Many of us rarely see the origins of the stuff we consume. Whether it’s the processing of our food or the sewing of our clothes, these activities take place in distant warehouses — out of sight, out of mind. For the lucky ones at the demand end of industrial value chains, this ignorance is bliss. But on the supply side, industries have cataclysmic impacts on the climate, landscapes and communities. The ability to manage and mitigate these environmental and societal impacts, commonly referred to as ESG (environmental, social and governance) issues, has rightly emerged as a material risk for companies and a cause of concern for consumers and investors.
Innovative digital tools deployed at scale can help bring much-needed transparency to international supply chains, ensuring that progress toward a clean energy future also delivers broader progress in social and environmental well-being.
Human rights abuses such as child labor and modern slavery occur with alarming regularity along material supply chains. Consider cobalt, used in a wide range of consumer items, including in most lithium-ion batteries. Today, 60 percent of the world’s cobalt comes from the Democratic Republic of the Congo, where 20 percent of mining relies on child labor, involving 40,000 children. Addressing these problems requires creating traceable supply chains to drive transparency and empower better procurement choices among manufacturers, investors and consumers.
For the lucky ones at the demand end of industrial value chains, ignorance is bliss.
The global energy transition cannot succeed without the allyship of the communities most vulnerable to the negative impacts of extractive industries. Taking a broad vision of equity and justice in supply chain accountability by defining “sustainability” to include all ESG factors is therefore mission-critical to achieving global climate targets and building a climate-safe future. To ensure that progress on the climate front does not hinder progress in other areas of the ESG realm, impacted communities need to be supported and given a voice in the design of solutions.
So how do you start to change a century-old paradigm in which commodities are made to be interchangeable and, by extension, anonymous? After all, the materials used in our computers, smartphones and electric vehicles — such as aluminum and lithium — do not arrive at the manufacturer stamped with their provenance like bottles of wine. Fortunately, the answer is not very complicated: Let the data follow the goods.
An old-school problem with a new-school solution
A rising tide in greenhouse gas (GHG) reporting is already driving new traceability initiatives in supply chains. In the Horizon Zero project, RMI’s Climate Intelligence Program is building an open-source blockchain data architecture to track embodied greenhouse gas emissions along complex chains of custody. The system will allow high-carbon commodities to be distinguished from lower-carbon alternatives, enabling buyers to procure responsibly while rewarding producers for reducing the carbon footprint of their operations. Horizon Zero will make emissions visibility accessible and actionable for the world’s most carbon-intensive products.
But next-generation reporting technologies such as Horizon Zero also have the capability of recording key ESG data, shining light on a greater breadth of impacts than climate alone. These technologies can deliver accountability beyond carbon and greenhouse gases to more stakeholders, including mining-affected communities.
RMI’s Climate Intelligence Program is building an open-source blockchain data architecture to track embodied greenhouse gas emissions along complex chains of custody.
Under current industry practice, ESG reporting operates like a game of telephone, whereby incomplete information passes from company to company in an ad hoc and unstandardized manner. Transforming this status quo into a scalable, digital and decentralized reporting system would allow ESG factors to be linked to products at each step of a manufacturing process, with digital barcodes that flow seamlessly along the chain of custody. This traceability would allow for ESG- and climate-differentiated products on an unprecedented scale — and finally allow the price of commodities to reflect their full environmental and social costs of production.
In many respects, the challenge is not so different from what has already been addressed in several cases across the food or apparel industry. Much of the coffee and chocolate found in ordinary grocery stores bears information about its country of origin, and more specific information is often readily available. Clothing manufacturers frequently publish detailed information about their manufacturing operations, including codes of practice meant to ensure safe and fair working conditions.
But basic accountability in these supply chains remains the exception rather than the rule. For nearly all commodities, even “sustainable” ones, the market transfers only goods, not data.
Steps toward a new paradigm
Imagine that an automotive company had access to data on the steel it purchased, including data on GHG emissions, waste management, water use, labor practices and worker wages. Imagine the carmaker discovered its supply chain contained instances of forced labor: Would it still source cobalt from the same suppliers? The fact that these issues of provenance remain unknown is a significant risk to all firms with a basic commitment to “sustainability.”
Meanwhile, the policy landscape is rumbling with tectonic shifts in sustainability disclosure. In February, the European Commission announced its plans to mandate corporate environmental and human rights due diligence, finally bringing these matters to an unprecedented level of scrutiny and compliance. In March, the US Securities and Exchange Commission released the initial standard for mandatory reporting of greenhouse gas emissions for all listed companies. These changes promise to further accelerate the coming transformation.
Meanwhile, the policy landscape is rumbling with tectonic shifts in sustainability disclosure.
At the end of the day, delivering sustainable supply chains is critical to ensuring a just and equitable energy transition. A generation from now, manufacturers will likely look back with incredulity at a time when supply chains were black boxes. Twentieth-century commodity markets will finally begin to open up to let buyers look under the hood — allowing producers, manufacturers and consumers to make informed choices and take responsible action to support all stakeholders.
As this progress unfolds, having a system in place to track ESG information along supply chains will be crucial to enable transparent sharing and reporting of data. As part of a separate but complementary project, RMI plans to expand its work on GHG emissions tracking through the Horizon Zero project to also track ESG attributes. Although the accounting challenge for ESG data looks different, it will only be possible to generate the market signals to reduce the unintended impacts of our mode of production if environmental, social and governance issues are in plain view. Full supply chain traceability is the first step toward creating differentiated markets, and we’re well equipped to address the problem.
May 4, 2022 at 01:41PM