Supply chains are changing. Over the short term, disruptions created by the pandemic will lead to complicated systems of production and logistics becoming more resilient to future shocks. A longer-term goal is for the supply chains of the future to be designed with sustainability in mind, reducing the huge amounts of pollution and waste that are generated by the globalised system of production.
With supply chains accounting for 80 per cent of the planet’s carbon emissions, creating sustainable production networks will help the world meet its environmental goals1. Hong Kong will play a key role in this process, as it is a sourcing hub that sits at a key point in many supply chains. A major international trading centre, the World Trade Organisation ranked Hong Kong eighth in 2019 globally in merchandise trade2.
The HSBC Navigator 2020 survey found nearly all Hong Kong businesses see environmental, social and governance (ESG) considerations as a driver for growth. The standout finding is that 96 per cent of Hong Kong companies believe that there are multiple opportunities to come from improving environmental and ethical sustainability3.
Realising there is a problem to be addressed is the first step to finding a solution: “A company will not be able to become sustainable unless they have sustainable objectives,” said Shirley Kwong, Head of Business Development, Global Trade and Receivables Finance, Hong Kong, HSBC. She was speaking at sustainable business forum ReThink HK 2021.
Addressing challenges through collaboration
The challenges to greening supply chains are considerable. Underlying every large multinational is a highly complex chain of suppliers that includes resource extraction, manufacturing, and delivery. In the US auto industry for example, there are 140 branded manufacturers relying on hundreds of thousands of different suppliers4. Coordinating change in such a large number of companies will be difficult without careful planning.
“The financial industry has a big role to play in creating low-carbon supply chains,” she said. “Sustainability can be costly, and you don’t usually see the results on day one. That’s where sustainable finance comes into play.”
She shared some practical suggestions on how companies can realise sustainable business plans, stressing the importance of collaboration across the ecosystem. In particular, the regulatory environment differs in every jurisdiction the supply chain touches, complicating plans to impose ESG standards for the entire production process.
There is a similar issue with measuring success. Not only are their different metrics that can be used to assess the impact of sustainability projects, the availability of data varies from market to market.
“Talk to your financing partners,” said Ms. Kwong. “They are in touch with government regulators and other organisations, and are more than happy to share with you insight into regulatory developments. If you share your ESG data and metrics, the bank will better understand what you want to do and provide a solution that is suitable for your specific needs.”
Using data to understand supply chains
The apparel industry exemplifies many of the sustainability challenges associated with supply chains. In 2018, the fashion industry on its own was estimated to account for 4 per cent of the world’s total greenhouse gas emissions5. Furthermore, chemical waste from textile mills is a major source of water pollution, while most items of clothing are not recycled and end up in landfills.
“The average customer or regulator assumes that companies understand their supply chains. The reality is that almost no company knows their supply chain all the way through upstream to cotton,” said Vivek Ramachandran, CEO of Serai – a B2B platform subsidiary of HSBC that helps companies manage their supply chains by delivering visibility and traceability.
There is a real drive for change in how clothing is produced, he said. This comes from younger consumers, who are increasingly likely to pay more for clothes that they consider to be sustainable. Regulators in large economies are also demanding that importers prove that garments meet stricter ESG standards. Both of these factors affect investor behaviour.
He describes the lack of information as the single largest challenge facing the apparel industry. Without an adequate understanding of all the links in the supply chain, it is impossible to enforce sustainability.
Serai is an industry platform that connects businesses in the apparel industry to share knowledge. This eliminates informational inefficiencies that allow intermediaries to make a profit, said Mr. Ramachandran. Small businesses can use the platform to find new partners, while larger companies can use it to find out more about the firms that constitute their supply chain.
But this is only the beginning: “Once you understand who is in your supply chain, then the next set of challenges includes driving down carbon emissions, water pollution, and addressing labour standards,” he said.
New solutions for old problems
For decades, global trade has focused on maximising efficiency while at the same time minimising key costs – such as labour and resources. This has led to a world of highly complex interrelated supply chains that do not meet the demands of a sustainable world.
In the same way that supply chains consist of many companies working together to bring products to market, the drive to sustainability will be a collaborative effort between multiple parties to incorporate ESG practices into their operations. There will be challenges on the path ahead, but the availability of new financial and technological solutions will help clear roadblocks that have impeded progress in the past. It will be worth the effort, as green supply chains will be an essential part of a sustainable world.
To find out more, speak to your HSBC Relationship Manager.
4HSBC Navigator, November 2021
This material does not constitute Investment Research. It has not been prepared by HSBC’s Research Department. This material represents the best estimates or approximation as at the time of compilation and is not a recommendation. Investors must make their own determination and investment decisions.