How DLT Can Help Businesses Meet Their ESG Commitments

May 09, 2022
Digital Transformation

Businesses are increasingly turning to advanced technology tools to facilitate seamless data flow, which in turn provides a visible track of compliance through the entire length of their value chain— Enter DLT.

Credit: iStock/Khanchit Khirisutchalual

By Srikumar Ramanathan, Chief Solutions Officer at Mphasis

Nearly two decades since the term ESG was coined in a groundbreaking report called, Who Cares Wins, mindful and planet-affirmative investing has become both smart and mainstream. Whether it is individuals or businesses, financial institutions or investors, regulators or insurers, everyone in the ‘economic community’ is aware making ethical decisions is no longer just ‘wokeness’—it makes good business sense too.

The pandemic has only further strengthened this realization. Capital flow into ESG funds more than doubled during 2020. In the U.S. alone, ESG funds captured roughly USD 51.1 billion in new investments—accounting for more than 25 percent of all money invested in U.S. mutual funds in 2020. This surge in interest and commitment to ESG investments makes it clear that enterprises must prioritize adherence to ethical environmental, social, and governance parameters to stay in the calculation.

Evident though this may be, it is no easy task. From an enterprise point of view, supply chains particularly over the last few years, have become ever more interlinked, complex, and global. This has expanded the scope of regulatory requirements businesses need to consider and concomitantly increased their concerns regarding risk management. As a result, there is a growing need among companies to gain a bird’s eye view of their operations, to continuously identify potential weaknesses, and look out for environmental, social, and governance (ESG) risks across the entire length and breadth of their value chains.

Moving towards a stakeholder approach

What has accelerated this need for ongoing and reliable scrutiny of international supply chains, especially in the wake of the pandemic, is the shift taking place in both society and business from a largely shareholder to a stakeholder approach. Pursuing business purely for raw profit is now outdated. In its place is a growing appreciation of the connectedness of the three P’s and the need to place business ethics, production processes, and corporate practices within a humane and sustainable framework for everyone concerned.

Yet given the global expanse of current supply chains, businesses understandably struggle to keep up. The smallest breach has the potential to undo hard-won reputations among stakeholders, have a domino effect on other entities in the chain, and cause unanticipated financial and other reversals. Take for example the criticism of some of the world’s leading fast fashion labels, including Boohoo and Zara, have faced for churning out inexpensive, disposable clothing with limited regard for the environmental or labor conditions. Consider how Swedish retail giant H&M was marked by the Norwegian Consumer Authority recently for ‘greenwashing’.

In addition to the impact on reputation and costs, are the legal obligations businesses face in some parts of the world to disclose the impact and legitimacy of their value chains? This can often further stretch an enterprise’ resources and be both expensive and cumbersome.

Enabling data flow with advanced tech

Enter smart, intuitive tech platforms enabled by Distributed Ledger Technologies. Businesses are increasingly turning to advanced tech tools to facilitate seamless data flow, which in turn provides them with a traceable track of compliance through the entire length of their value chain.

In the context of ESG, a trackability function takes on special relevance as ESG data is on the whole non-standardized, frequently inconsistent, and often unverified. This is because there are no commonly accepted international standards as yet for ESG data, audit approaches are inconsistent, and few small-scale companies are able to report any ESG measurements.

Empowering visibility and transparency

COVID-19 with its restrictions on travel and lockdowns threw a wrench in the wheels by further frustrating the collection, analysis, and sharing of ESG data. It is in this context that DLT and blockchain promise to skillfully address concerns around record keeping and transparency by offering a platform that is both auditable and transparent. As it is decentralized, immutable, transparent, and effortlessly compatible with other technologies, networks built on DLT offer every entity on a value chain—continuous and reliable visibility into every transaction that takes place anywhere. 

This helps businesses ensure they can assess, track, prevent, and manage potential risks that could otherwise tar their bottom line and reputation while providing stakeholders with access to their performance on ESG parameters.

Already, varied industries, from fashion and fine jewelry to technology, are leveraging the advantages of DLT to improve data flow in their supply chains, monitor ethical sourcing, track provenance, and incentivize sustainable production practices.

As the world emerges from COVID-19, supply chain networks built on DLT will help businesses ramp up by providing them with the visibility and oversight they need to prevent mishaps and optimize sustainable accountable and ethical growth.

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