SUSTAINABILITY REPORT€¦ · External stakeholders are increasingly concerned due to the lack of...

SUSTAINABILITY REPORT

Outperforming Through Transparency and Traceability

SEPTEMBER 2018

SUSTAINABILITY REPORT: Outperforming through transparency and traceability 1www.climateadvisers.com

OVERVIEW

This paper explores the next natural step for consumer goods companies adopting traceability through the supply chain: full transparency for stakeholders, suppliers and consumers. We examine examples of risk mitigation, opportunities for value creation, and distributed ledger technology (DLT) solutions that are already in use.

MAIN DRIVERS

Creating visibility across the chain for company stakeholders, regulators, and the end consumer will open opportunities based on: Climate RiskExternal stakeholders are increasingly concerned due to the lack of information around climate risk. Traceability and transparency IT solutions can prevent surprises in the supply chain, leading to predictable revenue and earnings, and improved forecasting and budgeting.

Food SafetyThe financial impact of a recall in the U.S. can be substantial: 52 percent of all recalls cost more than $10M, and 23 percent cost over $30M, according to the Grocery Manufacturers Association. Transparency and traceability can play a critical role in containing the damage.

Access to capitalFrom a lending and investment perspective, the notion of traceability and transparency will grow in importance alongside the burgeoning field of supply chain finance and investors’ commitment to support the Sustainable Development Goals and Paris Agreement.

Brand loyaltyBrand loyalty can be established with open communication about sourcing. A recent study by Unilever found that 33 percent of consumers are now choosing to buy from brands they believe are doing social or environmental good, and 21 percent said they would actively choose brands if they made their sustainability credentials clearer. The trends represent a potential untapped opportunity of €966 billion ($1.3 trillion) out of a €2.5 trillion ($3.2 trillion) total market for sustainable goods.

TAKEAWAY

Consumer goods companies have an opportunity to stay attuned to their market, achieve significant efficiencies, and enhance relationships from the first link of the supply chain to the Point of Sale and beyond.

Executive Summary


CLEAR VIEW TO VALUE: OUTPERFORMING THROUGH TRANSPARENCY AND TRACEABILITY

Widespread adoption of distributed ledger technology (DLT) has catalyzed an evolutionary burst for supply chains. Companies in a range of industries are reaping the benefits of finely tuned traceability that was impossible until just a few years ago. Greater efficiency, cost reduction, and safety are among the key considerations – but those are the tip of the proverbial iceberg.

Full transparency in supply chains is the natural next step. Creating visibility across the chain for company stakeholders, regulators, and the end consumer will open opportunities for value while addressing active concerns around human rights, climate risk, and brand loyalty. Blockchain and other IT solutions offer a cost-effective tool that builds on the proven approach to traceability. Walmart, for example, is using blockchain in collaboration with IBM and its Food Trust platform to provide a standardized system for tracing shelved products back to their point of origin. According to Walmart’s Vice President of Food Safety, Frank Yiannas, “We believe transparency is the ultimate goal. Blockchain will give us the ability to not only track where food came from, but how it was produced. Was it produced safely? Was it produced responsibly? Is it sustainably grown?”1

With all consumer staple companies in the S&P 500 already using DLT to increase traceability, transparency initiatives are imminent. Forward-thinking companies can enact a “full transparency pledge” to create value on multiple fronts, mitigate climate risks such as those associated with deforestation, and enable improved due diligence.

1 WalMart’s food safety solution using IBM’s Food Trust built on the iBM blockchain platform (video), IBM Food Trust

Clear View to Value


The rising demand for detailed information on the nature and origin of products is making traceability and transparency an increasingly legal and commercial necessity.2

Provenance, a UK-based company that empowers brands to trace the origins and histories of products, has worked with more than 200 retailers and producers in the food and beverage industry. In one case, its platform enabled more than 12 pole and line certified seafood producers in SE Asia to track sustainably-sourced and slavery-free fish through the supply chain for UK, Japanese and U.S. markets. On the other end of the retail spectrum, Provenance partners with the UK’s largest consumer co-operative, The Co-op, to validate the origin and journey of the chain’s fresh produce.

In all cases, Provenance finds that transparency opens doors to improvements that are made visible by DLT. “We take a close look at reducing time wasted in supply chains, which is often caused by opacity,” says Laura Burnett, Community Manager at Provenance. “As different parties open up to one another, they begin to think about how many steps and players are involved in the chain.”

Such efficiencies are a natural outgrowth of better information. On a broader scale, consumer goods companies can also leverage transparency to create value based on improved food safety, access to capital, climate risk mitigation, and the increasingly prevalent consumer trust factor.

FOOD SAFETY

In 2015, the World Health Organization reported that approximately one in 10 people contract a food-related illness each year, with more than 400,000 dying annually from eating contaminated food. While food safety crises are rare, they are high profile public health threats and can devastate companies – even entire industries. According to the Grocery Manufacturers Association, the financial impact of a recall in the U.S. can be substantial: 52 percent of all recalls cost more than $10M, and 23 percent cost over $30M.3

The Value of Transparency

Farm-to-fork supply chains are historically complex and opaque, calling for extensive research to identify a source of contamination. As time is lost to track the source, brand loyalty collapses and competitors have a window to steal market share – the entire situation creates a deluge of material financial risk. Transparency and traceability can play a critical role in containing the damage.

Chipotle became notorious for food safety concerns that could be mitigated with improved traceability and transparency. From 2014 to 2016, average annual sales per unit fell 24 percent – equal to losing three years of earnings – due to its food safety record.4 The struggles continued when multiple incidents of illness were reported from May to October 2017; the company’s share price fell 32 percent while the industry around them grew by 6 percent.

Chipotle’s share price has still not fully recovered; once a robust $725 per share in 2015, it dropped in 2017 to $300 per share and now hovers below $500 per share.5 As the company’s value slowly rebounds, it is working to recapture consumer trust and industry standing: recent initiatives include an entrepreneurial accelerator program6 and a significant drive to reduce landfill waste in support of environmental goals.7

3 Capturing Recall Costs Measuring and Recovering the Losses, GMA, October 20114 Joe Nichols, Chipotle Food Problems: Three Years Earnings Lost, But Stocks Are Going Up, Jobs & Hire, April 15, 20165 Calculated April 4, 2018 using data from the Bloomberg terminal and from Nasdaq.6 Nick Statt, Chipotle is launching a food and farm tech accelerator program, The Verge, August 22, 20187 Cody Boteler, Chipotle Mexican Grill pledges 50% diversion by 2020, WasteDive, April 10, 2018

Source: GMA

52%of all recalls cost more than $10M

23%cost over $30M


The Value of TransparencyHad effective transparency systems been in place, the financial exposure for Chipotle might have been curtailed immediately – and the industry understands the risk. Nestlé, for example, is working with nine other large food companies to test IBM’s Food Trust solution. As the Wall Street Journal reports, “Data about harvests, processing, packaging and shipping is stored electronically on the blockchain system, which can allow trace-backs in seconds compared to days and weeks.”8

The FDA confirmed the critical nature of speed to source identification. “In the recent romaine outbreak, we did as much as we could possibly do but it took days and days to accumulate information and piece it together,” he said. “With blockchain, you can accomplish that in a matter of seconds.”9

CLIMATE RISK

While transparency initiatives are rising across industries, external stakeholders are still increasingly concerned due to the lack of information around climate risk.

This is particularly true of commodities linked to deforestation. Agriculture, especially the cultivation and production of palm oil, is well documented as a leading cause of deforestation, which accounts for nearly 15 percent of global greenhouse gas emissions – equal to the entire global transportation sector.

$941 BILLIONof annual turnover is dependent on

commodities linked to deforestation

8 Kim S. Nash, Farm to Cradle: Nestlé Experiments with Tracking Gerber Baby Food on the Blockchain, Wall Street Journal, August 1, 20189 Ibid.10 From risk to revenue: The investment opportunity in addressing corporate deforestation, CDP, November 201711 The Roadmap to Financing Deforestation-Free Commodities, World Economic Forum, June 201812 Gabriel Thoumi, CFA, FRM, Engage the Chain Case Study #2: IOI Suspended for Deforestation, ValueWalk, November 29, 2017

According to CDP (formerly the Carbon Disclosure Project), more than $941 billion of annual turnover is dependent on commodities linked to deforestation. Of companies disclosing to the organization, 87 percent identify risks from deforestation and 32 percent have already experienced the fallout from forest-risk commodities in the form of corporate losses and drops in share price.10

In the past, companies and financial institutions have relied on certification from third-party organizations like the Roundtable on Sustainable Palm Oil (RSPO) and the Forest Stewardship Council (FSC). These systems have played an integral role in mainstreaming ethical and sustainable practices in agricultural supply chains with the required market scale and comparability for banks and asset managers.

However, according to a June 2018 report by the World Economic Forum in collaboration with Tropical Forest Alliance 2020, “use of certification schemes among companies remains relatively low, which is problematic for financial institutions that rely on widespread coverage to have a large and diverse range of clients. In addition, a number of NGOs and leading operating companies are increasingly critical of existing schemes, with some companies moving to develop their own tailored approaches.”11

IOI Corporation, for example, was suspended by Roundtable on Sustainable Palm Oil (RSPO) for its subsidiaries illegally clearing land in Indonesia. The suspension prohibited the company from selling crude sustainable palm oil, which led to 27 of its largest buyers, including Unilever, Kellogg, Mars, Nestle, and Cargill, to suspend procurement contracts. This resulted in a 17 percent drop in market capitalization. Also, two months into the suspension, on May 10, 2016, Moody’s stated it “expects IOI’s earnings and profitability will deteriorate…if the suspension is not resolved swiftly.” Moody’s reaffirmed its Negative Outlook on IOI on August 11, 2016.12

Traceability and transparency IT solutions can prevent surprises like those experienced by IOI Corporation, leading to predictable revenue and earnings, and improved forecasting and budgeting. Source: CDP


The Value of TransparencyACCESS TO CAPITAL

Open-source DLTs that allow for traceability and transparency are prime candidates to alleviate concerns and substantiate labeling and other claims for third-party auditors, investors, financial institutions, regulators, and NGOs. From a lending and investment perspective, the notion of traceability and transparency will only grow in importance with the burgeoning field of supply chain finance and investors’ commitment to support the Sustainable Development Goals and Paris Agreement.

Cameron Prell, founding partner of The Coefficient Group, points to an inherent advantage earned by bringing clear, accurate, and traceable data to lenders and the financial markets. “Being able to demonstrate performance using production level data is inherently valuable to lenders,” Prell says. “That proof gives the buyer a path to paying a premium for their projected return on investment.”

Indeed, forward-thinking players are already leveraging transparency initiatives with capital sources. Unilever teamed with Sainsbury, Sappi and three global banks to better verify climate-friendly practices among tea suppliers.

“This technology has the real potential to help banks access more detailed and more reliable information about social and environmental impacts in a secure way, throughout the entire supply chain,” said Marguerite Burghardt, head of the Trade Finance Competence Center for BNP Paribas, in a statement. “This will benefit the en-tire supply chain ecosystem, enabling financial institutions to broaden the scope of their financing offers and to pro-pose financial incentives to their customer clients, based on their environmental and social standards.”13

BRAND VALUE

Consumer preference for transparency is clear, and brand loyalty can be established with open communication about sourcing. Technologies that trace and track products from farm-to-fork invite consumers into the process, showing them proof of sustainably and ethically sourced products well before the point of purchase.

13 Heather Clancy, Unilever teams with big banks on blockchain for supply chain, Greenbiz, December 13, 2017 14 Report shows a third of consumers prefer sustainable brands, Unilever, May 2017

A recent study by Unilever found that 33 percent of consumers are now choosing to buy from brands they believe are doing social or environmental good, and 21 percent said they would actively choose brands if they made their sustainability credentials clearer on their packaging and in their marketing. 78 percent of U.S. consumers say they feel better when they buy products that are sustainably produced.

Source: Unilever

78%of U.S. consumers say they feel better when they

buy products that are sustainably produced

Whether their concern is deforestation, water scarcity, or plastic waste, the trends represent a potential untapped opportunity of €966 billion ($1.3 trillion) out of a €2.5 trillion ($3.2 trillion) total market for sustainable goods.14

Transparency solutions that establish trust concerning sustainability and ethical practices claims are a significant part of the conversation at Provenance, according to Burnett. She cites by way of example the Grass Roots Farmers Cooperative, a U.S.-based meat producer that uses Provenance to allow customers to validate information through QR codes. “Their customers may only scan the product once to confirm its origin, and getting a clear picture establishes that trust immediately,” she says. “The customer may never scan the code again, but their allegiance to the brand has been solidified.”

Prell agrees that once transparency has enough critical mass in a competitive environment, consumers will lean heavily towards those willing to share information. “A Distributed Ledger Technology like blockchain shines a light on that production information,” he says. “If the market is more transparent, those companies with solutions in place are going to beat non-transparent companies every day.”


FoodLogiQ

HarvestMark Food Trust

Transparency Solutions in PlayDLTs are increasingly being brought to market to improve efficiency, limit fraud, and increase security in supply chains. Blockchain has become one of the most publicized technologies – although it remains perhaps one of the most mysterious as well. According to a 2017 HSBC survey, 80 percent of respondents that had heard of blockchain said they did not understand it.15

Simply stated, blockchain, similar to other DLTs, is a database replicated over a peer-to-peer network. What makes blockchain unique is that unlike other distributed databases, it is designed to achieve consistent and reliable agreement over a record of events between independent participants who may have different motivations and objectives. Put differently, “participants in a blockchain network reach consensus about changes to the state of the shared database without needing to trust the integrity of

16 Dr. Garrick Hileman and Michel Rauchs, Global Blockchain Benchmarking Study, Cambridge Centre for Alternative Finance, 2017

A SaaS platform that provides comprehensive and measurable accountability for critical supply chains. With unsurpassed blockchain traceability and quantifiable measurements for sustainability, Bext360 focuses on supply chains such as coffee, seafood, timber, minerals, cotton and palm oil to provide a traceable fingerprint from producer to consumer.

A division of Trimble that provides an easy and cost-effective way to implement item level traceability on products for food safety, recall and engagement of end consumers and others throughout the supply chain. Brands such as Driscoll’s and US Foods have implemented HarvestMark.

Offers a platform that empowers brands to take steps toward greater transparency by tracing the origins and histories of products. With its blockchain technology, brands including Martine Jarlgaard and The Co-op can easily stay connected, gather and verify stories, and embed them anywhere online.

Works with companies such as Subway and Whole Foods to manage suppliers and gain full visibility into safety and quality issues across the supply chain. The technology reduces the impact of FSMA and food recalls while better addressing food safety issues when they occur.

An IBM platform providing a standardized system of tracing shelved products back to their point of origin, currently being used by companies including Walmart, Nestlé, and Dole.

any of the network participants or administrators. The agreement between blockchain network participants over the state of the database is achieved through a consensus mechanism, which ensures that each participant’s view of the shared database matches the view of all other participants.”

This differentiator makes blockchain a leading candidate for cracking (or creating) the code for the most reliable, real-time traceability and authentication tools. In fact, many IT solutions already in use for supply chain management, traceability, and transparency are built on blockchain in conjunction with new technologies such as the Internet of Things (IoT).

Below are several examples of DLT platforms being used to achieve traceability and transparency from farm-to-fork:

Bext360

Provenance


Full TransparencyRISING TO MEET DEMAND WITH FULL TRANSPARENCY

Consumer goods companies have for decades sought solutions to make supply chains more seamless, more manageable, and more accountable. At the same time, consumers are being vocal about their need to understand the history of the items they purchase.

Proven solutions from players large (IBM) and emerging (Provenance) are now in use. While initially pioneered by small firms, these systems are now rapidly being adopted by global players like Dole, Driscoll’s, Golden State Foods, Kroger, McCormick and Company, McLane Company, Nestlé, Tyson Foods, Unilever, Walmart, the Emirate of Dubai, and many others. These forward-thinking organizations can trace, track and disclose detailed and accurate information, achieving greater clarity and speed across the supply chain while simultaneously reducing risk.

Putting it all together, data has shown that from 2015-2018, industry leaders around the world in the consumer staples sector have:

• Empowered buyers with trustworthy data to support product claims from farm to fork.

• Enabled integrity of the certifications that demonstrate their products’ sustainability.

• Provided proof of fair payment and economic efficiency to contribute to living wages.

• Shared product sales information from retailers to wholesalers to decrease loss.

• Traced sourcing in the apparel industry from farm to finished garment.

• Delivered economic returns to corporate market participants with solutions like IBM’s and Provenance’s.

• Raised the value of single-origin products to support marketing claims and prevent charges of greenwashing.

Sustainability demands are on the rise, consumers are calling for transparency, and solutions are being rolled out. Consumer goods companies have an opportunity to stay attuned to their market, achieve significant efficiencies, and enhance relationships from the first link of the supply chain to the Point of Sale and beyond

Outperforming Through Transparency and Traceability

CLIMATE [email protected]

Peter Graham:[email protected] Thoumi:[email protected]

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