The responsibility placed on boards, executive teams and business owners to manage their environmental, social and governance (ESG) risks and to drive sustainable outcomes has never been greater.

There are many strategies at a company’s disposal to meet this challenge, including measures such as sustainable financing and carbon offsets. In this article, we consider how those risks and targets can be met by embedding ESG principles into a company’s supply chain operations.

Reimagining supply is an ambitious undertaking given the complexities inherent in global supply chains, coupled with disparate and sometimes poorly integrated operational processes. Adding an ESG lens adds further complexity and many procurement teams don’t have the visibility of their suppliers to make the necessary risk assessments.

"The enormity of both the challenge and opportunity with respect to ESG is not lost on our customers," says Adam de Bree, Executive Director, Head of Business Development & Client Consulting, Transaction Banking, Institutional Banking & Markets at Commonwealth Bank.

"We have seen clients create ESG-focused teams under dedicated senior leadership appointments across virtually all industry sectors. This has led to a marked increase in our clients’ desire to understand how we can help facilitate their ESG goals and objectives, specifically as it relates to the supply chain."

ESG considerations will be unique to each organisation and will reflect not only the composition of its supply chain, but the industry as a whole, location and the regulatory environment. Organisations will need to invest in training, system upgrades and other resources to deliver the desired outcomes.

Managing the supply chain life-cycle from an ESG risk perspective

While Scope 1 and 2 emissions have been included in ESG policies for some time, Scope 3 emissions (those that are the result of activities from assets not owned or controlled by the reporting organisation) have raised the criticality of supply chains in a company’s ESG strategy. Similarly, government and regulators are becoming more targeted in their response to stakeholder and community demands, increasing the obligation on organisations to measure and report on their ESG performance.

So how can supply chains help an organisation manage its ESG risk?

Traditionally, the objectives of procurement teams have encompassed:

  • contract management
  • reducing risk
  • securing supply
  • lowering costs  
  • increasing efficiency
  • improving quality

Some common ESG considerations across several industries that CommBank has identified include:

  • corporate governance
  • greenhouse gas emissions
  • certified social and indigenous suppliers
  • poor workplace conditions including safety, hours and pay
  • modern slavery and human trafficking

Using these considerations, organisations have the opportunity to leverage their supplies to deliver against their ESG outcomes. De Bree says there are two key levers for an organisation to drive E&S outcomes throughout their supply chain: managing usage levels of various supplies, or influencing suppliers to optimise their value chains to deliver against objectives.

Each stage of the supplier life cycle is an opportunity to assess ESG risks and pursue ESG strategy including Sourcing, On-boarding, Performance Management, Risk Management and Off-boarding.

"There’s a range of opportunities and solutions for businesses to tap into to solve their sustainability challenges in their supply chain," says de Bree. "Data can provide really powerful insights into suppliers' performance and risk status".

"Businesses can also look to align the investment of excess liquidity to sustainability-focussed outcomes, or use carbon credits to offset excess emissions. Any one of these actions will help drive towards a more sustainable outcome."

How can CommBank help navigate ESG challenges in the supply chain?

Effective ESG management throughout the supply chain reaps a host of benefits for an organisation, including financing opportunities that are reserved for businesses adhering to the UN Sustainable Development Goals.

Sustainability-linked funding incentives are showing significant success across Europe and the numbers are growing in Australia. Sustainability-Linked loans and bonds can be structured with supply chain related Key Performance Indicators (KPIs), which incentivise improvements in a customer’s supply chain.

In addition to this, CBA launched its Sustainable Trade Finance product suite in late 2021 to provide a broad range of solutions that can be used to both drive ESG behaviours at the customer level and into their supply chains. Some of these new products apply Sustainability-linked funding incentives to a range of Trade Facility types. For example, under a Sustainability Linked Borrowing Base facility, which is used to help customers accumulate and distribute inventory, the funding costs are linked to the achievement of specific ESG targets. Meanwhile, CommBank’s use-of-proceeds based Trade solutions are designed to support the trade of specific underlying goods or sourcing from specific suppliers. For example, a Green Letter of Credit or Trade Advance that supports the purchase of materials required in the production of renewable energy.

"Trade Finance plays an integral role in helping customers manage their supply chains.  Embedding Sustainable Finance capabilities into Trade Finance solutions is a critical step in helping customers meet their ESG goals, particularly as they look for means to embed sustainable behaviours further into their supply chains," said Harry Charles, Executive Director, Structured Solutions, Trade Finance.  

At a grassroots level, de Bree says CommBank’s Financial Operations team can map a client’s organisational management and governance across its supplier lifecycle, to benchmark how processes and systems are leveraged to deliver against ESG priorities.

CommBank also has a supplier database that provides a range of insights for clients and is working on other data-driven tools to help organisations manage their ESG risks.

To learn more about how we can help your business, please contact your relationship manager.

Our expert

Adam de Bree is the Executive Director, Head of Business Development & Client Consulting, Transaction Banking, Institutional Banking & Markets at Commonwealth Bank.  Adam has a strong focus on supporting clients to assess and navigate their ESG-related risks and strategy as it relates to working capital and supply chain solutions.