THIS ARTICLE IS WRITTEN BY WAQAS HAMID. WAQAS (WHAMID@RSMNL.NL) IS A CONSULTANT FOCUSSING ON EMERGING TECHNOLOGIES WITHIN THE BUSINESS CONSULTING SERVICES OF RSM NETHERLANDS.

One of the key purposes of ESG-reporting is to disclose information on how the companies are managing ESG-risks stemming from their inherent business models and what actions are being taken to mitigate such risks. Therefore, it is important for companies to improve their ESG-monitoring, reporting and avoid green-washing practices as such practices may harm their business model long-term, sabotages the corporate purpose and its responsibility towards the society, and faces the risks of targeted regulatory scrutiny and fines. Companies are observing this everchanging environment and striving to take actions but there are several challenges that are coming in the way of ensuring effectiveness in complying with ESG-requirements.

The E, S and G in ESG

It is no coincidence that E, S and G are combined as one term. Although, all letters (E, S and G) provide a better focus towards each key issue individually and helps companies in implementing a governance framework around it; collectively, ESG-measures help stakeholders score and measure companies’ performance and take informed decisions with respect to their perceived investments, mergers and acquisitions, regulatory investigations and more.

Stakeholders are increasingly assessing ESG-risks and initiatives undertaken by the companies as this provides a better indication for sustainable growth, instead of solely observing their financial figures. In the past, the quality of product, cost effectiveness, reliability and delivery speed were some of the key metrics to assess within a supply chain. However, compliance with ESG-standards within the supply chains are increasingly gaining traction. Companies are striving to make tangible progress to improve transparency and traceability in their supply chains and intensifying the supplier due diligence to avoid engaging with suppliers with objectionable ESG-practices such as child labour, greenhouse gas emissions etc.

Improving the ESG-scores for supply chains can be done by leveraging the existing technology such as Blockchain. Blockchain refers to a technology that stores and distributes data across all databases in the network and creates an immutable record of transactions. Transactional data is stored historically in a centralized manner and shared with the relevant participant. However, Blockchain enables public sharing of the data (or with the set participants) while allowing for hiding the actual identities of the person for security and data privacy reasons.

As companies are embracing Blockchain technology to reduce costs and improve efficiency across their supply chain, their competitive advantages and investor confidence are increasing notably. Blockchain technology in the supply chain addresses the E, S and G in the following manner:

  • Companies and participants within the supply chain can track the location and amount of greenhouse gas emissions, waste, and sourcing of raw materials in each step in the supply chain that helps gather real time data (immutable and traceable) for complying with the ESG-policy of the company.
  • Blockchain offers some key functionalities including security, traceability, and immutability which allows for the raw materials sourcing from ethical suppliers (not engaged in child labour, human trafficking, and other crimes). For example, companies can obtain immutable data about the products, standards of workers, as well as expiration dates and delivery dates of the products that are recorded in the Blockchain.
  • Companies have access to instant, reliable, symmetrical and traceable information making the supply chains more transparent, fast and corruption free which can be used to abide with the local reporting requirements, as well as to establish governance around the usage of blockchain technology.

In this regard, one of the notable examples of Blockchain-use for ESG-monitoring is by Topl. Topl’s blockchain powered app allows farmers to record the process of cultivating and harvesting coffee. This way the process is recorded in a secure and immutable record, backed by geolocated photos. This information is accessible by any other participants in the supply chain including the end customer. This allows the companies packaging or distributing the coffee to record the ESG-risks throughout the supply chain but also provide value to the end customer and assurance that the coffee production process met the required or communicated ESG-standards. In the near future, we expect more similar models to emerge which reward the participants in supply chains with credit limits / revenue generation based on the carbon emissions, workers standards, ethical business operations etc.

What should companies do?

Companies may consider moving away from applying a reactive approach of simply complying with the minimum standards in today’s fast paced environment of regulatory changes and changing stakeholder’s expectations. In that respect, it is important for internationally active companies to consider implementing a digital governance framework that integrates key areas such as ESG-monitoring and reporting, supply chain optimization, risk & compliance and tax compliance so that the existing technologies available can be utilized to not only bring down the operational costs but to ensure compliance on an ongoing basis.

The everchanging regulatory environment and stakeholder expectations is just like a volcano that smoulders for several years before erupting which may not have a significant impact on your organization today. However, if a proper digital governance framework is not established, it can bring uncertainty and harm to the long-term sustainability of the business.

Digital governance allows companies to create thought leadership within organization and shape the policy of not being merely compliant with the rules but to be the one that has a standardized process to leverage upon digital infrastructure to achieve ethical business standards. Such governance frameworks support companies to embark on a journey of sustainable growth, opposed to being entangled in the everchanging regulatory atmosphere if no such governance frameworks are established.