Sustainable Finance Live is back for another virtual event. Finextra and Responsible Risk have come together for a thought-provoking series of experiential events, welcoming banking and technology ecosystems to collaborate on enabling a wave of change.
In 2019, leading banks and the United Nations launched the Principles for Responsible Banking, with 130 banks collectively holding $47 trillion in assets, or one third of the global banking sector, signing up. In line with these Principles, banks committed to strategically align their business with the goals of the Paris Agreement on Climate Change and the Sustainable Development Goals, bolstering their contribution to the achievement of both endeavours.
However, this huge volume of capital is trickling from behind a dam created by uncertainty from lack of data, taxonomies, schemas, reporting and products, which, somehow, is robust enough to satisfy the risk register of financial institutions. However, as a result, a lack of confidence around viable options for investing in sustainable initiatives permeates. The solution? Supply chain traceability - yielding dynamic, trustworthy, and secure data from complex supply chains - is required for investors to deliver on the promise of Environmental, Social, and Governance (ESG).
Richard Peers, contributing editor of Finextra and founder of Responsible Risk, opened sessions with an overview of the day’s proceedings and an explanation of the challenges and opportunities surrounding supply chain traceability. Using the palm oil supply chain as an example, Peers explored associated risk indicators such as biodiversity and climate change and the requirement for data in these areas. Further, for mitigation and conservation to be a success, adaptation and corporate disclosure is required.
To resolve these issues, he went on to state that the key question that needs to be answered is: “is it possible to use a transactional mechanism to convey data so that it goes outside of non-financial reporting?” - Peers asked. Alongside this, if features such as carbon certificates or biodiversity certificates were rolled into payments processes, they could become strong incentives for financial institutions looking to transform their mitigation techniques for money laundering, financial crime, and wildlife trafficking.
Peers continued: “Then, as we move through the supply chain and the billing process, our biodiversity and our climate risks change, our mitigations and adaptations change, and of course the payload of data as it moves through the transactional mechanism might change. That continues as we step through post processing, into manufacturing and into retail.” As he elucidated, the following sessions will help attendees consider the totality of a supply chain.
Supply chains, the conveyor belt that convert nature into goods
If the planet was a balance sheet, we are in a loss – exploiting 1.6 times more Earths than we have. Supply chains convert nature into goods, and often businesses can struggle to know the entire detail of how that exactly happens. David Cox, digital strategy and accountability at Microsoft, offered some insight into their journey and some of the challenges they are facing.
Brand is an important part of the ESG journey. “Our mission as a company is essentially to empower every person and organisation on the planet to achieve more,” commented Cox. For Microsoft, this appears to mean not only helping customers, but also their suppliers. There are three pillars to Microsoft’s supply chain approach: integrity, accountability and respect.
- Integrity: being honest, ethical and trustworthy,
- Accountability: taking full responsibility for decisions, actions and results, and
- Respect: recognise responsibility to respect the universal rights of workers in supply chains and the communities they live in.
These pillars are backed by technology and transparency. During his talk, Cox revealed Microsoft’s concerns are not only for the environment, but also human rights. Cox noted that modern slavery is one of the biggest issues “we” are facing, and explored the "transparency throughout our supply chain, how people are treated, how they are paid the conditions in which they work. The extent to which we support diversity and inclusion across the whole supply chain, not just within our own organisation is fundamentally important.”
Despite the technology at their hands, Cox reports a number of challenges faced by Microsoft in this space. The first of these is data, transparency and integrity. Cox commented: “Getting information across our supply chain, despite the technology we have, is a massive problem. While it might seem we’re doing a really great job in the space it’s still a journey for us as well.” Another challenge is getting stakeholder alignment on what the company values are, and what makes them important. This allows them to maintain goals and aspirations at every level of the supply chain.
Managing risk within the supply chain is a large part of Microsoft’s strategy. Cox said that “risk is not just about resiliency, but also about elasticity.” He reiterated the importance of having alternative suppliers and being ready to move to them when the need applies. Additionally, Cox's view is that “climate really is a location issue, and getting grip around that and relating that to your assets. The suppliers and the location of those suppliers is a problem that we're still grappling with today.” An emphasis on transparency and reporting was clear. Here, Cox pointed to Microsoft Procurement, which not only shows Microsoft’s output, but is intended to be released as a product available from April 2022.
Finally, Cox showcased some of their current reporting mechanisms. Microsoft carries out material assessments of its devices, the last of these being conducted in 2018 and the next one intended to be completed before the end of this financial year. Furthermore, Microsoft voiced their engagement in achieving the UN Sustainable Development Goals, and reporting in line with the Global Reporting Initiative Standards.
Sourcing reliable data for carbon assessments of portfolios
Presenting this Lean Back session was ODDO BHF’s Martina Macpherson, head of ESG strategy and GMC committee member, who explained the importance of factoring in systemic risk across supply chains when making investment decisions. “A holistic approach to ESG investing must take into account the systemic risks and opportunities in global supply chains linked to sourcing, tracing, due diligence and disclosure,” she said.
This is a critical mission. In less than two decades, the ESG investment industry has swollen to a value of $35 trillion – and is estimated to hit $53 trillion within this decade. Due to this momentum, explained Macpherson, the mandate is set for greater transparency, more rules-based approaches, and a need for better frameworks to attract and retain asset owner and investor interest.
Accurately understanding and managing ESG risks remains a considerable challenge wherever supply chains are concerned, since we are no longer just talking about direct operational impacts. As underlined by the pandemic, human rights and labour concerns – as well as climate and environmental issues – must be factored in. All pose significant challenges, not only to operations, but to broader chains.
According to Macpherson, two thirds of an average company's environmental, social and governance footprint lies within supply chains. “The financial services sector, meanwhile, has the highest exposure to indirect environmental effects – or impacts related to supply chain issues.” This is a problem that is growing, as opposed to decreasing and being resolved. To make matters even more complex, many supply chains contain SMEs – most of which are ill-prepared for alignment with EU disclosure regulations, due to budget and resource constraints. Still, “SMEs play a major role in most economies, and represent 90% of businesses and 50% of employment worldwide.”
There are other, more systemic, challenges that come with sourcing reliable scope 1, 2, and 3 data for carbon assessments of portfolios. These include:
• Divergence of ESG definitions, methodologies and criteria;
• Uncertainty around material ESG standards and frameworks;
• Lack of consistent supply chain management (SCM) and ESG data disclosure across markets; as well as a
• Lack of widely available ESG data sets for assessing SCM risks.
So, where does this leave us? Clearly, a holistic approach – from company pre-assessments to engagement – is needed, argued Macpherson. For investors, there are three key requirements for generating ESG progress – all of which are linked to data metrics and frameworks. “First, we hope to see more successful SCM oversight, beyond short term financial considerations. Second, we need better relationship management with key stakeholders to deliver long-term value creation, and accurately measure companies’ ESG risks. Third, sustainability issues must become an intrinsic part of investors’ due diligence and procurement practices – especially when sourcing trading, monitoring, and reporting are concerned.”
To improve consistency, Macpherson added, the next step would be to redefine ESG assessment methodologies, so that they cater for environmentally and socially unethical operations across the entire global supply chain. “Investors and ESG ratings agencies could, for instance, create incentives for companies to collect and disclose their partners’ activities.” Once again, clarity, consistency, and comparability of information could be more easily achieved if all stakeholders within the ecosystem work collaboratively towards this common goal. If successful, investors can help ensure that the trillions of dollars stuck behind a dam of uncertainty are allocated to the downstream projects that are pivotal to saving our planet.
The ‘Bindustrial Revolution’: Topolytics’ waste management and data case study
Michael Groves, CEO and founder of insights provider Topolytics, ushered the audience into the third lean back session of the event, introducing his case study around waste management and data. Tracking and tracing solid waste data is the “dirty, hard-end of the supply chain” and Groves explained that Topolytics’ core objective is around trying to build a view around what the waste system looks like on a global basis. “We’re trying to make the system more visible, the data more verifiable, and ultimately, to generate better commercial, environmental and social outcomes around that material.”
Contextualising the situation, Groves observed that the concept of waste can actually be considered to be a supply chain in itself. Raw materials are mined, sourced, then brought into production systems which creates an “upstream” flow of materials then taken to manufacturing systems (with associated biproducts). Then these goods and products are pushed out into the marketplace with the accompanying packaging, entering the municipality or households, even before being pushed out into the waste management system where we still see significant amounts of waste ending up in landfill or incinerated.
The result of this is a complex, ever-shifting supply chain with multiple materials and players involved. “What we’re trying to do globally is to move away from that linear model where we make goods, then use them, and then throw them away, into a more circular model where those goods and materials are kept at their highest utility.” The key challenge of achieving this circular model is around the lack of visibility into the ‘downstream’ waste supply chain. There is very little data and the trust in data that is available is minimal.
Sadly, this results in over 60% of all material going into the waste system within cities’ urban environment or industrial context “fundamentally being thrown into a hole in the ground.” On top of this, the informal waste industry further hampers environmental efforts, while also reinforcing significant social issues tied to the processing and movement of waste material. “There are still issues with modern slavery attached to people who are working in that system and that environment.”
While we fully understand the direct impact and damage that emissions directly tied to this waste are incurring on the environment, Groves continued that the next step is to analyse what is happening to the waste as it moves through the system. “This material is being moved significant distances sometimes which could be a result of commercial relationships that exist between companies that are handling that material, or it could be related to where there is capacity to actually process that material. Research suggests that 61% of the world's population does not have ready-access to recycling infrastructure. So the question is, what is the opportunity there to actually do something different and improve the outcomes for that material?”
Explaining the complex mix of infrastructure that underpins the entire supply chain, Groves furthered that the sites linked to this supply chain are also pushing material into the system. “So you've got this complex mix of infrastructure that underpins the whole supply chain, and obviously, linked to that are the sites that are generating that waste in the first place by putting that material in to the system.” These sites or manufacturers can be categorised as both pushing material in to the system and as sites interested in pulling material back in to their production systems.
Overlaid on this infrastructure is the movement of that material. “We don’t think we can divorce the mapping of waste material from what happens to waste material. We must consider the impact the movement of waste bears on the process too.” The movement consideration attached to waste is absolutely vital to understanding what must be changed within the entire waste system. “In terms of the environmental carbon impacts of significant movements of material over significant distances, we pull these two things together. That's how we start to try and build a picture of what's happening across that system.”
Looking at the data itself, Groves added that while the waste management industry is similar to most other industries in that it has been exposed to significant technologies, unfortunately the prevailing data sources available are databases and spreadsheets. These are very manual approaches and in order to unpick and understand what is going on, Groves argued that we have to be able to manage data even in this challenging form.
Within this world, there are classification schemes around how materials are defined which differ across countries, jurisdictions and companies. “There is real complexity around the way that material is being defined and measured, and how data is being collected. So on one hand, you've got a very manual, traditional kind of data collection system."
However, Groves continued that a shift is emerging toward machine based data collection. Regardless of this trend, he doesn’t believe there is one single data collection mechanism that will give a comprehensive view across the industry on a global scale which assesses the downstream supply chain effectively. “We've got to be able to pull in data from many different sources. We are starting to see robotics and machine vision systems being used to help sort that material, automating the sorting different plastics and polymers for instance.”
The “internet of bins” or “bindustrial revolution” is seeing the growth of bins with sensor technology so that local authorities can better manage the system, while digital deposit returns with smart labels are linking waste and recycling efforts to the blockchain. Yet, because these systems are far from ubiquitous, Groves stated that we must be able to pull data from this eclectic and disparate sources of information, to build a better, more truthful picture of the system.
“When thinking about the downstream waste system, the devil is in the detail. We need to get more granular, more comparability, reference-ability and quality in terms of the data we’ve been able to feed into ESG metrics to be able to stitch all of the available metrics together.”
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