Why Payment Terms Shouldn’t be used as Green Incentives

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As the year rolls on, the UN’s forthcoming conference on climate change in Glasgow looms like Christmas on the business calendar, with eco-conscious companies increasingly in the market for something special to show how much they care. They are shopping for sustainability.

One potential storehouse is the supply chain, the source of most of their greenhouse gas emissions. When the UK’s largest retailer announced in April that it would start using its payment terms to incentivize suppliers to reduce their carbon footprints, it did not expect a backlash. Several observers interpreted Tesco’s intention to reward stronger sustainability performance with earlier settlements as being more a way to legitimize late payments.

A carrot not a con

In theory, incentives are useful tools for encouraging change. If fair payment terms are made better by the desired action, that seems like a win-win situation. But any such arrangement must still be designed with care, warns Mark Chadwick, MD of sustainability solutions at Engie Impact in the UK & Ireland.

gradient-quote It’s a matter of having the correct measurements and controls. Offering any incentive poses risks, so we must structure them appropriately, mindful of any potentially corrupting influence. gradient-quote-right
Mark Chadwick, Managing Director of Sustainability Solutions, ENGIE Impact

He explains, trust and credibility are key in any client-supplier relationship, so waving a big compliance stick, only thinly disguised as a carrot, is not the answer.

“To be a genuine carrot, an incentive must offer an improvement on business as usual,” Chadwick stresses. “It is not enough to ask for sustainable action to forestall a downgrade in terms and conditions.”

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