The heightened attention being paid to environmental, social and governance (ESG) performance by companies is increasingly being extended to these companies’ supply chains. The rationale is clear: the ESG impact of any enterprise is not limited to its own direct policies and practices. Rather, ESG performance is the product of actions taken and decisions made at every point along a company’s supply chain.
For this reason, more and more suppliers are being asked by their buyers to embed sustainability into their business models. This has been noted by CDP, an environmental disclosure organization, which reports a 24% increase in the number of companies asking suppliers to report environmental data over the past year.
Companies such as Walmart Inc., sports-apparel maker Puma SE and tire manufacturer Bridgestone are taking this one step further and creating incentives that motivate their supply chains to enhance ESG performance. Most of these programs, however, are still in the early stages and not yet widespread.
The challenges are many. First, supply chains are complex, multi-faceted, and constantly sprawling ecosystems. Promoting, tracking, and incentivizing ESG improvement requires highly configurable programs that can tailor to the realities of each supplier.
Second, most supply chains are composed of many layers, or tiers. Creating truly impactful initiatives requires the involvement of many of these tiers, and entails significant coordination efforts. It also raises important privacy questions and creates the risk of a “big brother” situation. For example, can (or should) a large manufacturer gain visibility into the ESG performance of its suppliers’ suppliers, when it does not have a direct relationship with them? In the interest of learning about ESG, what other potentially confidential information will become visible?
Third, many suppliers, especially smaller ones, lack the financial stability and health that would afford them the ”luxury” of investing in ESG. Despite being an integral part of the supply chain for some of the world’s largest corporations, many small businesses struggle with working capital and have to pay exorbitant costs to access the money they need to finance and fulfill orders, let alone invest in ESG initiatives.
Technology-Enabled Working Capital
For companies that wish to empower their suppliers to improve ESG performance, working capital can be an invaluable tool.
Most large enterprises benefit from an attractive cost of borrowing and have a wide roster of lenders ready to provide them with competitive financing. This is not a privilege that is widely available to the suppliers that make up these companies’ supply chains.
Here, blockchain, and the breadth of technologies that have evolved around it, can play a fundamental role. Through asset tokenization, attractively priced funding can be digitized and distributed across the supply chain. This can be combined with programmable contracts that strategically direct funds towards ESG-specific projects and initiatives. And, through privacy-enhancing technologies such a Zero-Knowledge Proof, suppliers can demonstrate ESG progress and performance without jeopardizing their confidentiality and privacy.
Defining, Designing and Engaging With Suppliers
Before a company can employ financing to incentivize better ESG performance by its suppliers, a clear enterprise vision for ESG must be established and embraced. Of course, this will vary by industry. Fair and equitable labor practices and reduced carbon emissions are obvious places to start, but the specific ESG goals for an apparel manufacturer’s supply chain will be very different from those for an auto maker or a technology provider.
Furthermore, the participants in a supply chain will likely have widely disparate abilities to evaluate, monitor, report on, and manage ESG practices. Thus, access to capital must be accompanied by programs that allow larger suppliers to engage with, mentor and share ESG best practices with their sub-suppliers.
We are witnessing the onset of the “next generation” of ESG, as companies consider how best to extend and promote sustainability across their complex global supply chains. By using payment technology to “democratize” the availability of financing — and helping smaller suppliers to prioritize and report on their sustainable practices — businesses can optimize ESG performance at all levels and maximize the impact of their actions across the totality of their supply chains.
Andres Ricaurte is senior vice president and global head of payments at Mphasis.