Digital Supply Chains: Bridging the Sustainability Gap

By Marc Naidoo, Finance partner in the London office of international law firm, McGuireWoods.  He specialises in sustainable finance and can be reached at mnaidoo@mcguirewoods.com.

When smart shopping was introduced into the UK a few years ago, consumers were amazed by the innovation offered to them to save time on shopping. Being able to scan items in real time allowed consumers the convenience not only to avoid queues, but to also resist the temptation of asking a cashier to “throw in an extra plastic bag or two” when it came time to check out. As with all technology, base operating systems can be modified and, in some instances, repurposed to give effect to changing needs of consumers.

Perhaps the broader discussion is whether the changing needs of consumers is mutually inclusive to the broader needs of the world. It would be trite to assume that the readers of this article are unaware of the desperate need to incorporate sustainability into all aspects of our lives. From large corporates, to individuals, the need to live, and promote, sustainability is now a hard requirement if the world is going to satisfy the United Nations Sustainable Development Goals. Technology can therefore be the bridge that connects all parties in an economic ecosystem and would create accountability and transparency across a supply chain.

Supply chains present an opportunity for transparency regarding origination and transport of goods. It also allows various parties to a supply chain to monitor and account for the journey of goods using bills of lading. However, instead of endorsement stickers and badges on a product, what if we consumers could retrospectively track the journey of goods that we purchase / intend to purchase? Perhaps the nature of sustainability can be an exercise in quick wins. For instance, if a consumer purchases seafood on the basis that there are endorsements that the seafood in question was caught sustainably, but does not look further than how that seafood was transported along the supply chain. In this specific example, the seafood industry is particularly errant with modern day slavery labour practices and thus sustainably sourcing goods is only a portion of the equation that must be solved for. To expand further on this example, what if the vessels used when transporting this seafood are outdated and produce unnecessarily high hydrocarbon emissions? The tenets of sustainable finance are do good, but also do no harm. To embrace sustainability, the entire supply chain needs to be accountable. The only way to do this is to apply pressure to the bottom line of these supply chains which is controlled by the end consumer.

As mentioned earlier, technology can be repurposed to give effect to the changing needs of the world, and in this case consumers. A possible solution worth exploring is the use of blockchain technology to monitor the journey of goods from source to end consumer. Goods would be tagged at origin with certain characteristics. For instance: sustainably sourced, local farmers, organic, GMO free. These are but a few of the options that could be explored depending on the nature of the goods in question. These characteristics could then be coded into a QR code and added to the ledger and then the blockchain network once approved.

Collateral managers would then use this QR code as a reference point as to how to sort goods as they prepare for shipping. It would provide some accountability for the sourcing of goods, which can be a notoriously grey area. This QR code will then be added to the bill of lading, and in some instances, can be regarded as the bill of lading. Random samples of the goods can also have the QR code added to them so as to ensure that there is no co-mingling of goods.

On receipt of the goods by a carrier, the QR code and random samples can be scanned to ensure that the goods in question are in fact the correct goods. At this point further characteristics can be added to the goods which relate to the manner in which they are transported. Factors such as: hydrocarbon emissions, labour practices, sanctions and legality can be added to the QR code as a separate line item and then added to the blockchain network. In the first instance, the QR code ensures that shipping companies could hold parties responsible for the sourcing of goods accountable for their practices, while in the second instance it makes themselves accountable for their practices in actually shipping the goods.

The granularity of the system is dependent on the company responsible for producing the goods. Or perhaps another solution would be to create a uniform grading system as to supply chains. The grading system could take into account the journey of the goods to the ends consumer as well as the granularity of what information is uploaded to the blockchain network (which in turn is available to the end consumer). In terms of granularity, one could look at inter-country delivery of items, local couriers and the sustainability policies of retailers that sell the goods. The list could be endless, however the market would determine where to draw that line and create gradings appropriately.

Our consumer would then pick up their goods in store and use either an app or the scanning facilities offered by certain retailers to either (i) check the journey of that item; or (ii) verify the endorsement of a product to the extent that there is a grading system being used. This would be a real time confirmation of the sustainability of the product that they are purchasing. Perhaps in time an app can be linked to a rewards programme for shopping sustainably, but that would be the next step once the digital supply chain proves to work efficiently. A move to digital supply chains would ensure that the endorsements and grading given to goods actually mean something to end consumers, and there would actually be accountability throughout a supply chain. Perhaps this would be an interactive bridge between end consumers and the companies who produce their goods, rather than a sticker that alludes to the bridge that exists in the abstract.