Globalisation is a phenomenon that has rapidly ushered in an era of industrialisation, linking firms as diverse as multinational conglomerates and micro-businesses. The pace of change in emerging markets in particular has created a great challenge for local governments, businesses and civil society to adjust while protecting those communities from being exploited because of low wages, poor working conditions, weak regulatory infrastructure and the desperation of families for their children to earn rather than learn.
And so, more and more it’s being recognised that multinational businesses have a moral responsibility to ensure that the standards viewed as acceptable in advanced economies are also applied in the markets from which they source. That is why Michael Vrontamitis, head of trade at Standard Chartered, told SCFBriefing.com, “It is increasingly important for corporates to ensure that they maintain responsible supply chains.”
Vrontamitis was the coordinator for a new bank-sponsored report by the Economist Intelligence Unit: No More Excuses – Responsible Supply Chains in a Globalised World. He believes that financial stakeholders have an opportunity and a responsibility to help drive the development of responsible supply chains.
“Consumers, corporate purchasers and regulators are increasingly demanding responsible supply chain finance practices,” he notes. But while these players also acknowledge that there is a positive link between sustainability and profitability, Vrontamitis says that that cannot be the standalone justification for responsible supply chains. “The moment there is a cost-benefit analysis is the moment you’re not really getting it,” he says. “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?’”
Culture, he says, is the key success factor for developing responsible supply chain finance. And the key driver of culture is the tone from the top. That involves more than simply espousing the virtues of corporate social responsibility (CSR) and issuing policy statements: top management also have to make sure that their company delivers and that they do, indeed, actually do the right thing.
A moral compass and a $3.99 shirt
For consumers and companies alike, executing well is a complex challenge. If a bank is evaluating a controversial project, for instance, the easy path is simply not to fund it. A more difficult approach is to have a conversation, influence the outcome and not saying ‘no’ to everything. On the consumer side, for example, individuals need to look at whether their moral compass changes when they buy products from different suppliers or at different price points, such as a $3.99 shirt or a $150 shirt. For $150, consumers generally want to make sure it’s ethically made and uses the best materials. For $3.99, they may just buy it and not think about how it was made.
In the banking world, the capital markets and financial crime regulations are well developed. It is easy to see what has to be done and what decisions have to be made because it is clearly mandated. Regulations relating to responsible physical and financial supply chains are much less well developed. “It’s easy to sign up to statements,” Vrontamitis says. “The question is how you execute, how you make the right decisions.” To do that, it is necessary to go above and beyond the scant regulatory requirements.
Transactions and technology
A key issue to address is ensuring that each corporate transaction meets the company’s criteria at a transactional level. While it is relatively easy to embed responsibility principles into processes for large ticket deals such as $1 billion transactions, the tension is around how to apply the same principles, thinking and depth to half million-dollar transactions. “You don’t want to create huge monitoring systems. It is a cost and technology trade-off. We’re trying to figure out solutions,” Vrontamitis says.
But while technology does not yet offer a full suite of solutions, it is beginning to help. One example is sustainable letters of credit, which are used to finance the right producers. Another is blockchain technology: Everledger, for instance, has figured out how to track details such as registration, certification and polishing for diamonds, going all the way back to where they were sourced. The next step, Vrontamitis says, is to apply that technology to other products.
While banks have looked at environmental and social performance for a long time, turning down loans because of such social factors, Vrontamitis says it’s still a “point-in-time” analysis: “What we’re missing is the ongoing connection between what was agreed at the time the loan was made and what was done after the loan was disbursed.” While he says it may well take a decade more to achieve higher levels of monitoring, technology and banks are moving towards solutions that can help make the world a better place.
Recommendations for more responsible supply chains
- Brands and other large buyers hold significant influence over their supply chains and should do more to exert this influence.
- Corporate social responsibility (CSR) professionals need to translate social and environmental issues from moral imperatives into risks and opportunities relevant to business leaders. This entails working closely alongside strategy and operations to improve communication, and hiring staff with business experience in addition to those with technical/scientific expertise.
- Business leaders and board members need to play a similar role in translating issues to financial stakeholders.
- Financial institutions can play a role in providing targeted incentives for inclusion of groups facing discrimination, and this can be commercially beneficial rather than altruistic. For instance, women and minority groups face discrimination in access to finance in many areas, and supplier finance programmes in partnership with buyers can drive financial inclusion while growing business for the financial institution or bank.
- More could be done to promote non-financial reporting and to move towards a broader, longer-term definition of fiduciary duty. Both regulators and financial stakeholders can play a role in this.
- Financial stakeholders and corporate leaders need to improve communication and agree on systems that are better at taking social and environmental risks and opportunities into account. This will involve new measurement systems on the one hand, and greater acceptance of qualitative analysis on the other.
- In jurisdictions where regulatory or enforcement capacity is limited, as in many emerging markets, the most effective temporary measure may be to develop the positive business case for responsible conduct, presenting the issue as an opportunity for individual businesses as well as the local economy.
From: Economist Intelligence Unit No More Excuses –
Responsible Supply Chains in a Globalised World