Beyond Compliance 2024

Beyond Compliance: Embedding Impact through Innovative Finance142.1 Risk management and compliance The structured nature of OBF can encourage suppliers to innovate and optimize their operations, reducing sustainability and social impact risks. Through OBF, companies can motivate suppliers to meet sustainability standards by tying additional funding to compliance achievements, creating an effective carrot and stick approach. This method goes beyond conventional ESG risk management by fostering a transparent, accountable culture within operations and supply chains. With OBF, companies can use third-party-validated metrics that are easily auditable, demonstrating progress to investors and consumers alike. Additionally, OBF builds impact-aligned partnerships with suppliers, promoting a mindset of continuous improvement that helps companies proactively address emerging regulatory risks as standards become more stringent. OBF can be used to mitigate specific risks in supply chain companies by incentivizing social outcomes. For example, the IFC Global Trade Supplier Finance (GTSF) set up a $75 million facility with PepsiCo Mexico in 2024. This initiative offers affordable financing to PepsiCo’s suppliers based on their progress towards sustainability targets, such as reducing carbon emissions and addressing child labour and forced labour. The programme enables suppliers to access lower financing costs and improve working capital by leveraging PepsiCo Mexico’s credit rating and commercial strength in return for improved supplier sustainability practices, creating stronger, more sustainable global supply chains.31CASE STUDY 1 IFC and PepsiCo Mexico – supply chain finance OBF can be applied pre-emptively to address social risks where legislation is pending. For example, bonded labour persists due to interrelated supply and demand factors in the global recruitment market. Social Finance has proposed an Outcomes-based Smart Subsidy model to address the issue and support the market for ethical recruitment.32 One solution posited lies in creating ethical recruitment firms through a combination of outcomes-based smart subsidies for recruiters who do not charge workers, verified by worker feedback, and investment capital to support the transition. This approach benefits both workers and companies: workers avoid excessive debt and secure a job, and brands embed incentives for their suppliers to use ethical recruiters, and more easily verify their use in practice. Photo credit: Barefoot Law