The Future of ESG in Supply Chains: A Data-Driven Perspective on Incentives
From the labyrinthine world of supply chains, where commerce and conscience often find themselves at odds, we’ve increasingly seen a rising wave of hope. The floodgates of private capital ESG funds have opened, and the river of Environmental, Social, and Governance (ESG) principles in supply chains beckons — an estuary of economic vitality and ethical responsibility.
There is a future, where data reigns supreme, incentives align, and supply chains metamorphose into bastions of sustainability. While the path is uncharted, there are notable progressions (and meaningful celebrations) on our path to net-zero.
Let’s dive into the status quo:
Incentives/Incoming Capital
In September of 2022, Reuters announced the funding gap of additional capital needed to meet ESG targets by 2030 has risen to $135 Trillion, while the total cost of meeting global targets has risen to $176 Trillion.
The Atlantic Council continues:
“Sustainable investing, mostly in renewable energy, was the fastest growing Foreign Direct Investment (FDI) theme in 2021 — with 70% directed to developing countries.
Up until 2021, financial markets have also experienced large shifts toward sustainable investing, with ESG fund issuance increasing by 53% to $2.7 trillion in 2021, while the green, social, sustainable and sustainability-linked bond market rose $1 trillion, grabbing 10% of the global debt market share.
Sustainable companies also issued $48 billion in new equity, while sustainable lending reached close to $717 billion in borrowing.”
Increasing amounts of private capital are being allocated to ESG investment.
Increasing amounts of private capital are being allocated to ESG investment.
As a result of the influx of capital and rising Financial and reputational risks from poor ESG practices,
“Many [Multinational Corporations] MNCs, including, Nestle, PepsiCo, and Unilever, are working towards preventing this by establishing and adhering to SBTI [Science Based Target Initiative] targets to increase sustainable practices within their global supply chains. Others, including Starbucks, are diverting funds to support climate and water projects in developing countries in an effort to conserve or replenish 50% of the water they deplete through their operations, including the agricultural supply chain.”
Ongoing Trends
Job Trends
In addition to an influx of capital, “businesses predict the strongest net job-creation effect to be driven by investments that facilitate the green transition of businesses, the broader application of ESG standards and supply chains becoming more localized…Climate change adaptation and the demographic dividend in developing and emerging economies also rate high as net job creators.” (WEF).
They continue with more granularity into the specific trends we can expect:
“Employers anticipate a structural labour market churn of 23% of jobs in the next five years. This can be interpreted as an aggregate measure of disruption, constituting a mixture of emerging jobs added and declining jobs eliminated.
Respondents to this year’s Future of Jobs Survey expect a higher-than-average churn in the Supply Chain and Transportation and Media, Entertainment and Sports industries, and lower-than-average churn in Manufacturing as well as Retail and Wholesale of Consumer Goods.”
ESG Education
While the incentives for ESG Compliance and investments ramp up, we can anticipate an increase in attention while looking at global supply chains. A report by McKinsey & Company tells us that as much as 90% of greenhouse gas emissions and other environmental impacts are the result of consumer companies’ supply chains. As such, the supply chains hold significant potential for advancements in sustainability performance.
When supply chains have enormous potential, there are still very large challenges as we progress towards sustainability. “A recent survey by Avetta found that a “lack of in-house understanding of the importance of ESG issues within the supply chain” was the greatest challenge to incorporating ESG practices into the supply chain, followed by a “lack of suppliers understanding of ESG issues.” For optimal business outcomes, developing sustainability capabilities is critical for supply chain professionals at all levels.”
One such example of ESG Education is Optimizing resource utilization. The ESG mindset helps leadership to think about the supply chain in a new way: Instead of a linear process with waste and negative externalities, view the value chain as an interactive ecosystem that can reuse materials and resources.
Water is a great example of a resource. ESG-educated professionals are more equipped to develop metrics to capture key data points surrounding water use, wastage, and pollution. They can use this knowledge to identify key stages in the product life cycle, where water use can be reduced, water can be recycled, or water quality can be improved. (WEF)
Path to Net Zero
Despite these challenges, the WEF suggests are clear frameworks we can use to help progress towards net zero, with SMEs in particular.
1. Rethink product design. Net zero supply chains will not be delivered by tinkering at the edges and may require a wholesale re-evaluation of how people use products and how they are made.
2. Embrace collaboration. Supply chains are asymmetric, with top-quality talent, education and resources at one end, and many smaller, less sophisticated SMEs along the chain in need of help. All need to collaborate to succeed: to share knowledge, technology, investment and resources.
3. Build the capabilities needed for change. The transition will expose skills and knowledge gaps, which will be greatest for SME suppliers. Capability development and training will help accelerate the shift.
4. Invest in climate tech. Hitting net zero by 2050 requires investment in R&D now alongside close collaboration between industry, science and finance to accelerate bringing innovation to market at scale.
5. Develop better data structures. There’s a need to build systems that can gather operational data across the supply chain to enable transparent, comparable and consistent ESG metrics that are made widely available. This includes to end-consumers so these can inform decisions at point-of-purchase.
6. Think about policy and standards holistically. A historic lack of consistency in policies, standards and market practices has resulted in businesses being held to ever-changing requirements by their partners — driving up complexity and cost. Supply chains cross national borders and need policies that hold all to a high but workable common standard.
7. Enable financing. Targeted, ring-fenced and affordable capital is a key enabler, but banks will not be able to do this alone. Banks need access to mechanisms to team together (e.g. syndication), co-invest with corporates, and form public private partnerships to deliver financing to where it’s needed most.
Conclusion
The future of ESG in supply chains holds great promise, driven by a data-driven perspective on incentives. The landscape is evolving, with a growing influx of private capital into ESG investments, as evidenced by the staggering figures of funds directed towards sustainability. Multinational corporations are increasingly recognizing the importance of aligning with ESG targets, implementing science-based initiatives, and redirecting resources to support sustainability projects in developing countries.
Beyond the financial aspect, we observe significant trends shaping the future of supply chains. Job creation is anticipated in sectors promoting green transitions, ESG standards, and localized supply chains. This dynamic shift in the labor market signifies a transformation towards a more sustainable economy.
ESG education is pivotal in this journey, as supply chains play a significant role in environmental impact. Challenges include a lack of understanding of ESG issues within supply chains, both internally and among suppliers..
In the complex tapestry of global commerce and ethical responsibility, the future of ESG in supply chains is a beacon of hope. With data-driven insights, aligned incentives, and concerted efforts, supply chains can metamorphose into pillars of sustainability, fostering a world where commerce and conscience not only coexist but thrive together. The path may be uncharted, but the journey toward a more sustainable future is well underway, and the destination is within sight.
— Satvik Agnihotri
