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Commodity Pricing: the Need for Transparent Pricing to Benefit Supply Chains and Address ESG Risks

    Originally published on Finextra

    Change Opaque Markets – focus on agri-commodities 

    The lack of transparency is an infamous issue in the commodities market because it creates an inherent inability to accurately price risk. This issue is particularly pervasive in the agricultural commodities sector, such as natural rubber where supply chains start with remote smallholders numbering in the millions with little investment capital available and thus, lacking the infrastructure to collect accurate data. In addition, ESG reporting is technically still not mandatory as it relies on companies self-disclosing data, hence is viewed by many as optional and subjective rather than prescriptive. The choice to not respond also proves to be a barrier to the collection of accurate and timely data. 

    However, change is on the horizon in some sectors, such as natural rubber, with the creation of digital platforms, coupled with the proliferation of the Internet and usage of smartphones increasing in recent times [1]. For example, CISCO’s global projections for 2023 are that mobile devices will grow from 8.8 billion (2018) to 13.1 billion and the total number of Internet users will increase from 3.9 billion (2018) to 5.3 billion at a CAGR of 6%. This combination creates a conducive environment for location tracking to enable remote monitoring (with the necessary agreed protocols and permissions), thus providing better access to digital platforms and a better understanding of the points of origin for the supply chain.

    Moving to Transparency for Improved ESG Assessment for supply chains 

    But how can the adoption of ESG measures be improved to ensure better transparency for supply chains? Mandated efforts alone do not create the best environment for timely and accurate data collection, but there are avenues to create an effective data marketplace for asset owners (in this case, smallholder farmers) and funders/traders/consumers. Reward systems concurrent with stronger collaboration between business owners and their supply chains –  from upstream to all the way downstream – is a tangible means to increase engagement and facilitate the accessibility of appropriate data collection tools to make reporting less tedious. For example, Fitbit linked itself to insurance benefits to provide a mutually beneficial outcome for all parties. Insurance companies had fewer claims and payouts due to healthier individuals, users gained discounts for their accountability, and Fitbit increased its proliferation. 

    Additionally, asset managers are increasingly interested in investing in ESG-certified companies. Hence, ESG reporting could soon become a stronger strategic focus for many businesses in the future, especially those with currently opaque supply chains.

    Of course, regulations can and do also encourage support for global and regional ESG goals. Recent initiatives, such as the IMO2020 plan to reduce emissions from the freight industry, will hopefully provide more transparency around trade finance risk. 

    Gaining Credibility in the Marketplace  

    Companies that seek to improve transparency around their ESG risk and those that wish for confidence in the data they provide must be genuine in their efforts. This is done through strategic focus, particularly around their engagement with supply chains, investing in sustainable initiatives, and growing ecosystems that support transparency. 

    However, both credibility and ESG-ratings are built over time. Driving behavioural change, specifically in a corporate context, requires incremental steps across many different areas in a company. Sustainability is not a Fortune500-only game, rather, a commitment to forging a brighter future.