Consumers fuel the drive towards sustainable supply chains

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Consumers today have exceptionally high standards for the companies they interact with. They want the best products and services, but increasingly, they want to source those products from companies that demonstrate a strong commitment to their local community and the wider world.

Forty per cent of consumers in the UK and Europe say that the environment is their top priority when shopping for food and drink, with UK consumers rating environmentally friendly production and recyclable packaging particularly highly¹. Consumers are voting with their money too, with annual spend on sustainable products reaching £29.7bn in 2018, compared with £3.1bn in 1999².

This drive towards sustainability isn’t just powered by customers, but by investors, governments and regulators too. It is a societal shift in behaviour that expects companies to provide products in a sustainable way while contributing to their local and national communities.

Environmental, Social and Governance (ESG) factors can no longer be a token gesture: the internet will highlight any misstep and spread news of it at a lightning pace. The focus is such that a company’s responsibility has even extended out to the suppliers and partners it works with.

A significant event can come to represent the fight for sweeping change and, in the garment industry, that event was the fire in a factory in Dhaka, Bangladesh in 2012. At least 117 people were confirmed dead and 200 were injured in the blaze and thousands of Bangladeshi garment workers protested at the site for three days, calling for better workplace safety.

The incident led to an international outcry and a keen sense that the foreign firms benefiting from this labour should also ensure the safety and wellbeing of workers.

“This was a seminal event for the industry to realise they needed to make a difference,” says Rob King, Head of Sustainable Finance, HSBC UK Commercial Banking. “Borne out of that were industry forums where the garment industry and the fashion and apparel industry got together to define what they could do to make a difference.”

Although compliance standards had been in place before that tragedy, it became apparent that there were huge gaps in enforcement, and a lack of oversight on suppliers’ self-reporting.

The result was a number of agreements, including the Accord on Fire and Safety in Bangladesh led by European firms and the Alliance for Bangladesh Worker Safety headed by Walmart and Gap in the US, pledging better working conditions and the inspections to uphold those standards.

At the same time, there has been a growing spotlight on the unsustainable practice of ‘fast fashion’. As the rate of change in high street fashions has increased in recent years, partially driven by the rapid speed of social media trends and online influencers, garments can be worn just a handful of times before they’re simply thrown away. The State of Fashion 2018 report³ highlighted that, without reform, the fashion industry could be responsible for a quarter of the Earth’s carbon budget by 2050.

And the industry has responded. Global retailers such as H&M and Levi’s allow customers to recycle clothes through dropoff points, even offering a money-off voucher as an incentive. In the UK, M&S runs a ‘shwopping’ scheme as part of its Plan A sustainability strategy, encouraging customers to donate unwanted clothes from any brand, in any condition, which are sent to charity partner Oxfam⁴. Other brands have introduced innovative green commitments – Adidas, for example, is aiming to use only recycled polyester in all clothes and shoes by 2024.

Even in industries without high profile flashpoints, corporate sustainability is quietly becoming a greater priority. King highlights greater awareness of ethical standards and animal welfare concerns in food production, for example.

“Consumers are continuing to pay a premium for organic and ethically-sourced food and drink, with concerns about health and animal welfare high on the agenda. And while this is thought of only as a niche, we’re continuing to see volume there,” he says.

This level of supply chain sustainability is not an easy task for businesses, particularly when they’re not large multinationals. It has to be viable for companies to invest in sustainability while remaining competitive enough to survive in tough markets. That’s why banks also have a big role to play in supporting sustainability and ESG.

Applying the sustainability rule

HSBC Group has earmarked US$750 billion to US$1 trillion towards sustainable financing and investment globally over the next 10 years. HSBC is also doing a big part on the energy front, aiming to get 100 per cent of its electricity from renewable sources by 2030.

“The role we play in supporting sustainable supply chains through trade finance is also a critical one,” said King. HSBC is using financial incentives to help companies develop a more sustainable supply chain programme.

HSBC can apply tiered pricing under a supply chain finance programme where the pricing differential is based on the suppliers’ sustainability score. The score is calculated against standards defined by the anchor buyer – for example, a system developed by the customer for their industry or based on a third-party rating, such as the Higg index for apparel. The best rated suppliers have access to the lowest rate of financing.

HSBC works with the anchor buyer to structure the programme based on their individual supplier compliance goals or standards, under which the tiered financing charges are linked to sustainability scores. The tiering is transparent to all suppliers, while also ensuring that the price differential works for the industry they’re in.

“The starting point is always based on the cost of credit for our anchor client, who is driving the supply chain finance programme implementation,” explains King.

“Suppliers that meet the highest sustainability score or target qualify for the best financing rate closest to the cost of credit of the anchor buyer, while there is a differential applied for suppliers who have yet to meet the best standard. It’s not a standard set pricing differential. With every programme, that pricing differential can vary because it is driven by the overarching sustainability targets of the anchor buyer, the industry the company is in and their supply base.”

Providing financial support is just the first step. Through HSBC Corporate Sustainability, HSBC also partners with different bodies that help educate suppliers and train them to meet the standards expected of them.

For example, HSBC was one of the founding funders of the Apparel Impact Institute, a collaboration of brands, manufacturers and industry stakeholders that aims to drive transformation across the fashion industry in terms of both workers and the environment.

It’s vital for suppliers to understand why they, for example, are achieving a bronze rating, while other suppliers are at silver or gold. Highlighting the areas that need work and providing the necessary training help suppliers to meet new standards and make sustainability transparent for all stakeholders.

Technology developments that are underway can also be useful to help track and enforce sustainability initiatives. Blockchain applications, for example, can potentially be used to trace the provenance of every element of a product.

“You can actually identify where the cotton is coming from that eventually goes into the cloth making the garments that are supplied to the company and arrive on the shelves,” says King.

"That is what companies are after, the ability to track from raw materials to finished products."

Understanding the commercial dividend

The financial incentives are an important part of driving sustainability, but more and more, companies are coming on board because there are good financial reasons to do so. Suppliers who invest in sustainability improvements usually find that they are more financially sustainable because of related efficiencies.

“There needs to be a business case in making these investments,” says King.

“Research has shown that investments you make in sustainability improvements do bear fruit over the long term⁵. Companies that are making those financial investments are far more sustainable in the long term compared with companies that are not. They are saving more electricity, saving more water, etc., and eventually reaping those benefits.”

Putting a sustainable supply chain in place also relies on being attuned to the way the world is likely to change, he says.

“Given the context of climate change for example, it’s important to think of the world as it is likely to be in the future. One example may be the impact of climate factors such as wildfire or drought and how best to protect your business from these threats. As a bank, we’re helping customers get ready for the challenges they may face,” King adds.

But it’s the response from consumers that ultimately drives a company’s journey towards visible sustainability.

“It is about making it all much more visible to end-use consumers. Companies are striving towards being able to proudly display the sustainable source on the goods they produce. And to be able to say with confidence that they are driving change towards more sustainability and visibility than ever into their supply chains,” says King.

To find out how to make your supply chain sustainable, please speak with your Relationship Manager today.

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