ESG – why averages matter


Absolute targets are important, but we need to focus on averages. Tim Nicolle (pictured), Group CEO of PrimaDollar, describes why averages matter when it comes to ESG.

Human nature likes to focus on destinations. Often the journey is boring and sometimes even painful. Outcomes are easier to visualise and better to aim at. Averages are boring and don’t make good headlines.

Delivering meaningful ESG change is about averages and not destinations. Like many technology providers involved in trade finance and supply chain finance, PrimaDollar has become increasingly involved in measuring the ESG performance of supply chains.

ESG: social and governance

We all know that there are corners of the global supply chain which are not working as we would like. Those corners include forced labour, child labour, abuse of workers, and dangerous working practices. These are the stories that make the news – and matters that we need to be very concerned about.

But most of the global supply chain sits in a different place. Huge improvements have been made over the last twenty years via the actions of multi-national importers, new laws and regulations coming into force in manufacturing countries and a huge increase in surveillance, audits and checks. Let’s remember that, here in the UK, a minimum wage only made it into law in 1999 (£3.60 per hour at the time, in case you were interested!).

The collapse of a large garment factory at Rana Plaza in 2013 (Bangladesh) was a significant turning point when over 1,000 workers lost their lives. In April 2023 we will see the 10th anniversary of this awful event; this will be a good opportunity to reflect on what has achieved and whether the balance is right in the collective efforts to get global supply chains into a better place.

And there’s good news on this topic although a huge amount more lies ahead.

  • Initial efforts around the world were applied to identify and weed out the worst practices. This continues with new laws around worker conditions, forced labour and increased enforcement. In the US, there is now more frequent use of the “WRO” and importers are being required to evidence the work that they do to ensure their supply chains are clean. In Europe, new laws are also coming in – and existing regulations are starting to be enforced as well.
  • But the last two years has also seen a seismic shift in focus driven by the widespread use of rating systems for suppliers, allowing importers and their suppliers to see where they are and to be incentivised via peer comparison to do better. This is very much about averages and not absolutes.
  • Averages matter

    “The poor are always with us.” By definition, 50% of a measured distribution will fall below the median (ie: middle point by number) in any population.

    But rating systems tend to be even tougher with more than half of suppliers by number falling below an average rating (the “mean”). That’s simply because bad factories tend not to get rated – but very good factories will try to get rated as much as possible.

    We should focus on two main goals:

  • Our overall and most important goal should be to improve the lot of the average factory worker in the average factory – wherever they are in the world.
  • A secondary goal is certainly to make it much harder for bad working practices to persist – shining a light into those corners of the global supply chain where bad things might be going on.
  • And this is important when it comes to how we think about our own actions, and how to think about what we read. It might not sound like a big story if the average wage of factory workers were to increase by 1%. That’s a tiny amount but multiplied by the millions of people involved – that’s a big change. But it typically does not make the headlines, whilst, in contrast, calling out a major brand that has been deceived by an unscrupulous supplier is much juicier story.

    Real-time data on ESG: it also really matters

    There are a number of commentators now reminding us that net zero is a potentially dangerous concept. It is a potentially distant destination, a worthy ambition, but not necessarily meaningful right now. The perfect can be the enemy of the good, potentially allowing actions to be deferred.

    We believe that the best way to deliver impact and improvement is via continuous and, ideally, real-time monitoring of worker treatment, something that can be added to supply chain finance and trade finance platforms in form of sustainability / environmental scores for the “E” and social scores for the “S” and “G”. These are scores which measure supplier performance from day to day, shipment to shipment across E, S and G.

    Real time monitoring delivers the key components of a system that can and will drive meaningful change for workers around the world:

  • Suppliers see where their ESG scores are  against their peers in their own country, and in other countries – in their own industry and in other industries.
  • Larger importers see all their suppliers in simple dashboards; they can see where improvements are needed and where best to allocate their in-country resources for visits, checks and audits – and compare their supply chains to those of their peers.
  • More importantly, importers can detect if any of their actions (eg: late payments, cancelled orders, tough price negotiation) have had an impact on their supplier, particular in the “S” and “G” space – ie: worker conditions. It’s not that this happens often, but good rating and monitoring processes should allow buyers and suppliers to act in balance and recognise that good outcomes are best achieved when both ends of the supply chain move in harmony.
  • And finally – we can then link the ESG score in real-time back into the cost of supply chain finance and trade finance so that factory owners that improve their position benefit and factories that slip back are penalised.
  • The factory social score system is now live and being rolled out across supply chains. What’s most interesting is that the factory social score system is being accepted by factories without pressure from their buyers – but also that major retailers here in the UK and in Europe are also looking to roll out the system across their global supply chains. Their bankers too are getting engaged to assist. Real-time data on the “S” and the “G” of ESG is arriving fast.

    But the “E” of ESG is a much more difficult matter.

    On the one hand, technologies are emerging quickly that provide us with benchmark data on the climate impact of different activities. Whether that is growing cotton, transporting a container, pressing steel, or packaging with the right or wrong materials. And the data emerging on the multiple aspects of the circular economy; that generally cover sustainable sourcing and then achieving an efficient process at a product’s end of life.

    It’s all great but there is so much to do, and the “E” of ESG tends to be very industry specific. It’s hard to build systems and processes that truly work across different industries and deliver standardised and comparable results. But that’s also okay – we are going to get there – just not as quickly as with the “S” and the “G”.

    What should we focus on then?

    We should focus on measuring and then lifting up the average outcome across all aspects of ESG recognising that the “S” and “G” are arriving now, and that “E” is in process.

    Of course. we need to pay attention to the outliers – the shipments being impounded by the US authorities for breach of forced labour laws, and the occasional news story when a major brand has been caught out. But the big news will really be what happens in the boring middle – the vast bulk of global supply chains where houses are generally in order but improvements are needed. Here’s where change happens that has a big impact.

    And this is where transparency and information become very important. Measuring performance in real-time, creating systems where standardised outcomes can be compared, and then lifting up the average outcomes – this is the model we need to aim for. For S & G, the tools are now available to make this happen. For E, they’re coming but more slowly.

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    Our task – in the financial and fintech industry – is to keep these topics in the news and to continue pushing for robust and detailed transparency on ESG and the ESG journeys of supply chains from the corporate world, and to continue investing in the technologies that can deliver these results.

    What gets measured gets managed – and we need to be ready to find “averages” exciting.