A consortium of international banks, corporates, fintech startups, an NGO and a research institution has released a new model for blockchain-enabled sustainable supply chain finance, called Trado.
Led by the University of Cambridge Institute for Sustainability Leadership (CISL), the group includes BNP Paribas, Barclays, Rabobank, Sainsbury’s, Sappi, Standard Chartered, Unilever, as well as technology companies Provenance, Halotrade and Meridia, and IDH, a sustainability NGO.
Since the beginning of the year the group has been exploring a new supply chain finance structure in which new technologies such as blockchain and smart contracts are used to collect and record social or ecological data on suppliers, who in return get preferential access to trade finance.
The aim of the model is to drive more transparency in global supply chains and encourage sustainable production processes through supply chain finance.
The model was tested in a live pilot which saw the usage of blockchain technology to track tea from farmers in Malawi being sold to Unilever and financed by BNP Baribas. It was done on an Ethereum-based blockchain solution developed by Provenance, a social enterprise that helps firms track their supply chains using blockchain, and Halotrade, a fintech firm that uses smart contracts to convert supply chain sustainability data into automated access to trade finance.
The pilot saw Meridia, a data collection company, collect a range of data on the individual smallholder farmers supplying the tea, all verified by IDH. This included democratic data (such as gender and educational level), economic data (for example, type of transport and source of income), financial data (such as savings and borrowing) and agricultural data around the crop. All information was recorded on the blockchain using Provenance’s application. Furthermore, production data (quality, quantity, date, price and sample approvals) were provided by Unilever’s direct supplier, in this case a local tea factory, recorded on the blockchain and shared with Halotrade’s system to enable invoices to be approved earlier than usual.
In return, the local factory was given earlier access to Unilever’s supply chain finance programme. This is what the Trado model calls a “data-for-benefits swap”.
“It’s all about data,” Shona Tatchell, CEO and founder of Halotrade, tells GTR. “It’s all about being able to have the data verified and shared across the supply chain with all the parties that need to be able to see it, and trusting the data you see. We then used that data to understand at what point we could enable an earlier payment of the invoices, in order to help reduce the working capital cost of the factory.”
The sea of data generated through the Trado model is important for a buyer like Unilever for several reasons, Tatchell explains. One, a buyer can make the information available to prospective shoppers to increase sales (a small consumer test conducted by the Trado group showed that consumers would prioritise products that communicated a positive impact at smallholder level). Secondly, a buyer can use the data to prove to regulators that it is compliant with environmental and labour standards.
And finally, which is what the Trado model served to prove, the improved visibility can give the buyer confidence to instruct its bank to release supplier financing early, namely as soon as the goods have been produced. Under traditional supply chain finance programmes, a buyer only approves financing for a supplier once the goods have been boarded on a ship and the buyer has received relevant documentation such as the invoice and bill of lading.
Outlining the model in a new report (titled Trado: New technologies to fund fairer, more transparent supply chains), the consortium explains:
“In the period between producing the goods and those goods being boarded, a supplier would normally need to rely on more expensive local financing. With the Trado model, however, the supplier can borrow sooner at the buyer’s lower rate from the buyer’s bank when the goods have been produced.”
In the Malawi pilot, this time difference was 35 days, the report adds.
“We’ve been able to give Unilever the visibility of the contract being fulfilled, and they know everything that they could possibly want to know about that tea,” comments Tatchell. “It’s because of that trust and transparency that Unilever was prepared to take the pre-shipment risk and give a payment obligation to its bank before the goods had even left the factory.”
Being able to receive supply chain financing 35 days earlier provided significant savings for the factory, which was reinvested in sustainability initiatives in the farming community. According to the consortium, Trado generated up to a 3% increase in tea farmers’ income and invested in sustainable farming training.
Banking as usual?
So far, Trado has only explored the possibility of paying a supplier earlier, not at cheaper rates than a bank would traditionally offer. In fact, the report notes that the Trado model does “not create any material disturbance to business-as-usual banking processes”, meaning there are no changes in the underlying risk evaluation.
However, the report says that data generated through the model could be analysed to identify whether the credit risk is better for suppliers performing well from a sustainability perspective. If so, that might lead to preferential financing by banks through a change in their credit risk.
Tatchell explains: “The next challenge is to see whether the bank could or might improve the pricing, based on the score of the supplier’s sustainability rating. If you are scoring suppliers, banks can adjust interest rate relative to how well a supplier is performing.”
But she notes that in order for this to be a viable long-term solution, there is a need for the involvement of regulators. “At the moment, if you ask a bank to adjust the pricing, you are asking them to subsidise green finance, because the capital regulation doesn’t currently give any benefit for transactions being deemed to be green. We specifically did not want to ask the banks to subsidise this,” she says.
While the consortium has now released the new model, the involved banks have not been specific as to whether they will launch any new products based on Trado.
“For banking, the new technology has potential to offer better data, and therefore better oversight of transactions,” says Jacques Levet, Emea head of transaction banking at BNP Paribas. “A future application might be to enable compliance with domestic regulations such as the Climate Change Act, Modern Slavery Act and Bribery Act in the UK. Improved access to sustainability data could also help to attract clients wishing to demonstrate social and environmental leadership.”
Speaking to GTR, Thomas Verhagen, senior programme manager at CISL, says the Trado model is open for anyone to adopt, even those who are not part of the consortium. It is hoped this will help drive the model’s success.
“The idea was not to keep this knowledge but to share it in such a way that there is not IP protection, other than people need to attribute it,” he says. “You can change it and use it for commercial purposes. That helped us with the consortium, because everybody knows they can use everything. Secondly, it will hopefully help for a larger uptake of the Trado model.”