Accelerating ESG in supply chains: where technology and financing meet

The focus among companies of all types on environmental, social and governance (ESG) initiatives is sharpening. At the same time, Covid-19 has shaken some global supply chains, with demand for certain products outstripping supply – therefore impacting the ability to ethically source products quickly and efficiently.

In an era of outsourcing where companies increasingly rely on subcontractors which could be based anywhere in the world, oversight of their operations is a challenge. How does a company create and enforce ethical standards with confidence, especially where relevant performance information may be lacking?

“One part of the solution lies in knowing your suppliers, incentivising the right behaviour and using the latest technologies to ensure actionable information flows are timely and clear to all stakeholders,” explained Cynthia Tchikoltsoff, head of supply chain management in Asia Pacific at BNP Paribas.

The transparency challenge

Globalisation has created intricate supply chains, often across continents. While managing these networks is challenging enough in Europe or the US, it can be even more resource-intensive in Asia, where widely differing regulatory environments and opaque corporate governance practices can hinder consensus-building around ESG standards.

"Lack of transparency is one of the key hurdles across most supply chains," said Tchikoltsoff. "Addressing opacity, including with indirect suppliers, can contribute to creating more value for consumers, reducing impending risks, whilst also helping the weakest parties operating upstream in the supply chain.”

But the demand for change is there. Consumers increasingly prefer companies with stronger ESG profiles as they identify purchases with their personal values and beliefs. In turn, investors around the world, including in Asia, seek more quality data to analyse the connection between strong ESG governance and competitive edge to evaluate a company’s prospects for long-term success.

Incentivising ESG

Sustainable supply chain solutions need to be pertinent to each specific market to effectively encourage suppliers to adopt responsible business conduct in return for access to those solutions.

A tailored approach which recognises that customers have different needs creates a deeper understanding of a company’s intrinsic quality as well as its underlying environmental and social commitment.

Addressing working capital financing needs in such a specific manner, across payables, receivables and inventories, involves many challenges. Solution providers should not only understand an organisation’s financing background, but also its risk profile and sustainability and corporate responsibility goals. In this way, companies and their suppliers become committed to adopting sustainable corporate responsibility goals. Further, consistent adherence to environmental and social practices can mean earlier and potentially cheaper financing.

In November 2020, BNP Paribas launched its Sustainable Supply Chain Finance Framework – a first-of-its-kind globally – to measure the sustainability performance of corporates. This was part of the Monetary Authority of Singapore’s Green and Sustainability-Linked Loan Grant Scheme.

At the heart of this framework is a KPI matrix that measures the sustainability performance of corporates in their supply chain processes, and then provides corporates with more favourable terms based on their sustainability performance. Ultimately, this should facilitate a cascade of positive change that will flow throughout supply chain and global trade networks.

A suite of technology solutions

At the heart of most ESG initiatives lies the need for good quality data across the supply chain ecosystem. Third-party platforms, some of which utilise distributed ledger technology (DLT) and blockchain initiatives can be a means of aggregating and standardising this data. In this way, DLT and artificial intelligence (AI) may help solve some challenges around the traceability, governance and monitoring of sustainable practices. 

This cross-section of offerings contributes towards a wider fintech ecosystem that can leverage a combination of ESG data providers to augment company-reported data sources.

For example, technology such as that utilised by Meridia allows efficient land titling and mapping through onsite data collection. Mobile technology that works literally “on the ground” is vital for ensuring the correct and legal land is being used for the production of materials that feed into the supply chain. 

The concept of “digital passports” for physical products is also one that will gain traction. Social enterprises such as Provenance use blockchain to monitor products, recording the impact on people and the planet as they move across the supply chain. 

There are also emerging technology players that can help with the practicalities of calculating incentives. One such company, Halotrade, uses AI technology to create automated incentive and reward structures.

This leads to the creation of a virtuous cycle where, as an organisation’s ESG rating improves over time, so does its opportunity to further access to improved financing terms. This promotes a longer-term motivation and driver to commit to higher standards of governance.

“For me, I can see the future of supply chain reaching a point where the end result is a varied and secure means of inter-connectivity and data sharing, and an environment of visibility (and therefore more trust for all stakeholders) within downstream supply chains,” said Tchikoltsoff. “Technology is key enabler to this transition.”

Tea production in Malawi: a case study

The use of blockchain technology for a project involving tea farmers in Malawi provides an excellent example of improved supply chain visibility, data, trust and financing.

In this case, local tea estates usually take the crop harvested by farmers, process it and ship it onward to market buyers. Only after the tea is cleared into the buyer’s warehouse is payment normally made. Project Trado, a pilot programme based on blockchain technology, enables all parties to share data such as the status of the tea at every stage of the process. This provides buyers with confidence in their pending shipments, encouraging them to make payments sooner.

Early payments in turn reduce farmers’ need to rely on expensive interim financing. Everyone gains, by increasing trust and visibility throughout the process.
 

Click here to see how the use of blockchain in trade and supply chains is growing