How Blockchain can Catalyse Achievement of ESG Standards & Fuel Growth of Micro Businesses & SMEs
Updated: Aug 1, 2021
Driven by increasing demands by government, consumers and investors, the capabilities of Blockchain technology (BCT) can promote a reporting culture that improves human rights practices, environmental sustainability and drives inclusive supply chains for economic growth
Author: Sarah Adomakoh; Co-author:Ayon Hazra
Photo by Shutterstock
Blockchain technology is steadily increasing in popularity as a leading platform for increasing the ease of doing business across emerging markets. But this transition is occurring too slowly in the face of increasing policy mandates and consumer demand for transparency, as many less tech savvy investors and other stakeholders are still somewhat in the dark on its intricate workings and benefits. Blockchain technology (BCT) is of particular importance across regions where investor and buyer interests are on the rise at paces that are way too fast for many high potential Tier 1 suppliers to successfully rise up, to meet the needs of these buyers.
Furthermore, less well known about Blockchain based systems is their capacity to help companies conform to global, national and corporate level ESG (economic, Social, governance) standards, including supply chain integrity commitments such as those required by the United Nations Guiding Principles (UNGP) on Business and Human Rights, which call upon companies to assess the actual and potential adverse human rights impacts caused by their activities. In this article we highlight the inbuilt capabilities within blockchain, particularly its core features of verified audit data, to promote monitoring and reporting of any company’s ESG, quality and human rights standards maintained across its entire supply chain. We also highlight key challenges in making blockchain function effectively in the real world — the things that drive many skeptics into blockchain paralysis.
Efficient track, trace & transparency in supply chains will define the market leaders in production, scale and acceptability of products For tier 1 suppliers, meeting the buying needs of corporates, particularly, multinational corporations (MNCs) and large home grown or regional corporations, increasingly requires greater transparency and traceability of key aspects of operational management and all aspects of raw materials processing and production, within their supply chain. The onus is often on the corporate buyer to ensure that all aspects of their suppliers’ processes are ethical and authentic so that they ultimately meet the buying needs of their customers. In this capacity, blockchain enables its beneficiary businesses or clients to map their entire supply chain including its processes — from what, how, when, where and who, to final delivery, while still able to protect core trade secrets that differentiate them from their competitors.
Box 1: The Nature of Blockchain
"Rapidly increasing demands by policymaker and consumers to corporations and investors will push mainstream adoption"
In particular, for responsible corporate buyers and conscientious consumers to satisfy their buying needs they must obtain solid proof from their suppliers that human rights and other ESG standards are adhered to throughout the supply chain. In addition to this proof required to meet the buyers’ quality goals and cost-effectiveness, adherence to these standards are increasingly driving procurement and investment decision-making. The call for transparency in supply chains is slowly becoming concretized at international, national and state legislation levels, and within due diligence mandates issued by private sector industry oversight bodies and development agencies. For example, ILO Tripartite Declaration of Principles Concerning Multinational Enterprises and the United Nations Guiding Principles on Business and Human Rights call for companies to assess and remove the harmful effects of their operations on workers and consumers; and the US, UK, EU and other regions have enacted legislation that both prohibit companies from sourcing goods or services from suppliers who ignore humanitarian standards or fail to take actions to identify breaches in their second level suppliers.
In addition, complying with these emerging legislations comes with standardized disclosure requirements. Relevant legislation from US and UK, includes the California Supply Chain Transparency Act, and the U.K. Modern Slavery Act. These acts seek to promote inclusive supply chains and prevent child labour, forced labour, respectively.
“The holistic and integrated approach to blockchain implementation is what’s needed….. the lack of it is what’s paralysing private sector”
A growing number of buyer corporations, including big Pharma, are exploring BCT, demonstrating the foresight to stay ahead of the competition and protect, strengthen and diversify their supply chains, e.g. Walmart, Target & Coca Cola. However, the use of blockchain technology can be a costly, mind-boggling, ‘we don’t ‘know where to start” process, and is therefore still yet to take off and scale to reach and support companies in ways that will be significant enough to drive large-scale open connectivity and fairness across global value chains and reduce information asymmetries. BCT also promotes responsible practices that increase business’ impact on the sustainable development goals (SDGs) — as it is well known that setting corporate ESG targets, improving monitoring processes and measuring impacts linked to explicit workplace policies, or external legislation drives consistent and concerted responsible action across any company.
Blockchain as a catalyst for driving responsible business practices
So how is this possible? How can blockchain drive responsible action? First, through its core capabilities in data capture, data protection and data sharing within an immutable structure (see box 1), and its ability to integrate with social impact assessment platforms and any existing operations management platforms used by the beneficiary company.
Second, generating validated records through blockchain capabilities requires commitments and partnerships with key stakeholders brought together as a result of joint vision for diversifying supply chains and promoting ethical sourcing.
Just for starters, these two factors make blockchain well-positioned to increase business impact on the SDGs by promoting increased and authenticated visibility on various types of ethical business operations that that drive positive or adverse impacts.
A 2018 survey by Deloitte found that 74% executives believe there is a sound case for use of blockchain, and 84% believe it will eventually be adopted widely. This drives home Deloitte’s shared view that the only true mistake a [buyer or supplier] business can make regarding blockchain is to do nothing
As tier 1 and buyer corporations are able to partner more efficiently with their suppliers and track and trace the products they receive as a result of the blockchain platform and related audit services, they will be able to significantly increase the number of viable, yet disadvantaged small and growing supplier SMEs that will gain economically, as they become integrated within local and cross border supply chains. This takes time…
… but businesses must start somewhere rather than remain paralyzed when it comes to blockchain
Despite the progress being made in increasing the transparency of processes and traceability of products within global value chains, there remains key challenges within auditing practices, quality management and fragmentation issues that must be overcome:
Challenge 1: Identifying and tackling hidden aspects of the supply chain e.g. Ethical and human rights standards within operational processes, and workplace environments are not routinely monitored, or are monitored very intermittently, therefore creating blind spots during any buyer’s procurement process. For example, fragmentation within the audit and quality monitoring processes as described previously, can serve to further hide instances of non-compliance of high-potential SME suppliers with human rights standards, such as intermittent hiring of child workers, workplace violence against women, insufficient training or skill-set, etc.
Recent newsworthy dialogue and exposés have highlighted some “devastating cracks” exposing human rights breaches within the tea industry that could have been avoided with sufficient or routinely monitoring and impromptu visits. As more news continues to emerge, the threat of existence of these ethical ‘blind spots’, without sufficiently audited confirmation of their absence or existence, significantly decreases investors’ and buyers’ confidence in procuring local suppliers across more and more important components of their supply chains.
Disturbing investigative reports like those by Richu Sanil serve to highlight the long-standing nature of human rights breaches across value chains in which degree of profitability relies on low cost-high quality provisions from their tier 1and 2 suppliers. As global trade and corresponding value chains continue to expand, the increasing demands by consumers for fast delivered ‘inexpensive’ yet quality products has resulted, in many instances, in labour standards being circumvented wherever they can be hidden, just to attain high quality metrics and minimized production costs. These investigations also highlight the urgency of the persistent problem of inadequate monitoring and non-transparent (announced) or corrupt audits, that underlie non-adherence to ethical and inclusive workplace standards e.g as seen in the tea processing industry. These undercover investigations also indicate that the current noise and attention being given to the situation is perhaps too little, too late for the harm caused and lost lives that could have been avoided.
For example, despite having extensive due diligence mechanisms in place, development agencies have inadvertently provided underlying financial support to the establishment and growth of large tea plantations for decades, and given such large capital investments (from tax -payers and philanthropic funding sources) and funded investigations into the standards within plantations reflected stark breaches in labour standards, for decades. However, despite the undertaking of announced audits, these human rights breaches are enacted on site daily. In their responsibility to be accountable for the millions spent and continuing to be spent on such ventures, donors must be the first to support private-sector buyers and tier 1 suppliers, in consistent access to and application of cost-effective Blockchain technologies in order to promote continuous, immutable and legalized monitoring practices. The urgency is underscored by Richu Sanil’s article.
Due to the cost of overheads in collecting information, amid increasing numbers of venders spread locally, as well as across the globe, the monitoring of 2nd and 3rd tier suppliers by their tier 1 SMEs and corporate buyers, is increasingly more costly and convoluted. Corporate executive procurement teams simply cannot conduct the due diligence necessary to continually enforce standards in their suppliers due to this fast pace of vendor increase in the West and Emerging Markets. Therefore, sadly, the threat of breached ethical workplace standards remaining hidden, continues to rise. These standards include workplace health and safety, staff emotional well-being and the right to safety and security, as well as an inclusive environment, free from discrimination. These standards can be routinely included in all blockchain-led audits.
Currently, independent ad hoc audits don’t routinely monitor and record the findings in open sources that can be tracked back to see consistency in quality sourcing, etc., over time, in ways that maintain accountabilities of supplier and buyer. For example, pre 2010 abuse and harm in the garment industries that were within the supply chains of large MNCs came to light, to the extent that governments and consumers demanded change and accountability from sourcing to manufacturing to selling. The California Transparency in Supply Chains Act 2010 arose as result of this pressure and has motivated other sector brands such as tea and coffee sellers to initiate greater transparency initiatives to the extent of sharing the full list of their suppliers. However, the uptake is slow, with less that 30% of companies complying with the terms of this act by 2016.
"Without far reaching capabilities of BCT or something similar that gives stakeholders the transparency in operations and transactions that they demand and deserve, the outcomes of any development actions that aim to achieve economic growth through SME integration into local and global value chains will be significantly under-maximised".
The joint goals and targets that are often set nationally or by corporations across all industries for simultaneously increasing diversity & inclusiveness and transparency of their supply chains are conflicting and not easily attainable. This is due partly to cost-barriers faced particularly by tier 1 and smaller suppliers in routine access to monitoring that is required to achieve transparency goals. This barrier further constrains corporate buyers in their efforts to procure quality goods from a more diverse and inclusive list of suppliers. To achieve such joint goals, corporate buyers, together with tier 1 suppliers, must still find ways to scale-up their efforts and foster closer partnerships with their suppliers, in order to meet the transparency needs of governments and consumers in reporting on core fair trade, human rights and ESG standards.
Importantly, the use of blockchain based systems in achieving standards doesn’t remove the reality that better together means better business for all...
...For Blockchain to deliver sustained effectiveness its implementation needs to be underpinned by a strong ecosystem of functional multi-stakeholder partners (humans with integrity within the AI loop) across informal and formal sectors, legally committed to the functions of the platform and to the twin goals of transparency and diversity.
Challenge 2: Maintenance of the quality aspects of raw materials processing and standards related to ethical sourcing are not sufficiently verified and audited in terms of what information is audited, the frequency and spontaneity of audits, and the capacity and integrity of the audit team. Ultimately limiting the transparency and legitimacy of audit and quality assurance reports.
Quality assurance of intermediate product processing and authenticity of final products is a central objective of the supply chain transparency and traceability concept within Blockchain-based systems. The health and wellbeing of workers and of consumers that receive the final products, is a requirement of ethical trade partnerships and other national interest bodies that create fairtrade certifications and standards pertaining to healthy production and healthy products, e.g. the ethical tea partnership. However, within key industries there have been increasing reports of toxic, adulterated and fake raw materials and end products. These have been found with Jute fibres, honey, tea leaves and olive oil.
The circulation of below par products has been compounded by insufficient attestation of claims made by organic agricultural farmers or farming cooperatives on the use of safe fertilisers, or zero pesticides. In some cases, claims of high-grade quality raw products are completely unverified. Several public accounts have revealed that in some cases these assurances are not consistently monitored. For example, if an organic product is grown beside a field where pesticides are sprayed (spray drift) intermittently, there will be periods when the crops harvested in the organic field, will contain specific levels of pesticide content. Spray drift has become a public health concern for consumers and major production concern for these organic farmers who suffer the consequences when their fields are contaminated by pesticides.
Given this reality, should these end products be marketed as organic? The public health dangers are very real, with nutritionists worldwide increasingly warning that vegans and vegetarians are likely to be consuming several times the daily recommended amounts of highly harmful pesticides when ingesting non-inorganic vegetable products. Health concerns are even greater if then soil is being contaminated intermittently by unreported disposal of toxic byproducts.
With breaches in standards increasingly being revealed and shared publicly, simply saying “it’s real” within a company’s marketing slogan is not going to suffice for conscientious and/or health conscious consumers and buyers. Utmost transparency in how products directly impact the consumers’ health as well as the workers that produce them is being called for. Such product provenance in supply chains can only arise from assurances that come from knowledge and trust in all information pertaining to the origin, authenticity, custody, and integrity of the product.
MWG-BWS transparency project builds capacity and partnerships between investors buyers and suppliers to accelerate update and use of blockchain to promote adherence to ESG standard. Building on emerging successes with BWS;
High-grade Jute is required for a multitude of products globally
Adoption of transparency standards is urgently needed in the olive oil industry
Challenge 3: Tackling the quality gaps due to Fragmentation within the blockchain implementation process- Many local SME Tier 1 supplier businesses that source from tier 2 and 3 suppliers don’t have the financial and internal skills capacity to continuously train and monitor their quality and compliance of processes and products. Therefore, most of the time, particularly in developing regions and underserved communities in the West, they rely on NGO grants or ‘donor-supported intermittent compliance audits. In other cases, where they have trusted corporate buyers, they may be fortunate enough to have a partnership strong enough in which the buyer funds periodic audits, leads quality assurance and monitoring, and supports training of staff on quality management.
These fragmented, ad hoc(rather than embedded) arrangements are indeed lifesaving to SMEs that are trying to enter markets as tier 1 and 2 suppliers. However, ad hoc donor or NGO support without private sector ownership, government commitment and SME Tier 1 business leadership does not often foster sustainability transparency within the SME suppliers’ business processes: Simply because these arrangements are usually add-ons to the businesses core operational processes, that run for a defined short-term period. When arrangements cease, there is often insufficient internal funding available to support its continuation unless the SME has been fortunate enough to attain external funds from an alternative donor.
Many SMEs struggle to grow through expanding their access to local and global Markets, in particular, SMEs in developing regions and underserved communities in the West that are financially constrained. Therefore, quality management processes within these businesses fall under their lesser priorities and as a result they fail to consistently comply with buyers’ transparency demands. Buyers and investors must assess and manage risk that arises from vulnerabilities within their suppliers and tend to stick with known, trusted and transparent suppliers. Therefore, despite generating high-potential offerings, businesses with fragmented quality and compliance systems and insufficient proof of adherence to mandatory or voluntary standards are less likely to attract long-term investments, or access and sustain long-term contracts with buyers.
An important take away: Blockchain is a vital piece needed to galvanise a sustained coordinated entrepreneurial ecosystem that in turn must drive responsible business conduct
How can corporate buyers and tier 1 suppliers tackle these top challenges and be better positioned by using blockchain based systems to maximize ethical sourcing, supply chain transparency and inclusiveness?
We’re tackling these key challenges at MarketWorks Global(MWG). Together with Borlaug Web Services(BWS), we’ve launched the Suppliers4 Transparency project (S4T). Also known as the transparency project, S4T is multi-region SME transparency leadership blockchain service model that merges international SME capacity development, ecosystem building and market linkage strategies with Blockchain technologies, that seeks to:
Empower tier 1 suppliers in partnerships with buyers and donors to increase transparency and compliance within the supplier network, while protecting trade secrets.
Test and scale traceability and transparency from tier 1 to tier 3 suppliers including tackle supply-chain blind spots
Build both impact and profit driven connections (market linkages) between buyers-suppliers
Under MWG’s 3rd international development Pillar - Inclusive supply chains, the transparency project is led by MWG principal and founder Sarah Adomakoh and Ayon Hazra, CEO of Borlaug Web Services, the Transparency Project uses Borlaug architecture and its integrated applications, to empower SMEs in supply chain transparency leadership, capacity building and strengthening market linkages between SME suppliers in Africa, LAC and US and buyers in US, UK and Europe. With key partners in our selected regions, we are rolling out industry specific phased pilot sub-projects and establishing best practice models. Phase I focuses on our network of high potential member SMEs within the olive oil, Jute, Honey/food processing and fashion jewelry sub sectors.
Get in touch with Sarah Adomakoh and Ayon Hazra to discuss how blockchain drives human rights and sustainability standards and how together, through accelerated implementation, corporations and their tier 1 suppliers can meet their goals of quality and ethics within their supply chain through an infrastructure of trust such as the blockchain.
About the Authors This article is the result of an ongoing qualitative review conducted by the authors: