ESG stands for Environment, Social and Governance. Companies can use ESG criteria to verify and improve their production processes. On the financing side, ESG criteria serve to identify and execute sustainable investments opportunities.
Environment addresses the impact of a company’s production processes or products, such as pollution, greenhouse gas emissions or energy efficiency.
Social assesses consider a company’s record on topics such as diversity, occupational safety, and corporate social responsibility.
Governance (corporate management) looks at corporate values and structures.
Climate change and environmental concerns are climbing higher and higher on the political and public agenda. As a result, the ecological and social footprint of companies is also increasingly under scrutiny. Companies are no longer judged solely on their economic performance. There is a growing awareness that long-term economic success depends on the sustainable use of human and natural resources. Company valuations and investment decisions are increasingly influenced by ESG-driven KPIs such as corporate values and the ecological footprint.
Many investment companies have begun to offer financial products that, in addition to attractive financial returns, also have measurable, positive effects on the environment or society. This new way of investing is often referred to as impact investing.
The total volume of ESG investments continues to grow. The share of green bonds – currently the most prominent form of sustainable investment – reached a total issue volume of more than USD 250 billion in 2019 alone. In 2020, an issue volume of around USD 350 billion is expected.
Investors seeking stable returns in uncertain times – a situation that has been exacerbated by the current COVID19 crisis – are turning to ESG investments because of the underlying sustainability factors. Since 2019, ESG-specialized funds have received USD 125 billion in inflows worldwide, while other equity funds have seen a net outflow of USD 316 billion over the same period.
Supply chain finance also responds to the ESG trend and integrates ESG criteria into reverse factoring programmes in the form of sustainable supply chain finance (SSCF). By meeting ESG criteria, suppliers benefit from better financing conditions. Through their investments, financing partners promote the sustainability of global supply chains and open up alternative sources of financing.
Through SSCF, buyers actively combat the effects of climate change that pose a direct and indirect financial and material risk to their production line. It also enables companies to mitigate reputational risks by strengthening their external and internal public image.
On the CRX marketplace, companies make supplier invoices available via upload for third-party financing. Invoices can be marked with an ESG identifier and as a result, ESG-specific reverse factoring programs can be operated. For such invoice bundles, companies can invite specific financing partners and provide ESG-relevant information on the underlying assets.
In June 2020, CRX Markets successfully executed the first SSCF transaction in the DACH region. CRX Markets is once again an innovator in the market and continues its mission to bring companies and financing partners together and provide technologically innovative working capital financing solutions through the CRX Marketplace.
The first ESG-certified security achieved a spread reduction of approximately 30% compared to comparable non-ESG financing products. The interest of the financing partners operating on the marketplace was great. As a result, the ESG bond was significantly oversubscribed.
Due to the growing interest in SSCF, CRX Markets is expanding its product offering to all marketplace participants. CRX Markets now offers ESG funds, bank ESG departments and other green finance specialists’ access to working capital financing as a new asset class. As a result, CRX Markets’ liquidity pool continues to grow and increases the attractiveness of the marketplace for CRX Markets clients. They can now also improve their working capital in line with ESG.
On the product side, we focus on platform functions that further automate SSCF. The extension of ESG capabilities to our entire working capital financing offering will enable all clients to implement individual SSCF programs as part of their existing activities. We are already in discussions with several of our clients about introducing similar programs in the coming months.
We fully support the potential of sustainable financing and look forward to playing our part by expanding and establishing the SSCF as a program option in the CRX marketplace.
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