Consumer Demands Help Drive New Corporate PrioritiesModern consumers can be highly aware of the impact their purchasing power has on the global environment. Consumers appear to increasingly demand “green” products that are recyclable, biodegradable, and compostable. In a 2019 Accenture study, 81% of respondents expected to buy more environmentally friendly products in the next five years, and 50% stated that they are willing to pay more for a product that is designed to be re-used or recycled.1 This change in consumer sentiment is influencing large corporates to rethink a variety of business processes from an environmental, social, and governance (ESG) perspective. With little signs of slowing down, McKinsey notes that the magnitude of global sustainable investment (now topping $30 trillion) suggests ESG is much more than a fad.2 In an industry stereotypically linked to fossil fuel consumption, air pollution, and water contamination, chemical manufacturers may experience the greatest pressure from this phenomenon. Mark Costa, CEO of Eastman Chemical, said it best: “Sustainability isn’t simply a nice product attribute. It’s a requirement. Consumers demand it, and our customers expect it.”3

While it’s understood that consumers can expect producers of final goods to prioritize sustainability, the ripple effect of that pressure on intermediate manufacturers may not be as obvious. A recent EcoVadis survey looking at corporates’ understanding of the challenges embedded within their supply chains found that 45% of respondents have visibility into their Tier-1 suppliers, a mere 23% into Tier-2, and only 4% can drill down to Tier-3.4 As leading chemical companies seek to change public perception of their environmental impact, their collaborative partnerships with strategic suppliers are becoming increasingly important. In fact, Ernst & Young predicts that by 2025 corporate procurement functions will be expected to create economic and social value beyond cost management, which will accelerate the movement from a “linear economy” of consumption and disposition to a “circular economy” of continuous use and reuse.5

Many Chemical Companies are Taking ActionAs part of an annual sustainability survey conducted by Boston Consulting Group, 85% of chemical companies reported having a corporate sustainability strategy — more than any other industry.6

Sustainable Chemistry: How Supplier Finance Can Promote ESG

Treasury and Trade Solutions

James Matin

North America Trade Sales Head – Chemicals, Treasury and Trade Solutions, Citi

1 https://www.accenture.com/_acnmedia/PDF-117/Accenture-Winning-In-A-Circular-Economy-Executive-Summary.pdf#zoom=402 https://www.mckinsey.com/business-functions/strategy-and-corporate-finance/our-insights/five-ways-that-esg-creates-value#3 https://www.eastman.com/Company/Sustainability/Documents/Eastman-Sustainability-Report-2019.pdf4 https://resources.ecovadis.com/2019-barometer/2019-sustainable-procurement-barometer5 https://www.ey.com/Publication/vwLUAssets/EY-building-responsible-and-resilient-supply-chains/$FILE/EY-building-responsible-and-resilient-supply-chains.pdf 6 https://www.bcg.com/publications/2017/making-business-case-sustainability-chemicals.aspx

A common component of these strategies has been evaluating the supply chain to identify opportunities for sustainability investment. The Mosaic Company, a leading producer of concentrated phosphate and potash crop nutrients, is a prime example. In 2016, a third-party assessment of over 3,500 suppliers found that the primary environmental impact associated with its supply chain came from greenhouse gases emitted during ammonia production.7 Their consequential goal of reducing greenhouse gas emissions has pushed upstream manufacturers of ammonia to incorporate new energy efficient techniques. For instance, CF Industries, a leader in nitrogen and agricultural fertilizers, made large capital investments in technology and equipment to boost the thermodynamic efficiency of their ammonia plants, which reduced Scope 1 CO2 emissions by roughly one million metric tons from 2017 to 2018.8

The sustainability demands hitting chemical companies are not only coming from within the industry. Many chemical manufacturers early in the value chain are facing the same expectations to invest in sustainability from their customers outside the chemical sector as well. In the food and beverage market, The Coca-Cola Company assessed their supply chain’s CO2 emissions and determined that recycling post-consumer plastics into new packaging materials could accelerate the movement away from single-use plastic and reduce their overall carbon footprint.9 To put insight into action, the global brand has publicly committed to making their packaging out of at least 50% recycled material by 2030.9 This commitment is driving suppliers of plastic resins and feedstocks to develop robust recycling capabilities. Indorama Ventures, the world’s largest producer of PET resin (a polymer commonly molded into plastic bottles), has subsequently invested in state-of-the-art technologies that convert post-consumer PET waste into virgin and food grade PET to tackle this customer demand for more environmentally-friendly packaging.10

Further Progress Requires Further InvestmentWhile progress towards sustainable chemical manufacturing is undoubtedly being made, one major hurdle impeding faster innovation is the meteoric rise in capital spending required to develop new technologies. In 2018, PwC estimated global revenues rose 10%, but operating cash flow and capital expenditure as a percentage of sales declined – suggesting companies are managing cash levels by limiting investment.11 To bridge the widening gap left by declining cash flows without adversely impacting leverage ratios, chemical suppliers are in need of alternative sources of capital to fund further sustainability investment.

Citi’s Treasury and Trade Solutions business believes sustainable supplier finance may be an ideal option for chemical manufacturers. It presents an opportunity to help unlock cash tied up in net working capital (via payment terms extension), inject off-balance sheet liquidity into their supply chains, and incentivize vendor compliance with sustainability initiatives. At a high-level, sustainable supplier finance involves the incorporation of ESG performance criteria into traditional buyer-led supply chain finance programs, allowing buyers to reward select suppliers (i.e. those with strong sustainability ratings) with tangible benefits (i.e. preferential discount rates).12 Ernst & Young notes that key performance indicators and assessment criteria for sustainability ratings are already increasingly integrated into business processes for vendor selection and monitoring.5 Sustainable supplier finance may create a win-win scenario by taking those ESG ratings and enabling buyers to help facilitate the investment in sustainability they may be seeking to achieve with positive incentives for their suppliers.

Citi is Helping to Pave the Path ForwardOne immediate challenge chemical companies face today when contemplating a sustainable supplier finance program can be the lack of generally accepted industry standards for sustainability and reporting. Large multinationals in particular operate in different markets with different regulations; and their highly decentralized supply chains only add to the complexity. Many Treasury, Procurement, and Finance departments driven by quantitative KPIs need demonstrable evidence that the green benefits of ESG solutions like sustainable supplier finance are tangible and measurable.

As one of the world’s leading working capital finance banks, Citi is actively partnering with standards bodies and certification consultants to help develop a scalable and replicable ESG framework for the chemical sector. The intent of the standards set forth in that framework is to increase transparency, promote accountability, and incentivize progress against buyer-specified targets. Through continued collaboration, Citi is ready to help chemical clients optimize working capital while pushing a progressive sustainability agenda.

Treasury and Trade Solutionsciti.com/treasuryandtradesolutions

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7 http://www.mosaicco.com/2018stateofthebusinessreport/wp-content/uploads/2019/05/Mosaic-2018-Sustainability-Disclosure-and-GRI-Index-1.pdf

8 https://www.cfindustries.com/globalassets/cf-industries/media/documents/reports/sustainability-reports/2018cfindustriessr.pdf

9 https://www.coca-colacompany.com/content/dam/journey/us/en/policies/pdf/safety-health/coca-cola-business-and-sustainability-report-2018.pdf

10 https://www.indoramaventures.com/storage/sustain/report/en/2018-sustainability-report.pdf

11 https://www.pwc.com/gx/en/working-capital-management-services/assets/working-capital-report-final.pdf

12 https://www.bsr.org/reports/BSR_The_Sustainable_Supply_Chain_ Finance_Opportunity.pdf