A successful experiment by the University of Cambridge Institute for Sustainability Leadership (CISL) has shown how a new model of blockchain and other data sharing technologies can enhance the sustainability of global supply chains without increasing production costs.
Trado: New technologies to fund fairer, more transparent supply chains shows how shared data from smallholders can increase supply chain transparency and lead to earlier, pre-shipment financing with the potential for long-term benefits for suppliers, with net zero impact on production costs.
The Trado model was piloted with smallholder tea farmers in Malawi who were offered a financial incentive in return for feeding social or ecological data into the blockchain. An innovative blockchain structure, enabling traceability, has been developed into a blueprint for replication, development and experimentation in other contexts.
The model could potentially pay for some of the investment needed to establish traceability across supply chains, although further investigation is needed to scope the model’s ability to do this while benefitting smallholders.
Thomas Verhagen, senior programme manager, CISL, says: “This is a significant step towards the further development and understanding of how technology-driven innovation can support delivery of the UN Sustainable Development Goals.
“Collaboration between multi-nationals, financial institutions and fintech firms can harness new ways to ensure financial flows support fair and just policies and practices ready for a new financial system. The Trado model has potential for replication across a wide range of topics and we hope the blueprint will encourage others to deliver its potential for social and environmental improvement,” he adds.
It is estimated there are around 500 million smallholder farmers producing 80 percent of the food consumed in developing countries, with the majority likely to be found in least developed countries where the cost of borrowing is high. Many large companies recognise the importance of these producers to their supply chains.
The model enables a sustainability data-for-benefits swap between a buyer and a seller in the supply chain using banks’ traditional supply chain financing. This swap provides parties in the supply chain with reliable data about its sustainability properties, helping to reward first mile producers such as smallholder farmers for information on their production practices.
The model could allow for access to data by many parties in a supply chain or across many supply chains, and the data could relate to any number of topics, for example deforestation, land management, biodiversity, socioeconomic development, or verified distribution of Trado-generated benefits.
In exchange for the data, the buyer enables the provision of benefits by allowing a (lower) financing rate to be applied to working capital financing of the supplier. This can make a difference since suppliers often borrow money to cover their working capital needs at a higher cost than that of the buyer. The transaction takes place using a bank’s regular supply chain financing process. The model acts as an add-on, causing minimal disturbance to the bank’s business.
For banking, the new technology has potential to offer better data, and therefore better oversight of transactions. A future application might be to enable compliance with domestic regulations such as the Climate Change Act, Modern Slavery Act and Bribery Act in the UK. Improved access to sustainability data could also help to attract clients wishing to demonstrate social and environmental leadership.
The Trado project was led and convened by the University of Cambridge Institute for Sustainability Leadership (CISL). Members of the consortium include: Barclays, BNP Paribas, CISL, the UK Government’s Department for International Development (DFID), Halotrade, IDH the Sustainable Trade Initiative, Meridia, Provenance, Rabobank, Sainsbury’s, Sappi, Standard Chartered and Unilever.