Solutions to create more responsible supply chains

With consumers and companies as well as regulators increasingly demanding sustainably-made and socially responsible products, it is ever more important for corporates to maintain a responsible supply chain. GTNews spoke with Michael Vrontamitis, head of trade for Europe and Americas, transaction banking, Standard Chartered, about the bank’s recent report, “No More Excuses – Responsible Supply Chains in a Globalised World,” to find out more about what companies are doing to manage their supply chains better.

The issues with the supply chain

From child labour and hazardous working conditions to using materials from illicit sources and causing environmental degradation, potential problems abound along the entire length of the supply chain. For companies and consumers alike, figuring out what is responsible and sustainable is complex.

For companies, a key question is how to make the right decisions and execute well. Even if a company has a high moral compass and wants to achieve 100% compliance, it can be difficult to prove that a product was made by a specific company with the materials they say they used.

If suppliers do not follow sustainable or ethical principles, what the company decides to do may not be the obvious solution. “Let’s say you have a controversial project,” Vrontamitis said by way of example. “Do you fund it or not? The easy thing is to say you won’t fund it. The difficult yet often more beneficial decision is having a conversation and influencing the outcome. You don’t want to say ‘no’ to everything, as it may eventually reduce trade and investment globally.”

Consumers face similar issues. A fundamental question, for instance, is whether a consumer’s moral compass changes when they buy a $3.99 shirt or a $150 shirt and whether they think about the materials similarly. When a shirt costs $150, consumers often take the moral high ground and want to make sure it’s ethically produced as well as made of the best materials. If it only costs $3.99, consumers may not use the same criteria in selecting a shirt. “Even the same consumer has different ways of thinking about purchase decisions.”

While the report does show that some companies are getting it right, it also shows that many are not looking at sustainability beyond corporate social responsibility (CSR) rubrics and have policy statements with relatively low standards. That low level is surprising, given that metrics in financial markets clearly show a connection between sustainability and profitability.

How are companies managing supply chains?

How companies should manage their supply chain is complicated, Vrontamitis acknowledged. “As a company, you need to think about who’s my consumer. What do I want to stand for? How am I going to execute against that?” And even though banks are regulated, there can be higher obligations to do the right thing. While capital and financial crime regulations are well developed, for instance, regulations in sustainability are underdeveloped.

What matters most, Vrontamitis believes, is culture. And the key driver of culture is the tone from the top. “The moment there is a cost-benefit analysis, you’re not really getting it.” To set that tone, corporate leaders must determine the principles to abide by and the things their firm need to do, rather than just signing up to statements.

Another fundamental question is how to execute. Most banks currently try to make sure they know the customer and understand how they operate, then decide whether the firm’s practices fit their environmental and responsibility requirements. While it’s important to embed those principles into everyday work, it’s easier for a large-ticket deal such as a $1bn transaction.

The real challenge is how to apply the same thinking and depth of analysis for a half-million-dollar transaction. Creating huge monitoring systems and having people debate doesn’t fulfill the underlying duty, as it may take too long and the customer may go somewhere else. The sustainability working group at the World Trade Board is discussing exactly these issues and trying to identify best practices and determine what solutions are available, to help companies deal with all sizes of transactions.

Technology

At a transactional level, then, companies need to decide whether the transaction meets the criteria they set and how to do the quality inspection so that they understand the provenance, to verify how the product was made and who made it. If monitoring is so costly that no one will buy a product, however, companies aren’t going to look for the most ethical ways of producing goods.

Technology will help, Vrontamitis believes, and a variety of experiments are underway. In commodities, for example, solutions include sustainable letters of credit and a Banking Environmental Initiative (BEI) website. Even then, banks may have different standards about which companies they finance and tracking products can be difficult.

One interesting solution is blockchain technology from Everledger, which has figured out how to track diamonds. After the diamond industry reached a crisis stage and was struggling to get financing, Everledger figured out how to determine where the diamond was purchased and use distributed ledger technology to track registration, certification and polishing. The next step is to figure out how to apply that technology to other products.

What’s next?

While the analysis of environmental and social factors alongside financial performance has been used for a long time, and banks do decline loans because of social factors, it’s still currently a point-in-time analysis. What’s especially lacking is an ongoing connection between what was agreed and what is done over time. The fundamental challenge going forward, which may take a decade or more to solve, is to go beyond the obvious and understand what’s happening at all times along the entire supply chain.

For now, Vrontamitis said, the report provides examples of what great companies do and can be a guide for firms looking for ways of improving delivery to the client without adding more cost.

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