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How Blockchain can help progress ESG goals

by maria

By: Nish Kotecha, Co-founder and Chairman, Finboot

“Show me the Money” applies to Jerry Maguire as much as it does for the world of ESG and sustainability. Financiers have started to redirect capital to transformative businesses such as Tesla and Sunrun energy and away from ‘dirty’ businesses such as those reliant on fossil fuels. The transformation train has left the station and those still standing at the platform will find it increasingly difficult to fund their operations without adopting a clean strategy.

Enterprises’ view ESG in several different ways: some see it as a legitimate business strategy, others as a self-regulatory initiative, and then there are those who believe it to be the latest marketing spin.

Over US$1 trillion of financial assets are now tracking ESG parameters (source: Morningstar). All companies need access to capital and as this pool grows, it won’t be long before ESG becomes a mandatory reporting line in financial statements.

Capital is a strong motivator, but you need a connected strategy: one that you can implement, manage and monitor progress through regular updates to the investor community. Too lofty a target and you risk being exposed, too easy and you risk being ignored.

Within the strategy needs to be a data framework that enables you to collect, manage and audit data that supports the ESG objectives. The alterative of speeches without evidence is no longer acceptable. Trust is in crisis.

Trust in enterprises has been knocked through corporate scandals such as the VW emissions fraud, Boeing Max 737’s ‘culture of concealment’, Patisserie Valerie’s alleged accounting fraud and Carillion’s financial troubles as well as a number of governmental ones. Regaining trust requires integrity delivered through being transparent when required, having evidence and being accountable.

Validating ESG progress

Measuring ESG performance needs quantitative metrics that benchmark the progress – and they need to be recorded to ensure they are auditable and immutable. Enterprises should assume that their ESG claims will be scrutinised by regulators as well as ever more socially and environmentally conscious consumers. All it takes is for one enterprise to raise the curtain, and others will have to follow or risk being left behind. the more forward-thinking companies will be ready before they are forced to comply. Late compliance could risk the business model and will certainly damage a company’s brand.

Harnessing the power of blockchain

Introducing traceability into ESG policies requires some work! Most organisations operate within complex supply and value chains spanning multiple geographies. Furthermore, each member operates at a different level of digitalisation, some with just a laptop. Connecting the components while preserving the integrity of the data requires Blockchain.

Trust and transparency are the founding principles of blockchain, which, along with its immutability and ability to digitally represent assets moving along value and supply chains, makes it the ideal fit.

Blockchain’s value grows exponentially as the size of the network grows: the greater the number of parties in the network, the greater the collective value that can be derived from data sharing.

Blockchain in action 

Global energy giant Repsol is leading the charge on this and is already using blockchain to digitise some of its downstream supply chain – which means any resource that starts at a refinery or industrial complex before being processed into a product in subsequent supply chains. Here, blockchain is used to create a digital asset that mirrors the physical resource that will move along a supply chain, with that asset registering all of the characteristics that define the quality and regulatory compliance of its physical counterpart.

For example, in the case of a product like polyethylene, we could potentially trace the asset all the way up to the plastic container that is ultimately manufactured. Having traced this, we could recover the container and, through mechanical recycling, use it to produce new raw materials for a new batch of plastics, which could then be traced as well. This would certify how much primary and secondary raw material was used in production.

Stahl, the world leader in the specialty chemistry of coatings, processing and treatments recently implemented a Blockchain powered enterprise solution to improve the way it shares and verifies its products’ sustainability credentials with brands that use materials treated with Stahl chemicals.

Stahl specialises in the production of surface treatment and coating solutions for flexible surfaces, such as leather, synthetics and fabrics. Its direct customers are tanneries and other small manufacturers that supply their materials to brands predominantly in the fashion and automotive industries. Leading brands require that their suppliers only use chemicals from approved providers and so Stahl works closely with them to share relevant data about its products’ sustainability properties.

In the first blockchain implementation of its kind for the flexible surface chemical industry, the blockchain product creates immutable digital assets of Stahl’s products to deliver transparency and traceability within Stahl’s supply chain in a way that no other digital technology can. This means that the end-brands have direct and easy access to accurate and verified information about the overall properties of Stahl’s products so that they too can verify the sustainability credentials of their own supply chains. These properties include documentation such as bill of materials, bill of substances and the provenance of the raw materials.

There are numerous other opportunities when it comes to blockchain and sustainability in the broader petrochemicals sector, with sustainable fashion being one example. Chemical dyes and plastics (petrochemical products) play a large role in the fashion industry and, by deploying blockchain, we can track their carbon footprint or how much recycled material is used in the manufacturing process.

The pandemic – build back better

The pandemic has accelerated a journey that was in its nascency: digitalisation. Technology adoption can enable the flexibility we all require to operate in the new normal. Digitisation is fundamental to ESG measurement. Together, we have a unique opportunity to create the organisation of the future based on the principals of transparency, agility and sustainability.

Tesco’s recent announcement connecting supply chain finace to sustainability goals is potentially a game changer. Linking annual greenhouse gas emissions data provided by suppliers, independently verified and assessed by sustainability experts to lower financing rates provided by their banking partner, Santander creates a win-win scenario. Suppliers now have a reason to invest in a green supply chain and with Tesco’s might, they can refer to their customer calling for action.

Tracking the product across the entire supply chains requires a digital solution that is easy and straightforward to implement yet provides the tamperproof auditability that is transparent to ensure trust in the data. Without transparency, the Tesco programme risks being more style than substance.

Setting Carbon emission goals is one part; measuring them and monitoring them is arguably more important. In Tesco’s case, it has multiple supply chains across the world and participants have different levels of digitalisation. Consider a farmer at one end using a manual paper-based recording process to systems with tier 1 suppliers who have managed to invest in digital tools.

What is required is a common digital bridge that can connect across all types of digital capability from the lowest point (e.g. a connected device such as a smartphone) to a full digital ERP system like SAP. Data capture needs to be easy to setup, implement and operate seamlessly from end to end across your supply chain.

What is better? Better is resilient and sustainable.

The build back must prioritise resilience over efficiency. The Pandemic has forced a re-think of how we do business and whom we work with. Suppliers have fallen, while those who are digital have expanded.

The Pandemic has shown us that resilience requires agility. The ability to dynamically change your operational processes to adapt to new working conditions, such as your workforce switching to remote working or a supplier shutting down because of Covid.

The rigid just-in-time supply chain model has fallen short during times of stress, such as Covid – and before that during changing political landscapes (remember “America first” and “Made in India”), trade barriers or sanctions. According to the Economist, since the pandemic, countries have passed over 140 special trade restrictions and tightened foreign investment rules. Supply chains of yesterday need updating – and fast.

Overnight, digitalisation has become a survival imperative, as organisations rethink their supply chain design to both respond to the pandemic and understand that resilience comes from diversity of supply. This will drive a restructuring of supply chains that will help bring about widespread acceptance of blockchain as a technology that enables cross-enterprise transformation and digitalisation.

Blockchain technology offers transparency and creates the supply chain agility required in the new normal. For companies, blockchain can be used as a private permissioned framework for a group of stakeholders, such as suppliers, customers and regulators, to manage the sourcing, production and movement of goods dynamically throughout the supply chain. Unlike public blockchain networks, private ones could be more efficient than current legacy systems when you consider the amount of processing, time and money spent checking the data.

A majority of executives in large global enterprises consider blockchain to be one of their key strategic opportunities in the next 12-24 months, particularly in their supply chains or for sustainability.

A new tide is coming, and the smart companies are those that are looking to future proof and see blockchain as a route to accelerate digital transformation and to build trust within the supplier ecosystem as well as among consumers beyond.

Enterprises are under attack from consumers, regulators and now activists to change their ways. Engine no.1 which was only established in 2020 managed to put two Activist Directors on the Board of Enron, the Oil supermajor on 26 May causing shockwaves through corporate America.

As these new directors push for a more aggressive commitment to decarbonisation goals, many corporates will start to question whether they are swimming in the wrong direction with the tsunami coming.

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