Blockchain technology and supplier engagement can be used to enable reporting by small businesses
An assessment of ESG (Environment, Social and Governance) related performance of some of the best companies over more than 10 years reveals that there is a big improvement in scope, quality, and consistency of sustainability reporting by many public companies. Unfortunately, the same cannot be said about all the companies.
The latest data related to sustainability disclosure practices put out by The Conference Board, a non-profit business membership and research group organization, paints a bleak picture of how most companies in the Russell 3000 Index (and there is a whole universe of small companies beyond that) fail to report on basic ESG indicators such as emissions, water, and waste management. This ESG reporting divide clearly indicates that the sustainability or ESG reporting in corporations has failed to trickle down beyond the largest companies in each industry.
The situation of companies in Europe could be better than this, but in emerging markets and beyond the trend is likely to be similar or worse. Now before criticizing small businesses for this shortcoming, there is a need to try to identify why small businesses refrain from reporting their sustainability performance. Some of the major reasons are:
Most initiatives are aimed at large/ public companies: Two of the largest initiatives that have improved ESG reporting by companies in the last 10 years have been 1) reporting requirements put forward by the stock exchanges/ governments, and 2) ESG ratings considered by the investors for making investment decisions. Unfortunately, both these levers are applied mostly to publicly traded companies, which rules out the large universe of private companies from being impacted by these initiatives.
How can the companies contribute towards bridging this gap? The answer is not simple for sure, and more standards and more consultants will certainly not fix it as these are a part of the problem. We believe that large corporations can play a significant role in addressing this problem in the following two possible ways:
Blockchain technology, which provides immutable and transparent storage and sharing of information, can be utilized to create such frameworks for the benefit of entire supply chains or regional business ecosystems.
For example: A recent industry-level initiative is the battery pass project. The stakeholders from the electric vehicle industry – OEMs, battery companies, and chemical companies -- are banding together to create a blockchain-based platform where the suppliers will be able to record their environmental and ethical data that can be shared with all relevant stakeholders on a need basis. Another example of a consortia approach is where companies in the tea supply chain ecosystem came together to pilot a blockchain-based system where small suppliers are incentivized to report social and ecological data. There are several similar initiatives being taken in different industries with complex supply chains, but many more are needed.
This process can be made more inclusive if corporations start engaging with their suppliers on sustainability issues on a regular basis. They can encourage small suppliers to share the initiatives they are taking to address sustainability issues in their organisations. This will give confidence to these suppliers and mitigate the fear of greenwashing and allow them to record the initiatives and share the positive impacts that they are creating, with their clients.
This exercise will also strengthen the bond between the supplier and the client. Finally, if the corporation can share supplier success stories from such engagements with other suppliers or all stakeholders, it can create a wide impact among other suppliers as well. For example, sharing the positive impact the supplier can have by incentivizing employees to use public transport and then sharing the progress reported by suppliers on this front will encourage all suppliers to take such initiatives in their respective companies.
These initiatives can have a much wider positive sustainability impact that responsible corporations can drive, and will ensure that the ESG reporting gap starts to narrow down, especially on sustainability parameters that are most critical for their supply chains or business ecosystems.
(Sumit Kumar is the Founder of ESG Intelligence, a research firm involved in tracking ESG performance of technology companies and exploring how emerging technologies such as blockchain are being adopted across the world to create sustainable ecosystems.)