°C climate targets. This takes us closer to achieving our shared goal of halving the environmental impact of the average shopping basket.”
Why is this significant? (Hint - it's all about scale)
Given that sustainability linked finance has been around for a while – why is Tesco’s announcement notable? Tesco’s move to address supply chain finance is important because it paves the way for mass-scale joined-up participation in sustainability efforts.
Initiatives launched by businesses typically only affect outcomes directly associated with that specific business and its immediate stakeholders. Similarly, regulatory provisions (for the most part) are typically limited to a particular jurisdiction or economic block.
By contrast supply chain contracts span businesses and jurisdictional boundaries to tap an entire web of global producers and transporters. By placing correct incentives within supply-chain finance structures, Tesco creates the potential to unlock far wider impacts than could ever be achieved through the actions of isolated businesses acting on their own. This is why the move to 'green' supply-chain finance in particular is so consequential.
Better harmonisation = knowledge-sharing
Additionally, by catching such a wide array of suppliers within a single incentive structure, this goes some way to harmonising the sustainability standards and metrics under which the entire ensemble operates. The standardisation of measurement and reporting will pave the way for information sharing and cross-pollination of ideas – allowing Tesco to identify which policies and practices are delivering sustainability outcomes most effectively.
Wider ESG Trends in Corporate Finance
Tesco’s announcement is also reflective of a wider trend to provide businesses with ESG-integrated corporate finance solutions. Enzo Advisers and SemiCap Equity Partners (S.C.E) recently announced a joint initiative to help companies link their management of ESG criteria with a strategic approach to financing.
Nidhi Chadda, Founder and CEO of Enzo Advisors stated:
“Together, we will provide clients with the ability to determine the key sustainability KPIs best suited for their business that are credible, accurate, aligned with long-term targets, and linked to customized solutions to optimize financing and improve the overall cost of capital. Our holistic solution will meaningfully elevate a company’s sustainability profile and further drive accountability towards long-term goals.”
Douglas Rogers, Founder of S.C.E. Partners also commented:
“ESG-linked institutional investing is currently the largest growth area in our business and is having a direct material impact on our clients, both public and private. A company’s ESG score and disclosure compliance are increasingly having an impact on the cost of capital and a company’s access to institutional investor support.”