Over the last decade, headlines have seen a noticeable focus on sustainable practices across different business operations, particularly within the manufacturing sector. This shift is driven by heightened attention from consumers, investors, and regulators, prompting the industry to address its environmental impact. Concurrently, the manufacturing sector is actively adapting to the expanding digital landscape while integrating sustainable practices, a move that aligns with India’s vision to become a manufacturing hub by 2025. As digital expansion continues to advance towards this goal, it’s also driving a sustainability revolution within the industry.
Not just manufacturing operations but also the financial sector holds significant power in funding and promoting sustainability. By incorporating environmental, social, and governance (ESG) factors, sustainable finance is emerging as a guiding principle, driving the industry’s commitment to a greener supply chain. Despite this, reaching sustainable goals means companies must change how global and domestic supply chains impact the environment.
Why are businesses adopting sustainable solutions?
Businesses are feeling the heat from stakeholders and are starting to look closely at their supply chains through a sustainability lens. Presently, over 752 of the world’s 2000 biggest companies have set net-zero targets. But here’s the catch: only about a third of them are thinking about Scope 3 emissions in those targets, and just half are reporting on these goals in their annual reports. Here, financial institutions can be a big help in nudging companies in the right direction by coming up with ways to finance sustainability efforts and teaching them how to do it. It’s not just up to the sustainability folks; everyone in the company must get on board. That’s where solutions like sustainable supply chain finance (SCF) from banks and NBFCs can make a difference.
A sustainable SCF program enables buyers to set benchmarks and goals for reducing greenhouse gas emissions while supporting suppliers in transitioning to sustainable practices. This support can be costly and require significant system changes, which SCF helps address by providing resources for investing in new technologies and infrastructure. Sustainable practices are promoted by offering financial incentives to suppliers who meet GHG (Greenhouse Gases) emission targets and other ESG KPIs. Ultimately, sustainable SCF programs transform supply chain finance into a tool that provides financing and incentivizes suppliers to ESG practices.Large businesses leading a sustainable way for MSMEs
While many companies have made strides in sustainable manufacturing practices, extending these to MSMEs and the entire value chain is crucial. Contrary to a common myth, MSMEs are not unwilling to become more sustainable; rather, they face specific challenges in implementing those practices in their operations. For instance, 23% of MSMEs lack access to technical expertise, and 52% are unaware of green finance policies.
Large organizations often lead the way in sustainable procurement, allowing them to actively engage and assist MSMEs within their supply chain in adopting sustainable methods. Strengthening partnerships with compatible suppliers is key here, offering access to international expertise, technology, and various financing options through cross-border trade.
As the global sustainable supply chain finance market is expected to exceed US$ 5,700.5 million by 2032, integrating sustainability into the entire supply chain will become crucial. Achieving sustainable supply chains is an ongoing journey that requires continual evaluation and enhancement. MSMEs can benefit from this journey through cost savings, improved access to finance, and regulatory compliance. To unlock these benefits, they must undergo sustainability assessments, set targets, adopt sustainable methods, and regularly monitor and report their performance.
In the end, the sustainable SCF market offers many exploration opportunities, including navigating tech and legal challenges, tapping into underserved economies, and understanding economic incentives. Forward-looking financial institutions and Fintechs can leverage statistical data and insights to evaluate these challenges accurately and provide digital and transaction-related solutions that underpin supply chain financing.
About the Author: Mr. Deepak Rastogi, CFO at Deepak Fertilisers and Petrochemicals LTD
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