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Do new Emerging risks affect your Credit scoring model?

by Evelyne Legaux on 16-12-2021

With climate change & supply chain disruptions high on many businesses’ agenda, new risks are emerging that drive the need to elevate topics such as resilience & sustainability to top priority level.

Many manufacturing companies experience disruption to their operations due to bottlenecks & delays in the supply chain or shortages of key parts/components. As a result, companies tend to significantly increase inventory levels to be able to fulfil (rising) demand from their customers.

This mechanically translates into higher DIO & Working Capital (WC) and a longer Cash Conversion Cycle (CCC).

The good news though is that, as always, with risks come opportunities!

Some companies are using business environment as a springboard to drastically revisit their WC management strategy to drive efficiency gains & better insights, by leveraging new process automation & digital technologies.

Others go further and also look at their suppliers operations to drive sustainable improvements up the chain. For instance, they may rate suppliers against a set of ESG criteria & accept to work with A- or B-rated suppliers only, grant the latter lower funding costs through a Supply Chain Finance program, etc…

By the way, financial institutions should also play a key role here by helping to raise sustainability awareness & visibility over new supplier risks, in particular.

So, if you have read us up to this point, we would like to leave you with some ‘food for thought’ through the festive season, with this question:

What about customers down the chain? Do you incorporate ESG-type criteria into your Credit risk assessment methodology / scoring model?

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