The Quest to Quantify Sustainability Will Fuel a Transparency Arms Race
Optimistic sustainability goals will push companies to be more transparent about their supply chain operations
A hearty welcome to the fifth edition of The Logistics Rundown, a weekly digest that aims to put some perspective on what’s brewing within the logistics industry. This is a space where we religiously dissect market trends, chat with industry thought leaders, highlight supply chain innovation, celebrate startups, and share news nuggets.
Imagine going to a clothing store, rummaging through their collection for a nice pair of trousers. Maybe you're motivated to choose a brand that comes with a 'locally made' sticker on its trousers. It's not like you'd have to search long for finding one. Companies recognize the growing demand for sustainable and ethically sourced labels, reflecting on product lines today.
You're happy with your trousers. They look great, are locally-made, and also environmentally sustainable. At least, the label says so. But herein lies the problem—the definition of sustainability. What if the said brand bought its raw material from suppliers in Asian sweatshops? Or if the brand looked at diversifying its sourcing patterns with the intent of minimizing costs, even if it came at the expense of increased transport-related emissions?
Here's a leading fashion news outlet on how pointless labels could actually be in the European merch market:
In a world with increasingly complex supply chains that can span several countries, a jacket sold by a European brand can be manufactured in a cheap and relatively unregulated labour market like China, but finished and packaged in France or Italy, thereby earning a ‘Made in France’ or ‘Made in Italy’ label. Indeed, according to European Union regulations, companies need only spend a certain amount manufacturing a good in a certain country in order to qualify for local ‘made in’ labelling.
While labels, in general, do allude to something concrete, a 'sustainably sourced' sticker does not mean anything tangible. For instance, for food to be certified 'organic,' producers must attest to strict federal regulations that require attention to detail at all stages of the supply chain.
With sustainability meaning different things for different people, quantifying the term becomes paramount. Enter ESG reporting—an articulation of data explaining the impact a business has on three distinct areas: environment, society, and governance. These three factors can gauge a company's future in terms of sustainability and its financial performance in the context of the risks it takes on and the returns it can expect. (For all sense and purposes, we would only be digging into the environmental aspect of the ESG report on this newsletter.)
Enter ESG reporting—an articulation of data explaining the impact a business has on three distinct areas: environment, society, and governance.
Today, companies release their ESG footprint as part of their annual sustainability report, choosing a few (mostly favorable) metrics to highlight year-on-year improvement. For instance, companies may decide to talk about their primary carbon emissions, often showing how they've taken steps to curb emissions and the success they've got from implementing those measures.
However, ESG reporting should be taken with a pinch of salt, as the reports are largely shackled by their assessment limitations. While ESG results are indeed audited by premier firms, the audit in itself is seldom comprehensive. This has to do with the fundamental lack of visibility that most companies have beyond their operations—and in some cases—beyond their next-tier suppliers' operations.
The essential question is this—how can a company declare the environmental impact that it cannot measure? To answer this, The Logistics Rundown spoke with Data Gumbo, a company primed to alleviate the complexities of quantifying sustainability across entire supply chains.
The essential question is this — how can a company declare the environmental impact that it cannot measure?
"Think of a remote drilling site of an oil & gas company. The company brings in diesel that is used as fuel for the drilling rigs. This fuel is brought in via trucks. Apart from measuring the diesel burnt within its rigs, how does the company measure the fuel burnt by the vendors while getting it to the site? Every one of the ESG standards in the market today has a greenhouse gas Tier 1 and Tier 2 element to it," said William Fox, the chief product officer at Data Gumbo.
Fox contended that companies can automate data reception for ESG reports instead of running an entire analyst wing to manually collect data. Smart transactions based on digital contracts can help companies directly capture metrics—like fuel volumes, fuel costs, and delivery time stamps. Real-time automated data collection also simplifies auditing processes, as companies can easily pull up relevant information for audits.
That said, the bigger problem is finding data from related supply chain stakeholders, as it would require far greater transparency and close-knit tier relationships. "Data isn't within one company, it is within the whole supply chain, and we have to get that data to have a better estimation of the ESG footprint," said Andrew Bruce, the CEO of Data Gumbo.
Accessing data that is far removed from the company in question would require inter-tier trustability. And data accessibility aside, data measured by different stakeholders must also conform to specific standards, helping them stay interoperable. Blockchain and associated standards could be an answer here. Being an immutable ledger with decentralization at its heart, blockchain networks can help companies come together to share data, undoing issues with trustability.
Accessing data that is far removed from the company in question would require inter-tier trustability. And data accessibility aside, data measured by different stakeholders must also conform to specific standards, helping them stay interoperable.
"Companies with access to data can push quarterly reports that are public-facing and searchable. For instance, they can put out data on their total fuel burn, total emissions, water usage, and safety incidents," said Bruce.
While inherently proprietary data on a private permissioned ledger between companies and vendors cannot be shared, companies can take these internal private data blocks and create a public block that anyone can pull up and gain insights—including audit firms looking to inspect underlying data. Apart from helping companies stay transparent and compliant, it also increases a company's public standing and capital availability, like the impact investing pool. Bloomberg estimates that investment within the ESG market will double in 2021, with roughly 12% of investors jumping bandwagon to ESG-related funds.
"I think there's going to be a transparency arms race," mused Fox. "ESG reports are not going to be an afterthought, and depending on the industry you're in, there's going to be a relentless push to be more and more transparent and closer to reporting in real-time."
The Weekly Roundup
🚢 The Mediterranean Shipping Company (MSC) is about to displace AP Moller-Maersk as the world's largest container shipping line. MSC has at least 35 deep-sea vessels on its order book for a combined capacity of nearly 660,000 TEUs. In comparison, Maersk has only 16 regional ships that total roughly 42,000 TEUs. With the capacity gap between the two container lines today around 225,000 TEU, MSC is all set to become #1 shortly—unless Maersk adds more vessels to its order book in the meantime.
🛍️ US retail sales have exploded, rising 9.8% in March due to the higher spending in bars and restaurants that are now slowly opening to full capacity since the pandemic. The government stimulus checks have had a marked effect on spending, even as the country registered its lowest unemployment insurance claims since last March. As demand continues to stay strong, capacity strain and high freight costs across the transport corridor will likely sustain.
🚚 US trucking companies have been rushing to sign on more drivers, as tight freight capacity and rising freight costs push firms to add more capacity to their fleet. Wages for recently certified drivers have increased by 40% or more over this year, with driving school graduates earning more than $60,000 a year after their first year of training. Trucking demand is expected to hold firm through the summer as the US economy is starting to climb back from pandemic-imposed lockdowns.
⚓ While port congestion and slowdown were expected across North European and Asian ports as an aftermath of the Suez Canal crisis, early indications have reflected the opposite. Port terminals have shown resilience in managing the rising inbound vessel numbers without significant holdups. Port of Rotterdam, the largest port in Europe, had a rolling port call average of 77 ships a day, with port operators bracing for a rise in vessel numbers over the next few weeks.
🔴 Goldman Sachs has come out with a bullish prediction that the price of copper will go up by more than 60% in the next four years to $15,000 per ton. Copper prices have been on a tear over the last year, thanks to widespread anticipation of a surge in copper demand due to the electric vehicle market's growth. The depreciating value of the US dollar and the Biden government's push for infrastructure are also expected to increase the metal's price.
"In the past, there may have been supply chain officers in organizations, but many times they were the head of logistics or head of warehousing and also had the title of supply chain officer, but they weren't managing supply chain."
- Jörg Schaefer, global retail supply chain leader at EY, commenting on the rise in importance of Chief Supply Chain Officers (CSCOs) in organizations due to excessive volatility witnessed in the markets today.
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