Sustainability Pays, But It Took A Pandemic To Prove It

It’s hard to take many positives from the past year, but a rapid rise in the number of consumers who say the pandemic has inspired them to shop more sustainably in the future provides the glimmer of a silver lining.

According to a recent study by Mastercard across 24 countries, 58 percent of consumers say they have grown more conscious about their impact on the environment since the pandemic. Eighty-five percent said they are willing to take personal action to combat environmental and sustainability challenges in 2021, and for a quarter that action included refusing to shop with companies that do not have a solid ethical and environmental credentials.

Companies like Unilever have long espoused a mantra of ‘doing well, by doing good.’ That strategy is bearing fruit. Unilever recently stated that its sustainable brands are growing 50% faster than the rest of the business. Investors are increasingly looking to cash in on a trend they believe will continue to gather momentum.

“Companies with better ESG profiles are performing better than their peers, enjoying a ‘sustainability premium,’” Larry Fink, Chairman of BlackRock—the world’s largest asset manager—said in his 2021 open letter to CEOs. “The more your company can show its purpose in delivering value to its customers, its employees, and its communities, the better able you will be to compete and deliver long-term, durable profits for shareholders.”

For some time now, companies have been encouraged to include ESG metrics within company reports. But evidence to back up claims is frequently subjective, and in many cases almost entirely absent. Lack of proof has alarm bells ringing among some would-be investors. According to a survey by the Index Industry Association, 63 percent of investment companies believe a lack of quantitative data remains a major obstacle to effective ESG implementation.

Cynics will argue that companies are deliberately withholding information in order to make false claims. Research conducted by the European Commission found 42% of ‘green’ claims made on company websites included information that was false or misleading. There are bad actors out there. But for many companies it’s simply too hard to gather the right level of data to ensure that good intentions are backed by solid data. That’s particularly true when it comes to the supply chains many large organizations rely on to bring goods to market.

Despite rapid advances in technology, supply chains are heavily reliant on the transfer of paper-based documentation. During the pandemic, paper was a huge cause of bottlenecks as warehouses shut down and companies couldn’t access documents that told them when they were going to get paid or where goods they needed were in their supply chains. Such documents are also prone to forgery, and are of little use in establishing an effective audit trail that can be used to track provenance.

A study by Deloitte found 65% of organizations have limited or no visibility of their supply chain below tier one suppliers. With anywhere between 80% and 90% of a company’s environmental footprint originating within the supplier base, businesses of all sizes are facing mounting pressure to commit to greater transparency across value chains by publicly disclosing sustainability data.

In June, Germany adopted a draft Bill of the Supply Chain Due Diligence Act, on companies based in Germany with more than 500 employees to ensure that social and ecological standards are observed through all tiers of the value chain. Similar legislative proceedings taking place in numerous European countries, as well as at EU level.

Regulation will help to accelerate the transition toward a more digitally connected supply chain ecosystem where organizations can no longer use ignorance as an excuse for unsustainable or unethical behaviours in their supply chains.

Greater transparency will also mean procurement practices that focus purely on extracting maximum value at minimum cost will come under the spotlight. As resilience planning merges with long-term sustainability goals, a move toward shorter supply chains and increased supplier compliance will increasingly gather momentum. This reconfiguration will go hand in hand with a far more collaborative relationship between buyers and suppliers.

Identifying and punishing suppliers for failing to meet sustainability criteria is one way for companies to clean house and bolster their own ESG credentials. But if large organizations really want to bring about change, they also need to consider ways to provide suppliers with the tools they need to become part of the solution.

Some businesses are choosing to invest their own capital directly into supply chains to improve working practices. But not every business will have that luxury. Supplier financing provides an alternative route.

By digitizing the relationships between buyers and their supply chains, organizations – through a financier – can offer cheaper lines of credit to suppliers willing to align themselves with sustainability goals. Suppliers get the capital cushion they need to make improvements to their working practices. Buyers get to keep hold of capital they may need to improve their own processes. Everyone wins.

Human beings have a terrible track record when it comes to learning from history. But there's plenty to suggest this time could be different. There’s strong evidence that businesses with higher ESG performance were better equipped to handle disruption from the pandemic. As companies look to build resilience to future shocks, COVID has given them a ready-made blueprint to follow on how to make sustainability pay. For many companies this will be enough to accelerate change. For those still left on the fence, pressure from consumers, investors and regulators is likely to be enough to ensure that doing the right thing, and having the data to prove it, becomes a license to operate.

(Christian Lanng is the founder and CEO of Tradeshift)