Partner: Banco Santander S.A.
The first sustainability-linked supply chain finance (SCF) programme for a retailer in Portugal helped Sonae win both the Retail category and the overall ESG award in the SCF Community’s 2022 Supply Chain Finance Awards. It won praise for the simple yet innovative addition of environmental, social and governance components to an existing SCF programme that is open to suppliers across Portugal and Spain.
Sonae approached Banco Santander in 2021 to modify an existing SCF programme run by the bank in the Iberian peninsula to also incentivise suppliers to adopt more sustainable practices, and thereby help Sonae achieve its own sustainability goals. The result was a structure that offers preferential discount rates for suppliers when they materially improve an ESG score that is provided and updated annually by sustainability ratings agency EcoVadis. Sonae says the savings they make can be used to offset costs associated with investing in better ESG practices, and therefore help to improve their EcoVadis score year-on-year.
Sonae’s most important suppliers in terms of sales volume have been prioritised during the first phase of programme rollout. In the second phase, all suppliers in the company’s original SCF programme with Santander will be invited to request an EcoVadis rating. Simply replying to EcoVadis’s questionnaire earns those suppliers a financial benefit. This benefit might be increased if their initial rating is good enough, and then potentially further expanded if they act on EcoVadis’s feedback to improve their score. Rapid adoption is encouraged with a lean onboarding process.
“Sustainability is a key part of Sonae’s strategy, and we see our suppliers as partners, always including them in the implementation of sustainable ways of using resources and promoting innovative solutions to improve processes,” said Eduardo Garrido, head of corporate finance at Sonae.
The provision of credible, independent and customisable ratings was vital for ensuring the programme’s acceptance by a broad range of suppliers, according to Garrido. “The process must be simple and easy to implement, applicable to a large number of suppliers, and also small and less sophisticated suppliers should understand the solution and the benefits for them,” he explained. EcoVadis provides evidence-based ratings and actionable scorecards that can help businesses of all sizes improve their sustainability performance.
Supplier engagement is also critical to the success of the programme, according to Sergio Bataller , VP- Glpbal Trade and SCF within Santander’s supply chain finance team. “At this stage, it’s very important that we educate the suppliers, because this is something new for them,” he says. To this end, a Supplier Management Team from Santander works with suppliers to explain the benefits of SCF, clarify the ESG criteria on which they will be rated and offer guidance on actions that could help them improve their score.
During evaluation of Sonae’s entry, judges were impressed by its strong focus on and support for small and medium-sized enterprises (SMEs). With the programme’s easy onboarding process and a structure that is well aligned to the goals of Sonae, it is “overall, an exemplary, high-impact solution,” they said.
The programme breaks new ground by being the first sustainability-linked SCF programme for a retailer in Portugal – a country where there are also good opportunities for improving the sustainability of suppliers, according to Santander. The average EcoVadis score for Portuguese companies is 47.5/100 – which is above the global average but slightly below that for western Europe – with companies performing better than most on environmental and social issues but lagging on governance. EcoVadis has so far completed over 1,000 assessments in Portugal, with scores improving on average by around 4 points per year.
Santander structured the transaction using guidelines defined in its own Sustainable Finance Classification System (SCFC) and in partnership with independent ESG and corporate governance research, ratings and analytics firm Morningstar Sustainalytics.