Transitioning Asia’s supply chain

Large businesses, if managed appropriately, can enable society to tackle major issues such as climate change. However, they often sit at the centre of complex supply chains made up of small and medium sized enterprises (SMEs). SMEs need to address sustainability if the wider corporate world is to succeed here.

These topics were discussed during debates between policymakers and business leaders at the Japan Fintech Festival (JFF) in March 2024. While the potential within the fintech space took centre stage, it was also inspiring to see the dedication and creativity brought to the table to advance the Asia Pacific region towards a more sustainable future.

Common to many of the conversations was the importance of data. Unfortunately, the data gathering process remains labour-intensive even among businesses with prior experience in such processes.

A lack of data will hinder collective corporate progress on sustainability, as well as the ability of financial institutions (FI) to meet their commitments to improving the sustainability performance of their client bases and suppliers. Without such data, calculating risk becomes more challenging. In turn, FIs will be less inclined to provide targeted sustainable supply chain finance specific to SMEs.

In its traditional form, supply chain financing involves FI financing suppliers on behalf of a buyer. Its sustainability themed form is similar, with invoicing being settled in advance for the suppliers (often SMEs) on behalf of the larger businesses for a lower financing cost than the former’s own funds. This process is typically performed via an intermediary, the larger business, and leverages said business’ stronger credit profile.

However, this practice remains limited in scope. To increase the scale of the sustainable supply chain finance market, financial institutions can look to target SMEs directly for sustainable financing. However, this is not a straightforward process. From the perspective of many SMEs, embracing sustainability often presents little upside.

Considering limited awareness of environmental, social and governance (ESG) benefits among small businesses, an often-arduous data collection process, limited scale of financial solutions alongside residual greenwashing risk, the market for targeted sustainable supply chain faces headwinds.

Despite these challenges, there is still room for some optimism. To address them, we have identified five key words to guide FI activity here: strategise, anticipate, innovate, collaborate and commercialise. To elaborate:

1. Strategise - explore strategies to apply technological solutions and interrogate non-traditional data in a manner that can inform efforts to scale and impact sustainable financing.
2. Anticipate - review key EU legislation in anticipation of the increased levels of sustainability data they will provide. For example, the Corporate Sustainability Due Diligence Directive and European Union Deforestation Regulation will place an emphasis on exporters to the EU verifying their sustainability credentials via high quality data.
3. Innovate - develop innovative applications of solutions not traditionally intended for supply chains or sustainable finance. For example, using remote sensing and data drawn from satellite imagery to assess physical risks and opportunities within supply chains. Both should form key parts of sustainable finance innovation programmes, built upon clarity of purpose.
4. Collaborate - Launch a 12-month industry pilot programme based on lessons learned from different models of collaboration aimed at dissecting specific sustainable supply chain finance challenges and opportunities for SMEs.
5. Commercialise – Recent green bond issuances targeted at circularity hint at the commercial potential available in this space. This should motivate increased financing activity, here.

For more information on these points, please review our accompanying report “Transitioning Asia’s supply chain”.

We look forward to seeing how these solutions might be actioned in pursuit of leveraging the clear potential in technology, data and finance to its fullest potential, to address these challenges.