An IFC program works with manufacturers for global brands like Levi’s to accelerate the greening of sprawling supply chains.
The complexity and interdependence of today’s supply chains are staggering. Globalization has created a world where parts can be made in one country, shipped to another for assembly of a product that six weeks later can be sitting on a store shelf halfway around the planet. Sprawling supply chains have enabled large companies to tap into cheaper labor, reduce costs, and pass those savings along to their customers. But as an unintended consequence of sourcing in developing countries, these massive global supply chains have created some of the biggest new pollution hotspots on the planet.
While the richest economies have made significant strides improving their own air quality and tackling pollution over the past 40 years, emissions continue to rise in developing countries, where manufacturing is booming. Asia alone accounts for more than 40 % of global manufactured goods, much of which is exported to Europe and North America. Resource-rich countries in Africa and Latin America are also emerging as important suppliers to multinational brands.
According to the UN, Scope 3 emissions — those coming from supply chains (as well as end-users) rather than in-house operations — typically account for more than 70% of an organization’s carbon footprint. Unless these emissions are significantly curtailed, it will become nearly impossible to meet the goal of net-zero emissions by 2050, as set out by the Paris agreement.
Creating a financial bridge
Some global companies are beginning to reckon with the environmental impact of their supply chains and getting motivated to source from greener manufacturers. The challenge is that suppliers in developing countries, especially those in conflict zones, frequently struggle to get affordable financing to transition to low-carbon solutions.
As suppliers invest in cleaner, greener, and more efficient technology, global brands who source from them build a reputation for being environmentally engaged and responsible.
This is where the International Financing Corp (IFC) comes in with its Global Trade Supplier Finance (GTSF) program — a lending initiative that incentivizes suppliers in emerging economies to decarbonize their factories, conserve water, and manage waste. The program functions as a collaboration between local suppliers, global brands, and IFC. Suppliers agree to hit various environmental and social performance milestones in exchange for discounted short-term loans that are issued by IFC and secured by the credit worthiness of the brands they are supplying. As suppliers invest in cleaner, greener, and more efficient technology, global brands who source from them build a reputation for being environmentally engaged and responsible.
The Swedish conglomerate IKEA, for example, announced a program in 2021 to transition suppliers in China, India, and Poland to 100% renewable electricity, cutting 670,000 tons of CO2 emissions per year, about 3% of its value chain’s total climate footprint.
Jeans with better genes
Levi Strauss & Co. has teamed up with the IFC Global Trade Supplier Finance (GTSF) program to encourage its textile and apparel suppliers to improve energy and water efficiency and reduce greenhouse gas emissions.
In the case of the collaboration with Levi’s — which had already participated in our Partnership for Cleaner Textiles initiative — IFC also provides intensive assistance to around 40 of the clothing company’s suppliers across several countries, including Pakistan, Bangladesh, Sri Lanka, India, Mexico, Turkey, Egypt, and Vietnam, while also providing “lighter touch” support to other strategic suppliers that are developing action plans for reducing their carbon footprints.
Typically, supplier financing programs are reserved for large companies, but GTSF’s reach is wide. It has to be in order to serve suppliers across all emerging economies. Most participating suppliers come from regions where the credit risk and the cost of loans are high. So GTSF makes it cheaper and less risky for those companies to secure the liquidity they need to make improvements, expand their operations, and become part of robust supply chains – as long as they improve their environmental records.
Most participating suppliers come from regions where the credit risk and the cost of loans are high.
The program supports IFC’s primary mission of encouraging sustainable industrial development in emerging economies, creating jobs, eliminating poverty and clearing a pathway for businesses and communities to prosper. It takes a holistic approach designed to improve labor standards, advance gender inclusion, and develop interventions that can make supply chains cleaner and more efficient.
Since its launch in 2012, GTSF has disbursed $10.7 billion to over 2,500 suppliers across 28 countries. In fiscal year 2022 alone, GTSF disbursed $2.3 billion to 352 suppliers. Sixty-eight percent of disbursements were to companies operating in fragile and conflict-affected states where financing is difficult to secure.
If further scaled, initiatives like this can play a significant role in reducing greenhouse gasses.
Global brands have growing evidence that their customers care about the environmental impact of their purchases; it matters to them whether the products they buy are linked to deforestation, harming endangered species or are carbon intensive. According to a recent U.S. survey, “consumers across all generations — from Baby Boomers to Gen Z — are now willing to spend more for sustainable products.” Nearly 90 percent of Gen X consumers said that they would be willing to spend an extra 10% or more for sustainable products.
Financing low-emissions solutions is key and will need to be a collaborative public/private effort. The latest IPCC report suggests that annual global spending on decarbonization, currently running at about $600 billion, will need to increase by three to six times if the world is to hold global warming at 1.5 or 2 degrees above pre-industrial levels. Greening supply chains and curtailing emissions from manufacturers in emerging economies is a critical part of that mission.
Featured photo: Levi Strauss & Co
