Greening the Supply Chain: Financial Tools to Catalyze Decarbonization by Small Businesses

Abstract

As the need to decarbonize grows more pressing and public law demonstrates its inability to satiate this need on its own, scholars and practitioners are increasingly seeking private governance solutions to decarbonization’s challenges, and these efforts have found strong support among many large, multinational firms. Most of these large firms’ emissions, however, originate within their supply chains, which often consist of small- and medium-sized enterprises (“SMEs”). SMEs are often left out of conversations about climate change—a massive blind spot in decarbonization efforts—likely because their individual-level emissions are so inconsequential. True as that may be, their collective impact is huge; aggregate emissions from SMEs account for half of all emissions in the United States annually. To their credit, many SMEs express interest in decarbonization, but they often cite insufficient capital and expertise as central barriers to these efforts.

To help overcome these technical and financial barriers, this Article proposes integrating energy savings performance contracts (“ESPCs”) into large firms’ supply chains, looking to sustainable supply chain financing (“SSCF”) for guidance in so doing. ESPCs allow firms to invest in energy efficiency upgrades with an experienced energy services company that oversees the project and accesses financing by guaranteeing savings from those upgrades. These arrangements have historically been limited, however, to large publicly owned properties. SSCF provides trade financing to SMEs when they meet sustainability metrics using their larger buyers’ credit lines, but the financing is typically short term (roughly ninety days), preventing utilization for deep decarbonization efforts. This Article argues for incorporating ESPCs into supply chain contracts by tying buyers’ unit price of a good to the energy savings realized under the ESPC, which utilizes the buyers’ higher credit (as in SSCF) to access low-cost financing for energy efficiency upgrades in SMEs. These “supply chain energy saving guarantees” could be integrated into ESPCs to help bring SMEs into the decarbonization conversation, reduce larger firms’ Scope 3 emissions, and provide low-risk investment opportunities that reduce costs for all parties in the long run.

Keywords: private environmental governance, green finance, small business, supply chain, environmental, decarbonization

JEL Classification: K29, K32, K12, M14