As of 20 December 2022

Supply chain finance (SCF) for
economic security and green
transformation (GX)
Tokyo’s Role as Asia’s Financial Hub
The Organization of Global Financial City Tokyo (FinCity.Tokyo)- Tetsuya Inoue, Head of Policy Research- Keiichi Aritomo, Executive Director- Tomohiko Shinohara, Manager
1.

Purpose......................................................................................................................... 2
1-1. Background ................................................................................................................ 2
1-2. Setting the topics ....................................................................................................... 3

2.

Current situation ............................................................................................................ 4
2-1. Current situation in SCF ............................................................................................. 4
2-1-1. Structural Financial Constraints for SME suppliers .............................................. 4
2-1-2. Structural Financial Constraints for Financial Institutions..................................... 4
2-1-3. Structural Financial Constraints for Suppliers’ DX .............................................. 7
2-2. Current state of ESG investment / Sustainable Finance ............................................. 8
2-2-1. Fragmented ESG disclosure ............................................................................... 8
2-2-2. How to combat cross-border Greenwashing in a supply chain. ........................... 9
2-2-3. “Transitioning Asia” ........................................................................................... 10
2-3. Demands from economic security ............................................................................ 10
2-3-1. Visualizing and strengthening supply chain: an economic security concern. ..... 10
2-3-2. Implementing Economic National Security: broad actions needed. ................... 11
2-3-3. Achilles' heel: SMEs as a focal point for policy measures. ................................. 13

3.

Analysis of current measures and suggestions for the future ....................................... 14
3-1. How does finance enhance supply chains? .............................................................. 14
3-2. ESG disclosure plays a meaningful role in enhancing supply chain finance. ............ 15
3-3. What should fill the gap? .......................................................................................... 16

4.

Policy proposals .......................................................................................................... 17
4-1. SCF should be strengthened and visualized with new financial solutions anddigitalization. ................................................................................................................... 17
4-1-1. The current solutions in SCF need to be mapped.............................................. 17
4-1-2. SCF FinTech solutions should be promoted as a distinct business area. ........... 18
4-2.Integrating the supply chain and sustainable finance should be through universal andholistic standards for ESG evaluation. ............................................................................. 181

4-2-1.A conferences for practitioners to discuss holistic ESG evaluation criteria andmethods should be established. .................................................................................. 19
4-2-2.Policy measures should prepare an environment for Scope 3 ESG disclosure andexpand ESG investment and transition finance. .......................................................... 19
4-3. Reinforcing SCF should be achieved through integrating the supply chain with theinvestment chain. ............................................................................................................ 20
4-3-1. The function of CFOs must be updated to match the global standard and talents
must be trained to promote the integration. ................................................................. 20
4-3-2. FinTech companies and asset managers help streamline the present financestructure of supply chains. ........................................................................................... 21
4-4. A global financial center should also function as a global SCF hub .......................... 21
5.

5. FCT’s contribution <Provisional conclusions>.......................................................... 22

1. Purpose
The purpose of this white paper is to identify the structural weakness of today’s
global supply chain and discuss how the financial sector can contribute tostrengthening and visualizing supply chains. The first chapter provides an overview
of the international environment surrounding Japan, the status of finances and theeconomy as well as sustainable finance, while indicating the visualization andresilience of the supply chain that have become focal points as policy issues. Basedon this, we explain the issues addressed in this White Paper that contributes tocontaining the various issues in the supply chain through finance.

1-1. Background●

Demands to strengthen the supply chain in Japan from the perspective of securing
essential materials and strengthening the robustness of critical infrastructure haverecently increased in response to US-China frictions, the pandemic, the war in
Ukraine and the consequent economic sanctions, etc.（Figure1）●

Visualization of the supply chain and compliance are also becoming increasingly
important from the perspective of ESG / sustainability.

●

In light of this, contributing to the reinforcement of supply chain finance (SCF),
including SMEs, has been a pillar of business in the Organization of Global Financial
City Tokyo (a.k.a., FinCity.Tokyo, hereinafter “FCT”) Medium-Term Business Plan
since April 2021.

●

The Ministry of Economy, Trade and Industry already identified that improving
efficiency while digitizing the supply chain is a policy issue in its White Paper on
International Economy and Trade and its White Paper on Manufacturing Industries2

(Monodzukuri1). It has also established forums such as “the Study Group on
Advancing Global Supply Chains in the Digital Age” to consider such issues since thebeginning of this year. In addition, the Japan Financial Services Agency is also
requiring banks to provide credit to SMEs through the efficient use of corporate
information by promoting the “evaluation of business potential” to invigorate regional
companies.

●

Recently, the implementation of smart contracts that utilize digital currencies using
Blockchain technology as a method of payment between private businesses (FinTech
companies and general trading companies, etc.) in Japan and financial authorities in
Asia have resulted in seeking out ways to test digitalization of the supply chain fromthe finance side.

(Figure 1) Supply chain-related issues

1-2. Setting the topics
This paper considers the following questions concerning the contribution of a Global
Financial City to the resilience of the supply chain and proposes policies that apply to
Japan/ Tokyo and as an Asian financial hub.
1.
2.
3.
4.

What types of characteristics are required for SCF to contribute to the demand forvisualization and resilience of the supply chain from a finance perspective?
How should digitalization of SCF be promoted?
How can the supply chain and the investment chain be fused?
What functions does the Global Financial City Tokyo require to become an SCF hub
in Asia?

1 craftsmanship culture in Japan3

2. Current situation
This Chapter provides an overview of the current situation in the supply chain and
SCF, while highlighting the prevailing issues.

2-1. Current situation in SCF
2-1-1. Structural Financial Constraints for SME suppliers
Financially, there are various structural constraints for SMEs, which are the typicalsuppliers, in a supply chain that is focused on large corporations.
●

Major financial institutions generally provide back finance for parent/ subsidiary loans
and issue letters of credit (L/Cs) for trade credit to their large corporate customers(buyers) in Japan as finance for the cross border supply chain.

●This is substantially dependent on the external creditworthiness of the parent
company and credit judgements. Therefore, apart from the benefits being restricted
to comparatively higher order suppliers, there are limits on the bargainingpower ofsuppliers over buyers, concerning the receipt of finance. The latter point is also a
new point, as seen in the criticism of overseas e-commerce business operators(Amazon Prime phenomenon, etc.) when abusing their superior bargaining powers.

●

In addition, even from a buyer perspective, being encumbered with both liabilities andassets to maintain trading relationships necessary for business can also be an
impediment to improving the efficiency and enhancements to balance sheet
management.

●

Suppliers also have options to use factoring as an alternative financing method andto supplement their creditworthiness with the use of an external guarantee company,
albeit there is also the burden of interest rates and the cost of guarantee fees.
Similarly, suppliers located overseas have access to methods such as borrowing
from local financial institutions, but they face the problem of high cost due to low
credit standing in the local market and foreign currency liquidity risk, etc.

As seen above, today’s SCF is mainly provided to large corporations as finished goods/
services providers, and SMEs are unable to adequately or efficiently receive the financial
benefits. Furthermore, small and medium-sized suppliers are in disadvantageous positions
relative to buyers.

2-1-2. Structural Financial Constraints for Financial Institutions
Banks, which are the main supporters of SCF, are being disincentivized to play theirpart in visualizing and strengthening supply chains.

4●Particularly in relation to the cross-border supply chain, it also becomes difficult forbanks that provide credit to the parent company (buyer) since multilayered suppliers
transact with different banks, and it is inherently difficult to understand the issues ofthe entire supply chain and to immediately respond from a finance perspective.

●

Many aspects of the payments and settlements for cross border transactions still relyon “correspondent banking,” which is inefficient in terms of both cost and time forboth the banks and the client companies as well as the transaction andadministrative burden of multiple banks in relevant countries. Reforming this requires
the cooperation of many relevant parties, so voluntary initiatives are difficult toadvance (Figure 2).

●

In addition to stronger banking regulations (including Basel III, developed by theBasel Committee on Banking Supervision), loan-deposit margins have also declined
under the worldwide low interest rate environment, resulting in further declines inincentive for major banks around the world to provide credit to SMEs, including SCF(Figure 3).

●

From a long-term perspective, the sustainability of providing SCF using foreign
currency could become an issue even for major banks. This is not simply from the pointof view of the upside for higher returns on asset holdings but could also become
important in terms of managing foreign currency liquidity risk and dealing with thevolatility of foreign currency funding costs.

●

The use of finance focused on the value of goods and services that flow in the supply
chain or the value of infrastructure that supports the supply chain can be considereda finance method for dealing with such problems. However, momentum for SCF
reform has stalled in the financial industry as a whole, in part, because of theGreensill scandal.2 which was an arrangement to contain SCF issues through assetbased finance.

●

In addition, the credit sections of banks, which have to date been in charge of SCF,
have not yet accumulated adequate knowledge and experience to evaluate the valueof such assets nor the methods to liquidate such assets as required.

●

In addition, while such expertise and functions also exist within major financialgroups, their ability to flexibly mobilize the information and knowledge necessary for
SCF is hampered by their organizational structures that are matrixed by product andcustomer segment.

●

Furthermore, the digitalization of business and transactions also needs to beadvanced at small and medium-sized suppliers to deal with the SCF problem from an

2 Greensill was a financial services firm established by Lex Greensill to provide accounts receivable

based financing. The company became rapidly successful, culminating in the appointment of Lex
Greensill to Advisor to then UK PM David Cameron and attracted investors including Softbank Vision
Fund. However, due to its over exposure to steel magnate Sanjeev Gupta's stable of companies,
termination of insurance underwriting by its insurers and Credit Suisse's freeze on its investment toGreensill, the company became insolvent.

5

information perspective, as well as to shift the flow of both goods and funds toStraight Through Processing (STP). However, it is difficult for banks to be the solebearers of the role of supporting the overall modernization of SMEs (See 2-1-3
below).
●

This problem has been exacerbated with the growing demand for stronger
verification and confirmation of counterparties (Know Your Customer, hereinafter“KYC”) in transactions between companies in light of anti-money laundering (AML)and economic security requirements. That is, from a bank’s perspective, there has
been further reduction in the motivation to provide SCF that also extends to small
and medium-sized suppliers, which has resulted in small and medium-sized suppliers
finding it difficult to benefit from SCF.

As seen above, incentives for individual banks, including major financial groups, tostrengthen SCF and invest in the visualization and resilience of the supply chain havedeclined. In that context, both a policy response and solutions are required.
(Figure 2) Issues of correspondent banking
Cost

The fees for both the sender and the recipient are high- This can be prohibitively high if remitting small sums

Time

Remittances require a number of days to complete- Remittances to developing countries take even longer

Lack of transparency

Transparency in relation to fees and the remittance process islow- Elicits user concerns and distrust(Figure 3) Issues concerning bank loans to SMEs

6

2-1-3. Structural Financial Constraints for Suppliers’ DX
Suppliers, including SMEs, also have issues with the use and application of
information.
●

The typical supply chain comprises various economic entities, namely large
corporations (finished goods/ services providers) and multilayered suppliers including
SMEs. Furthermore, a supply chain also comprises the flow of goods and services
and the supporting infrastructure (including know-how and technologies not only
facilities and equipment).

●

As already seen, it is hard to implement SCF according to the value of eacheconomic entity, particularly for comparatively lower order suppliers. In fact, credit isprovided based on the credit of large corporations (finished goods/services providers)such as with parent/subsidiary loans and letters of credit.

●

However, undertaking SCF according to the goods and services that flow in the
supply chain or the value of the infrastructure requires knowledge and information for
the appropriate evaluation of their value (residual value) or a market for liquidation,
as necessary.

●

On this point, leasing and trading company finance already play a major role for the
infrastructure supporting the supply chain e.g., machine tools and transportationequipment (aircraft and ships), etc. Similarly, in Japan, the financial authorities havebeen promoting “evaluation of business potential” by banks and gradual progress has
been made in the collateralization of moveable property, including intangible assets
such as technology and know-how. This trend is likely to advance further with policy
inducements.

●

Even so, despite the progress in overall asset-based SCF, the evaluation of the valueof goods and services and infrastructure remains an obstacle. Nevertheless, anotherissue is that suppliers themselves, who should have the deepest knowledge of thisproblem, have not shown any objectivity in such evaluation. A particular problem forlower order suppliers is that technology is not separated from management and they
do not have methods for evaluating value (Figure 4).

●

As has already become evident, even among SMEs, the digitalization of businesshas been substantially delayed for lower order suppliers, with orders given/received
in hard copy and by fax, etc.

●

To date, it has been possible to maintain business using the current methods and the
incentive for digitalization has been low due to the tendency for the costs to be borne
upfront. Furthermore, despite various government support for digitalization,companies have lacked expertise, which has raised concerns about ongoing
maintenance and management.

●

However, without the ability to digitally manage the flow of goods and services andfunds, there will not only be a lack of progress in improving the efficiency of business7

by shifting the supply chain to STP, but it will also be difficult to respond to demands
for visualization and resilience of the supply chain. The COVID-19 pandemic has
provided a clear lesson on this point.
●

In addition, not only will suppliers that have delayed digitalization be unable to deal
with the use of blockchain/smart contracts, but there are concerns that large
corporations (buyers) could remove suppliers that are facing such problems from the
supply chain in order to manage and improve the efficiency of transactions.

(Figure 4) Issues for evaluation through the supply chain

2-2. Current state of ESG investment / Sustainable
Finance
2-2-1. Fragmented ESG disclosure
Major companies only provide ESG disclosure on an individual company basis and
ESG disclosure has not spread to SMEs, leaving ESG disclosure fragmented.
●

In recent years, there has been a global shared awareness of ESG and measures toaddress climate change (E) have led the way with progress made by various
international organizations and industry groups to standardize corporate disclosures.
At the same time, cooperation between international financial authorities has madethe requirement for financial institutions to disclose the implementation of sustainablefinance and its risk in terms of regulation and supervision become the norm.

●

Even in Japan, there has been a pronounced increase in the number of corporate
entities issuing disclosures in accordance with the TCFD recommendations, which
has become the international de-facto standard, and even among financial
institutions, the trend for disclosure is spreading to some regional financial
institutions.

●

In contrast, the spread of such initiatives to SMEs has been comparatively delayed.
This is because, in addition to the fundamental problem that SMEs face in needing to
respond to important management issues than ESG e.g., their day-to-day funding
positions), there is a lack of professional knowledge and personnel for measuringgreenhouse gas emissions and the risk, and they do not have the capacity towithstand the cost.
8

2-2-2. How to combat cross-border Greenwashing in a supply
chain.
To combat globally festering greenwashing, ESG evaluation must be enhanced in aholistic and interoperable manner that incorporates cross border supply chains.
●

In the typical cross border supply chain, there is a pattern of large corporations
headquartered in advanced countries receiving goods and services from suppliers
that are multilayered SMEs located in emerging and developing countries.

●

In this case, even if there are growing demands for ESG in advanced countries,
particularly to address climate change (E) and for corporate disclosure requirements,
large corporations, as buyers, have incentive to effectively transfer the burden of
addressing climate change (E) to SME suppliers in emerging and developing
countries, where there is comparatively weak policy demands and relevant parties
lack awareness. This is a type of regulatory arbitrage.

●

This is embodied in the physical response to shift production processes that have alarge burden in terms of climate change to emerging and developing countries and toutilize the differences in ESG disclosure standards and interpretations with large
corporations in advanced countries shifting the burden off their balance sheets(Figure 5).

●

As a result of such cross border greenwashing, progress is not being made towards
climate-change focused ESG/sustainability for the supply chain as a whole. From theoutset, addressing climate change requires progress by the world as a whole, which
is why there are growing moves amongst international organizations to require an
ESG response through the entire supply chain (in terms of greenhouse gas
emissions, the Corporate Value Chain Standard in the Greenhouse Gas Protocol, socalled Scope 3) as well moves in the opposite direction.

(Figure 5) Issues of Greenwashing through the supply chain92-2-3. “Transitioning Asia”
To effectively curb climate change in Asia, which is the world’s factory, the notion of“transition” is important, despite many issues being faced.
●

For Asian countries, where there is accumulation of global manufacturers playing animportant role in each country’s economic activity, it is unrealistic, when responding
to ESG (particularly to climate change), to take a binary approach which splits
economic activities into “Green” and “Brown” based on such standards as
greenhouse gas emissions and aims to reduce the latter activity within a short periodof time.

●Instead, after indicating the ultimate long-term targets and the realistic pathways, aphased response towards such targets needs to be achieved by each country’s
government and private businesses. In fact, such an approach has been clarified by
the relevant authorities in Japan and there are moves to indicate targets for phased
reductions in greenhouse gas emissions for major industries.

●

It is essential to promote such initiatives in a harmonic manner with Asian countries.
This is because a large, crowded supply chain has been built within the region, which
can be used not only to curb existing cross border greenwashing but becomplementary to excellent technologies and initiatives for reducing and absorbing
greenhouse gas emissions.

●

There are currently high hurdles to achieving this. Despite the large impact that Asia
has on global climate change in terms of greenhouse gas emissions, etc. there
remain differences in the levels of awareness of and policy response towards climatechange at each country within the region.

●

In addition, Asian countries require foreign investment from European and American
investors for “pump priming” at least, to raise the vast amounts of funds needed forresearch and development and facilities investment to address climate change.
However, indicating the approach and evaluation criteria for corporate disclosuresfrom the importance of transition is not easily done in a reliably objective format.

●

On this point, future ESG investment could also become an issue in the realms of “S(Social)” and “G (Governance).” This is particularly the case as it spreads to “S” dueto concerns about a delayed response. This is because E, S and G are not matters tobe achieved independently, and require a consistent approach as a whole.

2-3. Demands from economic security
2-3-1. Visualizing and strengthening supply chain: an economic
security concern.
Visualization and resilience of the supply chain have been raised as issues from the10perspective of economic security, where finance has a role to play.
●

Prompted by the US-China confrontation in recent years, there is now a sharedinternational understanding of the importance of procuring strategic resources suchas food supply and semiconductors and of curbing their costs. Such understanding
has been reinforced by the uneven international distribution of medical supplies andequipment throughout the pandemic, concerns about food and energy supplies
caused by the war in Ukraine and embargoes by Western countries on industrial
goods.

●

These trends not only clarify the necessity for resilience in the supply chain to secure
key goods necessary to maintain economic activities in each country, but suggestthat visualization of the supply chain is vital to appropriately identify the location ofrisk as well as to comply with economic sanctions.

●

At the same time, the financial sanctions imposed by Western countries, including
Japan due to the war in Ukraine, have once again highlighted the impact that SCF
methods have on the financial and economic activities of each country.

●

In particular, Russia’s exclusion from the international payment clearing network byWestern countries has conversely resulted in Russia and other countries expanding
their own payment clearing network. For Japan, which has a strong reliance on
foreign currency for SCF, this not only leads to a simple decline in the efficiency offunds and increase in administrative burden, but is also considered to exacerbate
Japan’s vulnerability in maintaining SCF.

●

As seen above, it goes without saying that the finance sector has a role to play instrengthening supply chains and catering to growing demand for transparency. Yet
Structurally the involvement of the financial sector in this area has been relatively
limited, highlighting the need for policy measures.

2-3-2. Implementing Economic National Security: broad actions
needed.
The Japanese government has enacted the Economic Security Promotion Act,targeting a broad range of industries, and is now shifting towards implementation●

In light of this changing external environment, the Japanese government has recently
enacted the Economic Security Promotion Act. This bill includes two pillars that have
major impacts for management of Japan’s supply chains (Figure 6).

●

The first pillar is the move towards securing essential materials, which aims topromote the transfer. This is mainly related to essential materials necessary forindustrial production. To enhance the appeal and return to domestic production andthe transfer of control for procurement to friendly countries, primarily withconsideration to essential. Needless to say, this initiative not only enhances the11resilience of the supply chain, but also requires visualization of the supply chain tocomply with the legislation.
●

The second pillar is the move towards strengthening the infrastructure. To steadilyprocure goods and services necessary to maintain and enhance the infrastructure,targeting finance in addition to energy and communications, while aiming to mitigate
cyber risk, etc. Much of the designated infrastructure relies on overseas supply of
resources and technologies, so this pillar also requires resilience and visualization of
the supply chain.

●

Such policy responses are also being reinforced in Western countries other thanJapan against a background of US-China antagonism and the war in Ukraine.
Therefore, large Japanese corporations engaged in cross border supply chains arelikely to see increased legal risks not only in Japan but in their relationships withoverseas authorities. Investors in Japan and overseas will also become increasingly
focused on such risks in their investment activities.

(Figure 6) Outline of the Economic Security Promotion Act (extract)12

2-3-3. Achilles' heel: SMEs as a focal point for policy measures.
In implementing national economic security measures, the response of SMEs will
also be a focal point from the economic security perspective.
●

In responding to the demands of economic security, there needs to be stricter checksof the lawfulness and appropriateness by business corporations and financial
institutions involved in the supply chain concerning the transaction counterparties
themselves as well as the production, supply and content of the goods and services.
However, this not only requires checks at the start of the transaction, but also needs
to be continuously managed throughout the transaction period.

●

Furthermore, all of this needs to be regularly reported or disclosed to the relevant
authorities and investors. On top of that, as noted above, even as other Westerncountries advance similar policy responses, the reporting requirements, at least for
the foreseeable future, are likely to differ between countries. Similarly, US andEuropean investors could require Japanese companies to provide a security
response based on an approach that differs from Japan.

●

In responding to such demands in an efficient manner, and with requirements forstandardization and digitalization of data throughout the supply chain, the response
from SMEs comprised of multilayered suppliers, if not large corporations that arebuyers, is being delayed. This also raises concerns that in complying with legislation
and responding to the requests of investors, large corporations as buyers will
become negative towards continued transactions with SMEs as suppliers that are13unable to respond to the improved efficiencies in the supply chain.
●This type of “financial exclusion” is likely to damage Japan’s industrial
competitiveness. Therefore, SMEs should be a focal point for policy measures tozero in on.

3. Analysis of current
suggestions for the future

measuresandThis chapter further analyzes the issues confronting ESG investment, particularly in
relation to the supply chain and in addressing climate change, in light of the
discussion up until the previous chapter, and analyzes the current bottlenecks. This
Chapter also evaluates the response to SCF by financial institutions to date and therequired response for the future.

3-1. How does finance enhance supply chains?
In addition to generating incentives for coordination between multiple financial
institutions, a response through new financial solutions is needed.
●

Current SCF is focused on loans by major banks to large corporations that arebuyers in the supply chain, with large corporations on-lending (parent/subsidiaryloans) to SMEs that are suppliers, as necessary. These benefits are limited tocomparatively higher order suppliers.

●

By contrast, the direct approach of financial institutions to SMEs(suppliers) is limited
by such constraints as insufficient ability for evaluation of finances and assets owned
by suppliers and the related costs.

●

On this point, such understanding is shared by major banks, as can be seen in theoptions offered by financial institutions to develop SCF based on the goods andservices flowing through the supply chain or the value of the infrastructure that
supports the supply chain.

●

Having said that, there is a major bottleneck from the lack of professionals andpeople with the know-how to evaluate the value of the goods and services and theinfrastructure to achieve this. In addition, the data that is vital for such initiatives is notavailable for use and application, due to delays in digitalization by SMEs thatcomprise the supply chain and the lack of data standardization and interoperability,
etc., which is also an impediment.

●

In addition, criticism of SCF has been exacerbated by the Greensill scandal, whichcame to light in 2021, notwithstanding the excellent short-term investment
opportunity that could be provided by SCF based on the value of goods and services
14

flowing through the supply chain in that the investment funds can be recovered when
the transaction ends.
●

On the other hand, expanding the field of vision to major financial groups that include
large banks and to general trading companies, etc., some SCF has been
underpinned by evaluations of the value of very versatile goods and highly liquid
infrastructure, etc. and the market has reached a certain size.

●

This suggests there is scope for development of asset-based SCF if there isappropriate information sharing and cooperation that extends beyond product lines
within financial groups or the appropriate evaluation of goods and services andinfrastructure as well as access to a secondary market (Figure 7).

●

Even in relation to the many comparatively high structuring costs, which we havenoted are an impediment to the expansion of asset-based SCF, assuming the lowinterest rate environment continues, the response is thought to be realistic if costs
can be curbed through improved efficiency.

(Figure 7) Examples of related services provided by major financial groups
Service

Function

Responsible department(Examples)

Parent/subsidiary loan

Loans to buyers

Corporate businessdepartments

Trade credit

Loans to suppliers secured by goods as
collateral

Overseas businessdepartments/ Overseas
branchesCashmanagement

Cash management support forbuyers/suppliers (including foreign
currency)

Foreign exchange
departments

Factoring

Acquire the accounts receivables ofsuppliers

Overseas businessdepartments/ Overseas
branches

Lease

Lease business assets to suppliers

Affiliates in Japan andoverseas3-2. ESG disclosure plays a meaningful role in enhancing
supply chain finance.
It is desired to spread the benefits of SCF throughout supply chains throughpromotion of ESG disclosures that cover the entire supply chain.

15

●

Current ESG disclosures are generally conducted by large corporations on an
individual company basis with the background that the presence of knowledge andprofessional personnel as well as IR incentives are not accessible to SMEs.

●

By contrast, there have recently been moves, particularly by internationalorganizations, for global development of ESG spearheaded by addressing climatechange (E) with demands for ESG disclosures throughout the entire supply chain
from the perspective of curbing greenwashing and the unfair shifting of the burden bymajor companies that are buyers in advanced countries on to SMEs that aresuppliers in emerging and developing countries.

●

In concordance with such moves, policy makers and institutional investors in majorcountries are also increasing their demands for substantive ESG disclosure.

●

The enhancements to ESG disclosure throughout the entire supply chain provides
companies dealing with ESG policy targets such as for climate change, with theopportunity for appropriate returns from the perspective of SCF costs, availability anddurability.

●

Having said that, the resolution of issues that are already evident such as knowledge
and professional personnel, the standardization of data and interoperability are
required for SMEs comprised of multilayered suppliers to respond to ESG
disclosures.

●

Furthermore, while in Asia there is a particular need for an approach and framework
focused on transition in terms of addressing climate change, there also needs to be ashared understanding of the rationality and validity when attracting funds from
European and American investors.

●

In light of these points, ESG disclosures that reflect Asian economic characteristics
and policy issues need to be introduced, and the evaluation methods and rulemaking need to be shared with other global financial centers.

3-3. What should fill the gap?
The lack of asset management firms (particularly for SMEs that are suppliers) thathave strong global CFO personnel and supply chain experience has been an
impediment to strengthening SCF.
●

As already seen, resolving the problems faced by SMEs that are suppliers has major
significance for strengthening SCF.

●

Considering the fact that SCF corresponds to the nodal point for supply chains andinvestment chains, the former being the flow of goods and services and the latterbeing the flow of funds, it is desirable that SCF should be built and managed by a
CFO with a global strategic point of view. In fact, there are already renowned CFOs
16

at some large corporations involved in large supply chains in Japan as well.
●

Nonetheless, it is true that there are difficulties for SME, especially lower order
suppliers that comprise the supply chain, to recruit CFOs of global standards widely,
given the costs and availability.

●

Even so, if some of the knowledge and information held by global CFOs could bemade available to SMEs that are suppliers, it would help strengthen SCF. For
example, contributing to that objective could be made by listing examples of new
SCF solutions that are not conventional bank loans and their providers in an easy toread format, as well as indicating the pool of professional personnel.

●

At the same time, in expanding asset based SCF, it is useful to increase theknowledge of investors, who are the providers of funds. In that context, there would
be benefits in having asset management firms involved in SCF regardless of whether
they are in Japan or overseas.

●

In expanding SCF through the capital markets, it is important to regularly supply
products at a certain size for funds procurement in consideration of investor needs.
Even in this sense, the standardization of SCF has important significance and there
is also the prospect that asset-based credits will be incorporated into some types offunds.

4. Policy proposals
This Chapter proposes policies that are necessary to resolve the issues that havebeen outlined and analyzed up until the previous chapter.

4-1. SCF should be strengthened and visualized with new
financial solutions and digitalization.
4-1-1. The current solutions in SCF need to be mapped.
To visualize the current solutions in SCF, we propose cataloging a cross-section of
the industry and publishing the overall image of the financial services provided bymajor financial institutions.
●

Amid major changes in the international environment, the visualization and resilienceof the supply chain, including the perspectives of ESG and economic security, havebecome urgent and important issues. Strengthening SCF can play an important role
in responding to such demands.

●

In strengthening SCF, in addition to conventional bank loans, there are benefits inutilizing asset-based financial solutions that focus on the goods and services that17

flow in the supply chain or the value of the infrastructure that supports the supply
chain.
●At present, major financial groups already provide various solutions, but therelationship between each solution and the product and customer segments is notwell organized and information is fragmented. Therefore, we propose the promotionof the uninterrupted provision of supply chain finance by cataloging existing solutions.

●

To realize this, it will be important for financial institutions to accumulate theknowledge and professional personnel to evaluate the value of assets underlying
SCF. On this point, apart from the hopes that moves to utilize movable property as
collateral in domestic finance will raise awareness, it will also be useful to coordinate
the already scattered management resources linked to various financial services atmajor financial groups, and the visualization of the example will be very significant.

4-1-2. SCF FinTech solutions should be promoted as a distinct
business area.
We propose establishing a business that promotes the introduction of SCF FinTech
solutions through such measures as pitch events for SCF FinTech in the context of
the reinforcement of SME suppliers.
●

SMEs as suppliers not only need enhancement of SCF, but the sharing of knowledge
and information concerning specific methods and techniques. Therefore, this requires
an environment that provides easy access to advanced or successful examples andproviders of new financial solutions.

●

At the same time, it is important to digitize the flow of goods and services and funds
to support the understanding and management not only to facilitate the introductionof new financial solutions by SMEs but to respond to new requests from a policy
aspect for visualization and resilience of the supply chain.

●This type of response should provide an important and effective foundation for the
future introduction of digital currencies, which are being tested in demonstrations inJapan and overseas, as well as when upgrading the operations and management of
the supply chain utilizing smart contracts, etc.

●

Consequently, we propose that the authorities with jurisdiction over supporting the
suppliers in the supply chain convene demonstration events for SCF fintech solutions(with the principal audience being Growth and Standard listed companies) andincorporate increased opportunities to introduce solutions.

4-2.Integrating the supply chain and sustainable financeshould be through universal and holistic standards for18

ESG evaluation.
4-2-1. A conferences for practitioners to discuss holistic ESG
evaluation criteria and methods should be established.
In order for sustainable finance to ideally enhance supply chains, a wide debate for
ESG evaluation methodologies that reflect actual credit operations is necessary.
Conferences should be held with the regulators and practitioners to facilitate debate
about ESG evaluation criteria and methods.
●

To achieve ESG and, in particular, global targets for climate change, advanced,
emerging and developing countries need to cooperate in advancing mutuallyconsistent initiatives.

●

Supply chains built to date are typically built with buyers located in advanced
countries and SMEs that are suppliers existing in multilayers in emerging anddeveloping countries, so the method of operation and management of the supply
chain is key to achieving ESG targets.

●

In fact, among international organizations and major investors in Japan andoverseas, there are pronounced moves to demand an ESG response throughout theentire supply chain, being pioneered in the response to climate change (Scope 3).
That is, the idea of positioning sustainable finance for the entire supply chain isgaining ground.

●

For steadily progressing such moves in the supply chain within Asia, it is important toensure the standardization and interoperability of evaluation methods between
related countries through promotion, particularly focused on data items and content
aspects of ESG disclosure. Japan should also actively contribute to rule-making as
an important hub that supports the supply chain.

4-2-2. Policy measures should prepare an environment for
Scope 3 ESG disclosure and expand ESG investment andtransition finance.
Further enhancements to the initiatives for transition finance support that also
includes help for SME suppliers to improve ESG disclosure systems.
●

It will be particularly useful to increase the incentives while reducing the burden on
SMEs that comprise the supply chain to increase the momentum for responding to
Scope 3.

●This point is also important for helping SMEs understand and manage the flows ofgoods and services and funds with digitalization. In addition, it will be very useful tosupport from the perspectives of knowledge and professional personnel to enableappropriate ESG disclosures even by SMEs.
19

●

On the other hand, since there are large groups of manufacturers that arecomparatively large emitters of greenhouse gasses in Asian countries, including
Japan, the response to climate change requires a gradual progress. Transition
finance should be an important element of SCF in relation to the supply chain.

●

If such moves take hold, the increase in credibility and interest in ESG investment in
Asia, including Japan, will hopefully attract funds and offices of European andAmerican investors. Furthermore, even as the focus of ESG investment shifts to S
and G in future, this will provide a foundation for cooperation within the region.

4-3. Reinforcing SCF should be achieved throughintegrating the supply chain with the investment chain.
4-3-1. The function of CFOs must be updated to match the global
standard and talents must be trained to promote the integration.
Global-standard CFO personnels should serve the role of integrating the supply
chain and investment chain. The concept of CFO itself needs to be updated andinvestment in human resources must be directed to that purpose.
●

In reinforcing SCF while utilizing the features of Tokyo as a global financial center, it
will be vital to integrate the investment chain, which is derived from resources withthe extensive domestic financial assets and depth of diverse financial services, withthe supply chain, which is derived from resources with internationally competitive
industries and the flow of goods and services that supports them.

●

When considering the individual business corporations and financial institutions, thepresence of a global style CFO with the principal role of integrator at the nodal pointof both companies is important. There is not a sufficiently shared understanding of
this at present, and there also need to be initiatives for training CFO personnel andcultivating a community as well as from a legal perspective. For example, CFO could
be defined and positioned with responsibilities (including SCF) stipulated in the
Companies Act and the governance code.

●

While there are difficulties in demanding the installation of Western style global CFO
in SMEs that comprise the supply chain, it is possible to support management interms of information and costs to facilitate easy access to the knowledge andinformation expected of CFO.

●

The CFO personnel should be defined in the governance codes formulated by the
FSAJ and the Tokyo Stock Exchange, while also including the knowledge of CFO
personnel for SMEs in the various support menus at authorities that support SMEs.

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4-3-2. FinTech companies and asset managers help streamline
the present finance structure of supply chains.
Attracting FinTech companies and asset management firms that specialize in SCF
has an enormous advantage in promoting an international financial center. We
propose including FinTech companies and asset management firms specializing in
supply chains in the activities for promoting foreign direct investment.
●

In integrating the investment chain and supply chain in financial solutions, there arebenefits in utilizing asset-based finance using the capital markets more widely as
noted above.

●

On this point, since there are already initiatives among domestic financial institutions
to cooperate on sustainable finance and to upgrade inventory finance, it would be
useful to promote this while simultaneously identifying and attracting foreign asset
management firms and FinTech companies that use advanced investment methods
for SCF and utilizing them to stimulate the Tokyo Global Financial Center as a whole.

4-4. A global financial center should also function as a
global SCF hub
The future vision of Tokyo as a global financial center must incorporate the role of a
supply chain finance hub city for Asia.
●

In preparing the functions required for an Asian SCF hub, first from an information
perspective, ESG disclosures need to spread to SMEs that comprise the suppliers
and realize the visualization of the entire supply chain through the standardizationand digitalization of data. Such evaluation will make it possible to seamlessly
implement SCF.

●

Next in terms of personnel, it is not only the promotion and management of the
response to information aspects as noted above and the accumulation of financial
personnel with high levels of expertise in areas such as FinTech and asset
management that provide SCF based on such response, but the presence of a poolof CFO personnel that can strategically promote SCF to a broad range of businesscorporations.

●

In terms of funds, in addition to accumulating an abundance of financial assets thatcan be utilized in SCF, in light of the current demands for SCF, there needs to beelements such as skills and high-level understanding concerning the ESG investment
and the response for economic security.

●

Furthermore, as an Asian hub, information and knowledge concerning the current
status and issues for SCF within the region will need to be accumulated, and active
debate towards containment of the issues will be required. However, there arebenefits in having the power to lead and realize the outcomes of such debate by21

reinforcing the standardization and interoperability of SCF within the region andhaving the capacity to share the understanding with European and American global
financial centers.
●

We hope that Tokyo is not only comparatively close to achieving this, but by having
these characteristics, lift its status as a global financial center with the inclusion offunctions as an SCF hub.

5. FCT’s contribution <Provisional
conclusions>
Our proposed contribution based on the above policy proposal could at present
conceivably include the following. FCT plans to consolidate these while clarifying thepriorities through debate with various stakeholders.
●

Map existing solutions and create a rough sketch to promote exchange of opinions
between government administrative offices and the industry●

CFO personnel training 2.0: Contribute to having a mature debate, distributing
information at forums such as the FinCity Global Forum for training of personnel able
to promote the installation of digital solutions to connect the supply chain and theinvestment chain●

Attract asset management of the supply chain

We aim to achieve the following through these activities.
●

Share useful or instructive case examples concerning SCF and articulate the lessons
learned from the Greensill scandal, as the SCF’s image has been tainted, but theroot causes of the Green scandal has little to do with SCF per se, but not wellunderstood.

●

Create a Global CFO community and develop a global CFO education programs sothat CFOs can better integrate supply chains with investment chains●

Promote industry initiatives that increase the power of judgment for movable property
value

●

Share knowledge with the world’s global financial centers□ □ □The world is changing, so is the role of international financial centers. As has beenstressed throughout the discussion above, exacerbating geo-political confrontations
22and increasing uncertainties made supply chains a focal point for policy measures inorder to balance security, prosperity and sustainability.
Accordingly, the financial centers today need to play much larger roles andcollaboration among them is increasingly more important. In addition, we cannot
stress enough the importance of integrating supply chain and investment chain
through the function of finance. That way, international financial centers can assume
their new role in contributing to sustainability.

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