“We believe this is a product that fits companies’ sustainability ambitions like a glove,” says Olle Billinger, Climate & Sustainable Finance adviser. “It’s a tool they can use to help their suppliers improve in relevant sustainability areas.”
In recent time there has been record-fast growth of a new type of sustainability-linked loans and bonds. In contrast to green loans and bonds, where the borrowed money is earmarked for specific environmental and climate projects, sustainability-linked products are performance-based. The basic principle is that companies receive a set price discount if they achieve their strategic sustainability targets, and conversely, a slightly higher price if they fall short.
“This opens the opportunity for more companies to use sustainability products,” says Olle Billinger. “They may have ambitious sustainability targets, but no investment pipeline that is suitable for borrowing money for specific projects. With sustainability-linked loans and bonds, they can show they are serious about their strategy by creating a financial incentive coupled to their targets.”
Now, SEB has created a model for introducing this principle in Supply Chain Financing. This is business that is targeted at large core customers in the bank’s home markets. It’s a form of factoring in which SEB buys invoices from client companies’ suppliers at a certain discount and then receives full payment from the client company on the due date. The benefit for suppliers is that they receive payment immediately, while the client companies benefit from more efficient management of their working capital.
“We are now adding a function that gives client companies the opportunity to create a financial incentive for suppliers to live up to the sustainability requirements made by the company,” Gustav Novolin explains. “If the suppliers achieve the target, they receive a certain discount, and if they fall short it will cost them a little more”, says Paula da Silva, head of business area Transaction Services.
There is no cost involved for client companies, other than the time and energy they need to spend on establishing a structure. Instead, the risk and reward are born by the suppliers and SEB.
SEB has begun informing customers about the new solution and hopes to be able to land its first deal shortly.
Is there any corresponding solution currently on the market?
“We have seen similar arrangements globally, but nothing specifically in the Nordic region as far as we know,” says Gustav Novolin, product manager for Supply Chain Financing. “This is something that would profile us and give us a competitive edge right now. Over time it will be a hygiene factor as more and more companies are realising the importance not only of reducing their own sustainability risks, but also of broadening their perspective and addressing a larger share of their value chains.”
Olle Billinger adds: “This means that we can begin speaking the same language across different product areas. We can offer a palette of sustainability-linked solutions that are implemented in the same way and are therefore easy to understand.”