Innovating sustainability in trade finance
Emerging technologies are not only making trade and trade finance more efficient, transparent and secure, but are also helping businesses and financial institutions ‘go green’. But to what extent can tech really make supply chains more sustainable? Sanne Wass speaks to three companies looking to make a difference.
Combatting human rights risks with blockchain
Supply chain responsibility is a topic that is increasingly in the spotlight of consumers, NGOs and regulators across the globe.
Being associated with issues such as child labour and the financing of armed conflict poses not only huge reputational and financial risks, but it could also bring about serious legal repercussions.
Many countries have put in place direct legal measures to ensure that companies are not supporting irresponsible activities through their supply chains. In the US, for example, the conflict minerals rules impose mandatory supply chain due diligence and annual reporting obligations for companies using what have been dubbed ‘3TG minerals’ – tungsten, tantalum, tin and gold – which have been linked to armed conflicts and human rights abuses in DR Congo and neighbouring countries. In the EU, similar legislation is set to be passed in national parliaments by 2021.
To address this particular challenge, two entrepreneurs have turned to blockchain technology. Under the tagline “the blockchain for raw materials”, UK-based Dorae is currently piloting an Ethereum-based supply chain accountability system that tracks a mineral’s journey from source to end-user. The aim is to make global supply chains for anything from smartphones to electric cars more responsible.
While blockchain is currently being explored for a range of use cases in the trade finance space, the technology is particularly ideal for tracking and tracing goods in the physical supply chain – and in doing so ensuring responsible sourcing – as it allows data to be entered and viewed across the supply chain and safeguards against records being duplicated or manipulated.
Specifically, Dorae’s platform records information about the origin, transit and processing of raw materials into finished goods, so that companies, financiers and consumers will know exactly where a material comes from and what has happened to it along the way. The firm has started at the root of the challenge, in DR Congo, a hotspot for minerals mining, but also a country hugely troubled by armed conflict and a poor human rights record.
Its first pilot project is tracking cobalt and coltan from three mines in the Central African nation. Over time the project will expand to more mines and countries, and other raw materials. With a plan to work closely with governments, Dorae has already received approval for the project from DR Congo’s President Joseph Kabila.
“The highest value of blockchain is addressing the disconnect in the information that’s needed at one end of the supply chain and the information that exists at the other end,” Aba Schubert tells GTR. She is the co-founder of Dorae, along with Ricardo Santos Silva.
“That’s why we decided to start our project in DR Congo, because there is information on the ground that end-users need, particularly US manufacturers who have actual regulatory requirements to conduct diligence on their supply chains, but it gets lost along the way,” she says.
Explaining how the solution works, Schubert adds: “Our system takes the information, aggregates it at point of origin, loads it to blockchain. When a unit of material moves from the mine to the initial distributor, that sale is logged, and then when that distributor sells it to a processor, that sale is logged too. What the processor actually does to the material, that information gets logged, and so you get this immutable chain of information that is there as a pre-packed audit trail for the end-user.”
While Dorae’s solution could help combat human rights abuses, regional conflict and environmental exploitation, the founders’ approach is business-led, aiming to help companies steer clear of the repercussions that could come with having irresponsible supply chains.
Ultimately, however, Schubert explains, the decisions are in the hands of the businesses themselves. “We’re not an NGO, we’re not going in scolding people and telling them they shouldn’t do business this way or that. We’re saying ‘here is a way you can do it, and be economically compensated for the effort that that involves, and this is a system to get that information from A to B’.”
The new information sharing system will not only save companies time and money spent conducting supply chain due diligence: the expectation is that firms will ultimately be rewarded by the end-consumer for observing proper standards.
The system could also give more comfort to trade financiers, who, because of high due diligence requirements and scrutiny, are increasingly risk-averse when it comes to financing minerals from countries like DR Congo. “Financiers don’t want to get associated if there is some liability attached to it, and with this system they can know that what they are financing is actually green mine-sourced,” Schubert says.
Smart contracts for responsible supply chain financing
Like Dorae, Halotrade is utilising the power of blockchain technology to track and trace goods from origin to consumer.
However, Halotrade is not directly focused on the blockchain itself, but rather how the information recorded on it can be brought to the banks’ financing programmes and unlock access to faster and cheaper financing for responsible and sustainable sourcing.
It is currently working with Provenance, a social blockchain enterprise, and a number of other technology firms to test the usage of blockchain technology to track tea sourced from farmers in Malawi. The blockchain will record standardised information gathered from farmers about their produce, including quality and price, as well as account for the flow of products. With the transparency provided by this technology, the aim is that companies, their banks and their consumers access more detailed and reliable information about the social and environmental impact of their entire supply chains.
The year-long project kicked off in January and involves Unilever, Sainsbury’s and Sappi, together with Barclays, Standard Chartered, BNP Paribas and Rabobank, which will carry out three pilots throughout 2018.
Halotrade’s role is to develop the software that will be used by financial institutions. In short, the tech firm’s solution uses smart contracts to convert the blockchain’s supply chain sustainability data into automated access to trade finance. The UK-based firm is owned and run by Shona Tatchell, who conceived the idea for Halotrade in 2015 while she was working as Barclays’ head of innovation, trade and working capital. After having taken the startup through Barclays’ own fintech incubator last year, she decided to leave the bank in October to focus on the project.
Speaking to GTR, Tatchell says she wanted the business to focus specifically on trade finance because it is “the fuel in the system to really turn the wheel, to incentivise suppliers and buyers to work in a way that is more ethical by giving more immediate access to lower-cost financing”. In turn, banks will get access to the supply chain data provided on the blockchain, which will help them to better assess risk and make decisions around financing. Having spent the first months of the year defining and planning the pilot project, the next step is to develop the product further and conduct a proof of concept, before taking the project to live testing by the end of the year.
Tatchell says that while she sees a huge interest from the involved banks in creating green financing products, one of the cases that banks are particularly interested in understanding is how a future pricing mechanism could work. She explains that the smart contract takes the sustainability data tracked on the blockchain and, using sophisticated algorithms, calculates a supplier’s sustainability rating. “The idea is that the better the rating the supplier achieves, the lower the financing rate, so the closer it will be to, for example, Sainsbury’s or Unilever’s normal cost of borrowing. The better you do, the cheaper the price.”
This could bring remarkable savings on financing for suppliers. Some of the Malawian tea farmers in the pilot, for example, today can only access working capital at a rate of 30 to 35%. One of the key datatypes that the pilot will be assessing is land ownership and various impact metrics that come with having verified smallholder land ownership. But going forward, the technology could record a range of other types of data, such as satellite data to measure deforestation, censor data to measure pesticide levels and other sources to record labour standards.
“At the moment, banks don’t really measure or look at any of that. There aren’t really standards that are connected into the level of financing that they are giving. The financial system hasn’t reached that point yet where they say, ‘if we have transparency, we could lower the risk factor’,” Tatchell says. “What we’re trying to do is to change the business model and actually say that the lending criteria can be different, because there is a different level of transparency and trust in the system.” The degree to which banks will be able to offer better rates or easier access to credit based on the evidence of sustainability supported by the blockchain is still something that is to be determined.
But Tatchell emphasises that the aim is not to make banks subsidise green lending. Instead, Halotrade is looking to prove that it is good business for financiers to reduce the cost of lending for responsible suppliers. “If you subsidise green lending, it’s only going to have a very short life. So it’s really important that this is all profitable business for everyone. It’s about seeing that it’s helping their customers,” she says.
Measuring carbon footprint with the internet of things
Another way in which emerging technology is set to revolutionise global supply chains is through the use of smart devices and sensors – also known as the internet of things, or IoT.
One tech firm that is utilising the opportunities brought about by IoT is Arviem. The Switzerland-based firm installs smart IoT sensors on containers and cargo to collect data on anything from the location of the goods, to disturbances and conditions such as humidity and temperature. It combines this data with its advanced analytics platform and a range of other data sources (such as weather data) to help business professionals make decisions around their logistics supply chains.
Although sustainability was not the tech firm’s main focus when it was founded 10 years ago, it was a natural space to expand into last year, explains Stefan Reidy, the co-founder and CEO of Arviem in an interview with GTR. “Our main offering is cargo monitoring, but because we collect so much data from the edge of the network, we can start offering additional services, and one of them is carbon footprint.”
In short, the company is able to use smart sensor data to measure the carbon emissions of firms’ logistics operations, thereby empowering them to implement changes to minimise their environmental impact, if it is deemed excessive.
Reidy says that while other firms are already attempting to calculate the carbon footprint of logistics operations, they typically do so based on average planning data rather than real-time transport monitoring. The integration with hardware – the IoT sensors – makes Arviem’s calculations more accurate.
“There are companies out there that calculate carbon footprint today based on software. They collect data from Maersk and other sites and they do an average calculation of an average vessel on an average distance. So it’s just an estimate, which is okay,” he says. “We’re improving that now, because we know quite precisely the distance. It makes our calculation much more granular, more precise.”
The firm developed its carbon footprint solution together with food and drink conglomerate Nestlé, and after launching it last year, the service is now being offered to all Arviem’s users.
But although the company is providing firms with greater insight into their carbon footprint, quite how that translates into more sustainable trade is a whole other matter, Reidy explains. “That’s now up to our clients to decide,” he says.
Thus far, however, it appears that the technology is having an impact. The company is already seeing clients actively choosing new routes or making changes to optimise container loading in an effort to shrink their carbon footprint – but only when it also makes sense from a cost or quality perspective.
“Carbon monitoring has to be in combination with other things as well,” Reidy says. “Let’s say you have a shipment going out of Europe to the US. You could go by Rotterdam, south or north of England, or you could take another vessel which goes first to the Bahamas. All these different routes you can now analyse from different aspects: performance of the carrier or the logistics service provider from a cost perspective and then also the carbon footprint. It’s the combination of all these different parameters that you’re going to look at to make your decision,” he says.
Perhaps the biggest challenge is that most firms still consider a smaller carbon footprint to be a question of improving their brand image, rather than a viable business case, Reidy explains. Nevertheless, the tech firm is seeing great interest in its offering, and is already looking to expand into other areas, such as risk profiling and financing. The firm is also exploring new data sources, by for example, partnering with technology firms that track fuel consumption directly on the truck or vessel.
Among its next initiatives, Arviem is developing a supply chain finance solution which Reidy describes as a matchmaking platform where financiers and investors can bid on financing for shipments based on their risk profile, calculated using real-time sensor data, historical data, as well as the value and type of cargo. The sophisticated algorithms and range of data will in essence “make assets in transit financeable, which is not doable today”, Reidy says.
“Whenever people talk about supply chain finance they are mainly talking about factoring. The cargo has arrived, the invoice has been accepted, and then you take that to the bank or somewhere else and they finance the remaining terms of the deal. But nobody is really financing the cargo from the beginning.”
A shipment’s carbon footprint may well play a role in defining the risk and price of the financing. In particular, Reidy expects this new solution will draw interest from the growing base of impact investors around the world. But ultimately, he says, it will be “the market that decides what kind of data it needs”. The platform is scheduled to be launched next year.take me back