Digital transformation steers supply chains towards a more sustainable future

Sriram Muthukrishnan, group head of product management, global transaction services, DBS, explains how digitisation is accelerating the sustainability agenda.

organic cotton procurement financing

Digitisation and the advanced digital technologies at the forefront of the fourth industrial revolution will not only enhance the efficiency and connectivity of global supply chains, but also hold the potential to enhance sustainability across these arterial networks. 

This is a hugely important benefit for companies as they seek to align their business processes and practices with an improved sustainability agenda, informed at the highest level by the United Nations Sustainable Development Goals and national policies or regulations. Organisations like DBS have further sharpened definitions to ensure a robust taxonomy and common framework.  

Regulators, investors, end-customers and various other stakeholders are driving an increased expectation from companies to adhere to better business practices with measurable sustainable outcomes.

By leveraging digital solutions to aid visibility and transparency of both supply chains and adherence to sustainability metrics, companies can expect to deepen engagement with their customers, reduce risk and imbue trust across their supply chain stakeholders, ultimately creating continual business growth. Just as importantly, sustainability practices and corporate responsibility can deliver positive impact to the natural environment, society, and economy over the long term. 

There is no better time than now for companies to seek to increase their sustainability credentials. With the proliferation of digital technologies, banks and corporates alike can analyse and interpret massive amounts of unstructured data, filtering out irrelevant information at an unprecedented speed and scale and at a lower cost, which in turn lowers the barriers of entry to being sustainable.

For all constituents of the supply chain, it’s a win-win situation. Suppliers get paid promptly and are incentivised towards positive change in exchange for more or cheaper working capital through supply chain programmes with banks. At the same time, large buyers optimise their payment terms, improve their working capital and meet their environmental, social and governance (ESG) goals. 

At DBS, we are a firm believer that issues such as climate change and sustainability are not only to be tackled at the industry or government level but also in businesses’ day-to-day operations to truly see productive change. Indeed, we are the first commercial bank to publish a Sustainable and Transition Finance Framework and Taxonomy to help facilitate the categorisation, monitoring and reporting of financing of sustainable activities, and to engage with customers to help them adapt to climate change, resource scarcity and income inequality.

What does this mean in practice? A good example is the partnership DBS has created with Inditex, one of the world’s largest fashion retailers, to launch an organic cotton procurement financing pilot programme. DBS provides financing for farmer producer organisations to procure organic cotton in a timely fashion through a fully traceable and transparent digital supply chain finance solution.

This gives farmers greater visibility of their cash flow, enabling them to better plan their business needs, grow their sustainable farming operations and reduce environmental damage. The solution also allows Inditex to meet its sustainability goals, builds resiliency into its supply chains and enables it to offer a high quality sustainable product.

Track and Trace

Of all the benefits digitisation and digital technologies will bring, traceability is one of the most important, helping to create a safer, smarter and more sustainable ecosystem. 

Technologies such as distributed ledger technology (DLT), smart contracts, and Internet-of-Things (IoT) are showing real promise in this area. For instance, in addition to DLT being used to conduct a digital-physical twinning of supply chains, the technology is also being used in other important areas such as carbon credit trading

For example, DBS, in collaboration with Singapore Exchange, Temasek and Standard Chartered, have launched Climate Impact X, or CIX, which is a carbon exchange and global marketplace to provide corporates with high quality carbon credits. It is the world’s first carbon exchange and marketplace to use satellite monitoring, machine learning and DLT to help enhance the transparency, integrity and quality of carbon credits. 

Another example of where DBS is collaborating on sustainability is its partnership with Halcyon to launch a digital marketplace for the trading of sustainably processed natural rubber. This enables natural rubber producers and consumers to track pricing and supply information and transact directly on HeveaConnect, promoting greater price transparency in the industry. 

Underpinned by DLT, smart contracts are essentially pieces of software that enable parties in the supply chain to automatically execute pre-defined process flows or contracts when specific conditions are met, which helps to increase efficiency and certainty in business interactions. IoT allows the mass collection of relevant data which can trigger the smart contracts or aid in monitoring of the supply chains and adherence to sustainability KPIs. 
All in all, these digital technologies help to improve data flows, bridging information gaps and streamlining trade processes by enhancing transparency and traceability across entire supply chains. 

Addressing challenges

The case for greater sustainability, supported by digitisation, is compelling. Achieving it, however, is still not so simple despite the greater use and benefits of digital technologies. Accessing reliable supply chain sustainability data in particular can be challenging. 

This is partly because supply chains are complex. Most are multi-tiered, which limits access to information beyond the first tier. In fact, sourcing sustainability data is particularly difficult for smaller corporates in emerging markets that may not have the resources or economies of scale to deploy the necessary processes or technologies.

In addition, the largely paper-based trade processes – although improvements continue to be made under various private and public industry efforts, there is still a lack of standards in tracking and reporting. For instance, there are many areas of ESG activity that are not yet represented in easily reportable figures or industry agreed measurement criteria, and self-disclosure can be inconsistent and subjective.

Ultimately, industry bodies and government agencies need to define the data points that would help assess alignment to specific metrics and indices, acceptable taxonomies and definitions, best practices, disclosure frameworks, and benchmarking. These standards setting will help avoid ‘green washing’ and bring greater confidence in sustainability reporting.

Cross-border trade and sustainable supply chains require multiple trade players (government agencies, ports, carriers, corporate counterparties) to see through a single transaction end-to-end. In order to tackle collective challenges such as climate change or digitising the trade finance ecosystem, industry collaboration will be critical. 

While aforementioned challenges have been impediments to change, there is a clear collective will at the industry and regulatory level to address them, for example: The Association of Banks in Singapore (ABS) Guidelines on Responsible Financing, DBS’ Sustainable and Transition Finance Framework and Taxonomy amongst others as well as sector specific certification schemes, international best practices and conventions such as the IFC Performance Standards, World Bank Environmental Health and Safety Guidelines

With efforts from various international bodies, industries and banks alike, we are most definitely moving towards the right direction for a meaningful sustainable future.

This article was first published by Euromoney in August 2021.