Preventing supply chains from fracturing as a result of further twists in the COVID-19 pandemic is a short-term goal, but further into the future, decarbonisation is the priority. These are complex challenges – where does one start?
The crisis of the past 18 months has prompted many organisations to re-evaluate their operations.
Sustainability has become a watchword, both in the short and long term. Preventing supply chains from fracturing as a result of further twists in the COVID-19 pandemic is a short-term goal, but further into the future, decarbonisation is the priority. These are complex challenges – where does one start?
Many large companies are discovering that they don’t know their supply chains as well as they need to. Sometimes, the scale of the risk only becomes apparent when the supply chain grinds to a halt. Shortages of raw materials and shipping containers, disruption caused by extreme weather events, and the two-week closure in August of the Chinese port of Ningbo due to a COVID outbreak have left shelves unstocked and quarterly profits affected, in the Asia-Pacific and elsewhere1,2.
Moreover, many of the issues occur not with direct suppliers, but with deep-tier suppliers, often small and medium sized enterprises (SMEs). Such SMEs often struggle to arrange the low-cost, timely supply-chain finance they require to cover the costs of their own inputs and inventory, and to bridge the time it takes for buyers to settle their invoices3. The volatility of input prices in the pandemic has accentuated their difficulties in this regard.
The financial services industry has been hard at work trying to help the ecosystem mitigate some of these issues. One promising avenue is blockchain. Blockchain can be used to create a ledger that is shared between many parties, far and wide. When one ledger-holder makes a transaction, everyone else’s ledger updates to record it, using the automatic online exchange of cryptographic keys and signatures. This ensures that all the ledgers remain identical. Blockchain therefore offers a highly efficient means of creating trust through transparency.
This trust can form the basis of credit-approvals. It was this idea that inspired a group of leading Asia-Pacific banks, Standard Chartered among them, to invest in the Contour Network in 2018. Contour replaces paperwork-based Letters of Credit with a blockchain-based equivalent, resulting in a highly automated system that can trim days off export processing times4. Given the extent of the turmoil currently facing global supply chains, such efficiency has never been more valuable.
Standard Chartered also has partnerships with blockchain-powered platforms such as Linklogis and Trusple to further improve transparency across supply chains, increase visibility and simplify trade.
Blockchain is not the only way that can help tackle the lack of visibility and resilience in supply chains.
One overall finding is that the tool shows a gap between the importance companies place on supply-chain resilience – 90% describe it as a strategic imperative – and the relatively low confidence they have in their resilience at the present moment5.
The lack of visibility over supply chains is further compounded by a need to meet demands for decarbonisation. Scope 3 of the Paris climate change agreement holds companies accountable not only for their own direct emissions, but for emissions throughout their entire value-chain, from the goods they purchase to the end-disposal of the products they sell6.
The impact is being felt, and the industry is starting to see changes in corporate behaviour. According to Standard Chartered’s research, seventy-eight percent of multinational corporations surveyed say that they will start to remove suppliers who are slow to decarbonise by 2025 – 15% say they have already begun this process7.
By the same token, almost half of multinationals (47%) are offering preferred-supplier status to sustainable vendors, with almost one-third (30%) offering preferential pricing. Financial institutions are supporting this: Standard Chartered has pledged to fund and facilitate USD75-billion worth of investment in sustainable infrastructure and renewable energy by the end of 20248.
Smaller firms can access credit in a timely, cost-effective way – particularly if they are green businesses that are making a bona-fide contribution to decarbonisation – while their larger customers can comply with their ESG requirements and strengthen the resilience of their supply chains, and investors can tap an alternative asset class.
The events of recent years have shown the importance of this kind of mutually beneficial arrangement in ensuring supply chains are secure and sustainable, both in the short and long terms.
Because while the pandemic has shown the risks of the old way of doing business, responses to it have also helped demonstrate the benefits of a sustainable, digitally enabled future. For companies trying to tackle these challenges, tapping the resources provided by their financial institution partners is one way to start.
