German integrated lifestyle clothing company Tom Tailor has used its environmental, social and governance (ESG) framework to introduce supply chain financing solutions to replace the letters of credit (L/Cs) it used to rely on in transactions with suppliers and distributors.

Tom Tailor's ESG framework calls for the implementation of sustainable supply chain finance programmes in the firm's dealings with suppliers and distributors.

Within this framework, suppliers and distributors are given financial incentives to enhance their ESG standards.

Costly L/Cs

The Hamburg-based company's Asian sourcing arm, Tom Tailor Sourcing, previously purchased from its suppliers on L/C terms but decided that this involved unnecessary costs and bureaucracy.

The firm wanted to move to open account terms but needed incentives to persuade suppliers to do this.

Supply chain solution

One of Tom Tailor's bankers, BNP Paribas, provided the answer to this by extending an uncommitted supply chain finance solution offering financial incentives for suppliers to accept the shift from L/C to open account terms.

The bank did this by discounting suppliers' Tom Tailor receivables at an attractive rate based on Tom Tailor's creditworthiness.

Promoting ESG standards

The solution includes a sustainable option that involves Tom Tailor setting discount rates annually based on a supplier's ESG standards, with a greater discount for suppliers with higher ESG scores.

This provides suppliers with an incentive to improve their ESG standards.

This article represents the views of the author and not necessarily those of the ICC or Coastline Solutions.