Smart Solutions for Sustainable Working Capital Finance

While green finance has gained significant traction in areas like project finance and bond markets - with total sustainable debt issuance reaching $1,740b in 2024 - its application to Working Capital Finance and Cash Management has lagged behind.  

At the 21st Universwiftnet conference, Laurie Chesné, Head of Green & Sustainable Financing & Advisory EMEA; Vincent Lauras, Head of Trade Solutions; and Fady Weessa, Head of Cash Management for Corporates & NBFIs, engaged with participants to explore the reasons behind this disparity, examine the current market environment, and investigate emerging solutions in an interactive workshop. 

This interview shares the key insights from these fruitful discussions. We extend our heartfelt thanks to all participants for their questions and contributions.

In their efforts to develop sustainable financing and investment strategies, companies and financial institutions initially focused on long-term horizons, which offered the greatest potential for transition. However, short-term maturities also play a crucial role, and stakeholders are increasingly engaging with this topic through what are termed “green” initiatives.

The integration of sustainability-oriented strategy for working capital and cash surplus is a new trend that is promised to equate sustainable financing market on vanilla financing, i.e. corporate loans and bonds. Sustainability within the value chain is key to supporting companies’ transition journeys, and serves as a core catalyst for cascading sustainable practices throughout the supply chain and with clients. 

Moreover, with the recent rise in interest rates, the importance of working capital optimization is becoming increasingly pronounced. Beyond supply chain and receivables financing, the effective utilization of cash surplus poses a new challenge for corporates. Interest income can constitute a significant portion of net profit for cash-rich companies. Therefore, the main drivers remain rates competitiveness and financial stability.  

However, several factors contribute to the slower adoption of sustainable practices in trade, supply chain, and receivables financing. These include the complexity of tracing environmental and social impacts across intricate global supply chains, as well as the emphasis on asset-based finance, which shifts focus away from trade and make it challenging to measure ecological effects.  

Finally, in the absence of standardization, the market clearly needs a comprehensive framework to effectively implement sustainable working capital solutions. For instance, increased transparency requirements, standardized reporting frameworks, and potential incentives for sustainable trade practices could promote broader adoption.

The development of a robust sustainability-linked approach applicable to trade finance is a positive step, as is the push for sustainability data disclosure, but further market guidelines are needed.

While regulations explicitly targeting sustainable trade finance are still nascent, various initiatives aim to support market development. Organizations like the International Chamber of Commerce (ICC) are actively developing standards and frameworks, such as the Principles for Sustainable Trade Finance (PSTF), to guide sustainable practices.

On November 9, 2022, the ICC launched its Principles for Sustainable Trade Finance, starting with Principles for Green Trade Finance published in October 2024. Largely inspired from the already well-installed Green Loan Principles (GLPs) originally published by the Loan Market Association (LMA) in 2018, ICC wanted to align the Trade Finance industry to a single definition of Sustainable Trade Finance and ensure comparability to other Sustainable Finance products. But as LMA's GLPs do not easily apply to trade finance as they are "flow products" where "purpose" is not always known, an adaptation for trade finance was necessary. 

Engaged with several working groups to progress to a minimum viable Wave 1 framework, the ICC Principles for Green Trade Finance, are a warmly welcome tool for users aiming at structuring green finance offer.

ICC is now focusing its next wave of development on one hand on Principles for Social Trade Finance and on the other hand on sustainability-linked trade finance frameworks, including principles dedicated for supply chain finance, utilizing the pillars of the LMA’s Sustainability Linked Loan Principles (SLLPs) as guiding principles. 

Within this emerging framework, which provides a solid foundation while still requiring further implementation and consolidation, several solutions are beginning to take shape. 

First, sustainability-linked trade finance products are gaining traction. These products incentivize improved environmental and/or social performance among suppliers and buyers by linking financing terms to specific sustainability targets (namely, Key Performance Indicators, KPIs).

Sustainable cash management practices are also becoming increasingly important. One promising approach is through our Green Deposit Offer, where funds are earmarked to a pool of assets which include environmentally friendly projects and corporate loans as well as green bonds.

At Natixis CIB, we leveraged on our Green Weighting Factor to developp a robust Green Deposit Framework which has been reviewed by a third-party - ISS provided a Second Party Opinion - and where fund allocation is audited annually.  Our clients can invest their cash surplus at competitive interest rates while enjoying capital protection and the strength of a cooperative group.

Short-term deposits have become a cornerstone of our clients' financial management, especially in light of the rising interest rates over the past three years and the need for cash-equivalent solutions. These deposit solutions have positively impacted corporate net results, providing a valuable and effective tool for liquidity management while constituting a pathway to accompany their corporate social responsibility (CSR) initiatives.

All these initiatives hinge on collaboration. There is a growing recognition that cooperation among businesses, financial institutions, and market bodies is essential for driving the widespread adoption of sustainable trade finance. Overcoming challenges related to complexity, standardization, and regulation through a global cooperative approach will be crucial for fully integrating sustainability into working capital optimization.