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Surprising lessons from the ESG frontline

Over the last few months, PrimaDollar has been developing a revolutionary new approach to the monitoring of ESG performance in supply chains. ESG, as I am sure we all know, refers to “Environmental, Social and Governance” issues, and it is rapidly becoming the new three-lettered acronym of choice, alongside CSR (corporate social responsibility).

Our new approach is based upon a simple thesis. This is that real-time ESG data is a much more powerful catalyst for change – compared to, for example, the more infrequent data collection strategy (annual, semi-annual) that typifies the monitoring of global supply chains today. And, moreover, if real-time data can be collected and linked directly to economic incentives, then we can drive change in small incremental steps – each tiny victory eventually leading us to a better place in terms of carbon neutrality, the circular economy and how workers are treated in supply chains.

And every desktop thesis finally meets its real challenge when it is directly exposed to the marketplace. This is what we have been doing in the last few weeks across South Asia and into Turkey, as our first real-time ESG product – a “worker app” – enters into its initial live phases in factories across the region.

What is real-time ESG and what is the worker app?

Real-time ESG focuses on finding ways to measure one or more ESG dimensions in real-time and then to drive change. There are several steps:

  • Establishing a monitoring system that can assess the current situation and measure changes as they happen
  • Moderating and evaluating the data returned in order to generate some kind of independent, measurable and standardised outcome that we can all understand – something simple
  • Linking the resulting measure to an economic driver so the improvements are rewarded and backward steps are penalised.

The smaller the steps that can be properly measured, the quicker the feedback loop can operate, then this should lead to more effective engagement of market participants, thereby delivering incremental progress.

Our first real-time ESG product is the worker app. This is an app that goes on the mobile ‘phones of workers in factories enabling them to report continuously on their pay, freedoms, conditions, and governance.

This is real-time S, and real-time G. We end up with a “factory social score”, like a “Trustpilot” rating but on a factory and derived from anonymous worker feedback, rather than on a business derived from customer ratings. The app delivers factory social scores that are standardised; this means that they are comparable across geographies and industries. These scores are also continuously updated – and then can be used to drive the cost of supply chain finance or trade finance as it flows down the supply chain from the buyer back through to its suppliers.

How hard can it be?

Whilst, at first glance, this looks like a very simple concept, as we got into the details of design and tested the concepts directly with factory owners across our markets, we realised that there are many complexities. Moreover, whilst we want a single measure of a factory’s treatment of its workers, we also need to develop the diagnostic information that allows the areas of concern in a workplace to be identified on a deeper-dive basis. Factories and their buyers need the big picture – but it is only valuable if there’s also an opportunity to get into the detail.

Here are some of the challenges:

  • We need to get feedback from workers on many topics. Our current panel of topics is 53 different questions across 7 different dimensions of the workplace. But how do we do that without creating an app that is too long and complicated for workers to be bothered with?
  • How do we incentivise workers to participate? Most emerging market countries are either highly unionised or not unionised at all. Moreover, we need workers to feel confident that their responses can lead to change without a comeback on them individually or collectively – whatever the local culture.
  • How do we make sure that we detect greenwashing in the many ways that it might apply? And here we have to focus on maths - because there are statistical techniques that can be used to detect artificial response patterns, but this requires a highly-engineered architecture and powerful models. Collected data must be carefully organised. In fact, we have ended up with a model that sub-divides worker populations into 18 sub-types in order to moderate and filter the response data as it arrives to deal with the way in which worker populations can be expected to behave in the face of different pressures.
  • And most importantly, how do we persuade factory owners that the worker app will help them to run their businesses better and that they should be ready to share the results with their important customers. Much better to have a system that works for the factory as well as for the buyer – even if, most of the time, the buyer has the power to require factories to implement a monitoring system.

Here are some key takeaways from the last few weeks

Perhaps it is surprising that our worker app has had a very good reception generally amongst the many factory owners that we have spoken with. We are signing up new factories pretty much every day now. There’s no pressure from buyers to adopt the app, and our marketing model is very low key.

But factory owners are receptive.

They know (and we know through our local offices and the work we have done with factories over the last 5 years) how much effort has gone into systems and processes to ensure that workers are treated appropriately. Whilst there are always exceptions, these are actually very rare. Despite the occasional bursts of publicity when the press catches out a major brand, things are in much better shape than perhaps we realise and understand herein on the receiving end of the products that are made in South and East Asia.

Where we do have pushback is generally in one area – which is around worker pay. Two key questions in our panel are (a) whether workers are paid on time, and (b) whether they are paid the full amount that they have earned. And here, factory owners are expressing significant concern. Through the pandemic, they have faced significant liquidity challenges as orders get cancelled and delayed, factories are closed and re-opened, and then – on top – they face the turmoil of the current logistics disruptions and the high cost of shipment. And the factory owners that have had problems are still having problems, as some powerful international buyers continue to play fast and loose with payment terms, on POs and shipments, especially given the logistics’ challenges everyone is currently facing.

And this brings us full circle to the whole point of worker monitoring apps. With real-time information, we can see where the problems are. And sometimes the problems are on the buyer side, rather than purely on the factory side.

Supply chains are made up of buyers and sellers, not just sellers. And so, the picture is more complicated than it first appears – and head office policies on how suppliers should be treated are clearly part of the equation. Factories can only deliver appropriate standards around worker treatment if their customers are also aligned.

The linkage between ESG and supply chain finance gets clearer by the day.

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