At the G7 summit in June 20211, world leaders agreed the G7 Nature Compact to reinforce their commitment to sustainable business practices and supply chains. But while these commitments were made by western leaders, it is largely in Asian markets where these supply chains are located, and where these sustainability goals will be achieved.
Standard Chartered’s recent Critical Indicators of Sustainable Supply Chains research report illustrates that companies operating or headquartered in Asia have the same level of concern about supply chain risk and sustainability as their global peers. However, Asia has the potential to move faster than those in other regions, as Asia’s rapid shift to the digital economy has demonstrated. The question now is how quickly Asia could overtake the rest of the world in leading a sustainable agenda?
While the COVID-19 crisis emphasised the vulnerability of many supply chains, natural disasters, terror and cybersecurity events, geopolitical shifts, regulatory change and the occasional stuck tanker can also all disrupt supply chains to varying degrees. Some risks are more predictable than others.
These issues are not new, nor are Asian companies’ focus on overcoming them. For example, McKinsey research in August 20202 notes that in the automotive, pharmaceuticals, aerospace, as well as computers and electronics industries, companies experience material disruptions lasting a month or more every 3.7 years on average, with shorter disruptions happening even more frequently. As such, companies in Asia are already adept at factoring these risks into their supply chain models.
For many Asian companies (52 per cent), the first critical step is to secure and build financial resilience into their supply chains. CFOs and treasurers, who comprised 82 per cent of research participants in Asia, have a key role to play in this, such as by injecting liquidity into supply chains to support suppliers. Integrated financing techniques such as reverse factoring as part of a supply chain financing (SCF) programme are an increasingly important way to achieve this.
53 per cent of participants in Asia noted the value of SCF programmes to support direct (tier one) suppliers. This is further heightened in South Asia, where 61 per cent of companies note the importance of SCF for direct suppliers, compared to 52 per cent of ASEAN companies and 49 per cent of companies in Greater China and North Asia.
Given the complexity of many supply chains, financing needs to extend beyond direct suppliers to indirect (tier two and beyond) suppliers to achieve the degree of resilience – and sustainability – that many companies are seeking. Reverse factoring or SCF has rarely been considered to be a suitable means of financing deep-tier suppliers as they do not invoice the ‘anchor’ company directly. This can be done, however, through innovative fintech partnerships. In 2019, Standard Chartered completed a flagship, deep-tier supply chain financing transaction for Digital Guangdong and its upstream suppliers in partnership with Linklogis, a supply chain platform provider based in China3. This could provide a valuable model for other companies and industries.
One of the specific challenges in Asia is the large proportion of smaller suppliers, making the cost and effort to onboard them to supply chain programmes prohibitive. In Southeast Asia, for example, there are more than 70 million micro, small and medium-sized enterprises4. These represent 99 per cent of businesses in the region, excluding the large informal sector. One recent study suggests as many as 80-90 per cent of SMEs in some countries may be excluded from official counts5.
In many cases, smaller suppliers do not have a bank account, which poses a barrier to obtaining financing and receiving funds. In addition, within Asia, success has been achieved to differing degrees.
Research participants note that financiers have an important role in helping to address this.
Payments to digital wallets can help improve financial inclusion and robust, sustainable supply chains. In Philippines for example, Standard Chartered helped a client to introduce digital wallet payments to truck drivers. Over 70 per cent of central banks are also exploring digital or virtual currencies6, including Mainland China, Singapore and Australia, as a way to facilitate small payments outside existing payment networks.
Equally, for many ASEAN companies, understanding their supplier’s climate change risks, and how they are approaching transition efforts is coming into sharp focus. Within the ASEAN region, companies believe it is vital to understand how their indirect suppliers are planning for the impact of climate change risks. However, they continue to struggle to check and monitor suppliers’ exposure to climate change and transition risks, and the impact from physical risks associated with climate change from their suppliers’ operations.
The combination of consumer, stakeholder, regulatory and strategic drivers has led to sustainability becoming a priority area of focus for Asian companies.
Supply chain resilience is not simply about financial resilience. Companies also need to ensure that suppliers adopt sustainable business practices so that supply chains can withstand future shocks and contribute to sustainability goals.
Companies’ sustainability strategy and levels of maturity will vary according to sector and stakeholder priorities. For retail and consumer products, for example, consumer demand for environmentally and socially responsible products is driving corporate priorities.
Some policies will be required to comply with regulations, such as decarbonisation goals in China. In other cases, such as in the oil and gas sectors, the transition to sustainability represents a fundamental shift to the business, and the process may be far harder and longer.
Our research provides further evidence of the conflict between the need to change, and the ability to change. For example, Greater China and North Asia companies place great importance on being able to understand and monitor their suppliers’ levels of risk associated with the transition needed as a result of climate change. However, in reality these companies also feel that this is an area where capability and performance can be improved.
Clients across all industries are looking to Standard Chartered for advisory services and insights into best practices. This applies particularly to those who are at an earlier stage in their sustainability journey, or companies that have complex, multinational supply chains across countries in which environmental and social standards and expectations differ from the company’s home market. These companies are seeking the Bank’s help to understand these differences, and to help suppliers to align their standards with those of the anchor clients.
For companies with surplus cash, the Bank’s sustainable investment solutions enable treasurers to invest in green and socially sustainable initiatives, combining the benefit of a convenient and flexible investment solution with the ability to contribute to the company’s ESG targets.
Suppliers’ performance against sustainability metrics has a major impact on a company’s ability to meet its own sustainability targets. Suppliers’ carbon emissions are, on average, 11.4 times greater than direct emissions7 so companies need to work together across supply chains to align their sustainability efforts. 59 per cent emphasised the importance of shared objectives and key performance indicators (KPIs) with suppliers, a view shared across ASEAN (57 per cent of companies), Greater China and North Asia (60 per cent) and South Asia (63 per cent).
There are, however, obstacles to achieving this. The Asia-based director of sustainable sourcing quoted previously continues, “You can only do that when you can see what’s going on.” The credibility and effectiveness of sustainable financing solutions is limited without consistent, comprehensive data that can be used to measure, monitor and report on performance against sustainability metrics. Currently, there are still some inconsistencies in the quality of data on sustainability metrics; however, there are initiatives underway to help overcome this. In Hong Kong, the SAR government has set up an initiative to define a new sustainability index and certification programme to encourage and scale up green financing. In Mainland China, Standard Chartered is working with an automotive client and a technology partner to invite financing to suppliers based on their carbon emissions data.
Although there are several data initiatives underway, there is still considerable potential to increase traceability and reduce costs, including using technologies such as blockchain. Given Asian companies’ digital pre-eminence globally, we are likely to see significant and rapid progress in this area.
The focus amongst US, and to some degree, European policymakers is to develop a domestic alternative to Asia-based supply chains to increase resilience and sustainability. The likelihood, however, is that foreign companies will continue to favour the convenience, reliability and cost-effectiveness of Asia, and that Asia will increase its share of global exports as economies recover8. Asia’s regional supply chains will also continue to expand and deepen, with US$1 in every US$2 in global investment channeled to Asian companies, which account for 43 per cent of the world’s largest companies by revenue. Asia must therefore be at the heart of the global supply chain resilience and sustainability agenda, as companies seek new ways to meet fast-changing customer demand and ambitious ESG targets that will shape the environment and communities of the future.
