Supply Chain Finance in the ‘New Normal’

“When sorrows come, they come not single spies but in battalions.” Rarely have the words spoken by Claudius in Shakespeare’s Hamlet felt more apposite than during the first half of 2022, writes Orbian chairman Thomas Dunn.

After two years traumatised by the Covid pandemic, the world emerged not to the joys of a global Glastonbury, but to the harsh realities of disrupted supply chains, dislocated workforces and then the horrors of Ukraine.

Minor inconveniences have rapidly snowballed into a cost of living crisis for which governments have very few articulate plans. Instead, they prefer to delegate responsibility to central banks for whom even carefully constructed interest rate and monetary policies remain fundamentally blunt tools with which to deal with profound social and structural challenges. “Slamming on the brakes” remains the (only) plan even as financial markets suffer and labour market relations deteriorate daily.

Under such circumstances, a narrative has emerged that environmental, social and governance (ESG), and most especially the climate change agenda, is not today’s priority. “The world has too many immediate problems, and addressing climate change will need to wait.” Unfortunately this is a narrative that had started to develop even before the security concerns of a Europe dependent upon now-weaponised energy supplies from Russia.

The results of Orbian’s most recent supply chain finance (SCF) and ESG annual survey already showed a lowering of corporate prioritisation. Factors included:

• Signals from major investors that they felt a climate change agenda was being too aggressively promoted. Corporate initiatives would be supported only to the extent that they properly addressed all other shareholder objectives.
• Frustration over the political horse-trading in connection with the EU ‘green taxonomy’. France ‘getting nuclear’ in return for Germany ‘getting gas’ may have been a reflection of realities on the ground (albeit soon disrupted by gas supply concerns), but bred a sense of ‘kicking the can’.
• A succession of whistle-blowers calling out greenwashing across the banking and asset management industries. Enabled by the (now) thousands of ‘green accreditation’ rating agents, much of the vaunted multi-trillion dollar climate change investment industry has been increasingly exposed as, at best, a marketing gimmick. A recent raid by 50 police officers on Germany’s largest investor suggests that ‘marketing gimmick’ may not start to describe the true extent of fraud inflicted on current investors and future generations.

So, a grim start to 2022 in which social, political, security and financial indicators all show a world coming out of the pandemic into a host of new, and thoroughly inter-connected problems.

But there are two flickers of light that give pause for hope.

Firstly, the rumble downunder

Amidst the poor, and worsening, global climate change narrative, an insurgent political organisation succeeded in forcing climate change as the primary issue in Australia’s recent general election. Scott Morrison’s Liberal Party was ousted with a loss of historic dimensions. In its place was elected a new coalition promising to put climate change at the heart of policy in the world’s largest coal exporter.

This political shock was followed barely two weeks later by the climate activist-led hostile takeover of AGL, Australia’s largest carbon emitter.

In both cases, a clear environmental message, a relentlessly slick PR campaign and the astute use of the finest tools of financial warfare each contributed to decisive victories.

These might re-align how politics and business work together to create the correct incentives, risks and rewards for long-term climate change policy.

Secondly, the return of Atlanticism

The end of the Cold War did not lead to the end of history. From 1990 until 2008, however, it did contribute an unprecedented peace dividend as globalisation lifted hundreds of millions of people out of poverty, extended average life-spans and drove global wealth to soaring peaks.

Unfortunately, the end of the Cold War also meant that the ‘high stability’ characteristics that ran alongside the ‘high threat’ world (“drive carefully on dark and icy roads”), were replaced by ‘low stability’ characteristics as threat levels fell (“what could possibly go wrong?”).

In the years since the global financial crisis we have seen the amplitude of disruptions in this low stability world steadily, and frighteningly, increase.

2022 may, however, mark a turning point: the world is no longer perceived as a low threat environment. Instead, attention returns to those organisations, structures and processes that will build resilience for countries and their neighbours. NATO stands as one, amongst many, examples of this. Sometimes blamed for provoking a post-USSR Russia, NATO now embodies a strong sense of collective purpose as to re-drawn lines of national security.

June’s Madrid conference not only committed substantial new resources to NATO but also saw Sweden and Finland set aside long-standing neutrality, and Australia, Japan and Taiwan become evermore closely aligned.

2022 may mark a very notable hinge in history as the post-Cold War world of fluid globalisation is recognised as having passed its peak. Instead, national and regional interests will increasingly dominate the discourse around economic, security and ESG agendas.

For the SCF industry there are some important considerations, and also some very important limitations that should be recognised.

So, in closing, three recommendations:

1. SCF is not a tool of morality

Properly managed, SCF is a powerful, subtle and sophisticated instrument to allow collaboration between buyers, suppliers and financial markets. Ultimately, however, the purpose of SCF is to deliver money as efficiently as possible to these constituents. The choices that they make as to how they use such money is up to them. This is not to abdicate responsibility that every company has for its own behaviour, but rather to avoid circumstances in which SCF becomes complicit in greenwashing or other diversionary arrangements.

2. SCF has far more to offer

Simple constructs of large buyer/supplier financing based on variable interest rates no longer characterise best practise in SCF. Rather, sophisticated tools of interest rate management, universal eligibility for all suppliers, and careful targeting of regional pockets mark the new standards of how SCF assists in broader economic, security and ESG objectives.

3. SCF has rules to be followed

In its modern guise of technology-based confirmed supplier financing, SCF has enjoyed a quarter century of very substantial growth and now stands as a multi-hundred billion dollar trade and asset class. At the same time, SCF has endured several attempts to subvert its capabilities for fraudulent purposes. Such frauds have generally been of remarkable simplicity relying on hokum of communication rather than sophistication of execution. Largely to address this issue of communication, accounting standards are going to be more clearly established. The SCF industry should applaud and reward these initiatives.

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