Lifting the veil: the era of ‘total visibility’ in supply chains

Many products travel through highly opaque supply chains. How do companies ensure its upstream suppliers match up to its own ethical standards?

Companies are under more pressure than ever, from governments, investors and consumers, to impose clarity and good standards on their global supply chains. Demand for environmental, social and governance (ESG) initiatives is gaining in attention and popularity. At the same time, the Covid-19 pandemic has shocked some global supply chains, as demand for certain products outstrips supply and impacts 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, 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, Asia Pacific at BNP Paribas.

The transparency challenge

Globalisation has created intricate supply chains that now extend 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 and consumers are increasingly being drawn to companies with stronger ESG profiles, as they identify purchases with their personal values and beliefs. In turn, investors around the world, including in Asia, are seeking more quality data to analyse the connection between strong ESG governance and competitive edge in order to evaluate a company’s prospects for long-term success.

Incentivising ESG practices

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

A tailored approach that 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, creates many challenges. Solutions 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 a sustainable corporate responsibility goals. Consistent adherence to environmental and social practices can mean earlier and potentially cheaper financing.

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

At the heart of the framework is a KPI matrix that measures the sustainability performance of corporates in their supply chain processes, and 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 AI may help solve some challenges around 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 on-site data collection. Mobile technology that works literally “on the ground” is vital for ensuring that 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 in the future. 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 who 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 further access to improved financing terms, promoting a longer-term motivation and incentive to commit to good 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.”