Thanks to the internet and social media, we live in an age of transparency where an unprecedented proportion of our private lives is now in the public arena. This is not just a personal issue but a business one, too – and it makes transparency a factor that investors need to consider when deciding in which companies to invest.
A series of business scandals in recent years has highlighted the complex, extended and opaque nature of today’s global supply chains – and the risks that can exist without businesses acknowledging them.
These include the 2013 Rana Plaza fire in Bangladesh, in which more than 1,100 people died in a fire at a textiles factory that made clothes for some of the world’s biggest brands and retailers, including Walmart, Benetton and Carrefour, and did not meet building standards.
In China in 2008, six babies died and 54,000 were hospitalised after baby milk products were contaminated with melamine while the 2013 horse meat scandal in Europe revealed that some of the continent’s biggest supermarket chains and food producers were unwittingly selling beef products that contained horse meat and had no idea of the length of their supply chains. The scandal wiped £300 million off the value of Tesco, the UK’s biggest supermarket chain.
Such cases are not only extraordinarily emotive, they also make consumers realise they know very little about the source of many products they buy. Consumers are now much more concerned with their own health and safety, as well as that of the world they live in.
They therefore want to know what is in the goods they buy, where these materials come from and whether there are any social, health or environmental implications to their production. In response to such pressures, product and building designers are looking to avoid risks and reduce exposure by having a better understanding of their products’ supply chain impacts.
Institutional investors are also increasingly pressuring the businesses they invest in to outline any environmental, social and governance issues that may affect their financial performance, with bodies such as the Sustainability Accounting Standards Board (SASB) highlighting the sustainability issues that can affect a company’s performance in a way that investors can use.
Many companies are reluctant to offer full disclosure for commercial reasons but also because they do not know how the information will be used and don’t want it to be assessed out of context. However, if businesses are not open with their customers, there is a feeling that they have something to hide.
As a result of these pressures, companies are being forced to disclose an ever-increasing amount of information, often in an indiscriminate manner. This is not helpful to the company, the investor or the customer. Data without context is not knowledge – it is just data. Unless you provide a framework that explains the impacts, it creates a space for confusion rather than a space for positive action. It is here that software platforms can help to make sense of the wealth of information available. Companies such as Kimberley-Clark are using software platforms to allow them to understand, predict and project energy usage, cutting costs significantly and generating comprehensive reports needed for internal and external stakeholders.
Sometimes this framework is provided by regulation, such as the EU’s REACH rules and California’s Prop 65, or the Safe Drinking Water and Toxic Enforcement Act of 1986, to use its full name, which makes companies disclose if products contain potentially harmful chemicals.
But this type of disclosure is “transparency-lite” and is very different to the “radical transparency” that is really shaking up some industries. Owners and operators of large consumer brands are asking OEMs and suppliers to disclose every single ingredient and impact of their products. In some sectors, such as consumer goods, this involves disclosing to the customer alone, but in buildings and construction there is a push for suppliers to disclose through an open source platform that any buyer can access, which is a real cultural challenge for the industry.
The companies that gain the most business value from providing more transparency are digging deep into the data to determine their current and future risks, to identify potential legal liabilities or regulatory risks and to move away from materials or suppliers that could undermine their performance. They are not just responding to the increased demand for transparency from customers and investors, but using the information they glean to future-proof their business and to increase profitability in the long run, making them a better bet for investors.
Major incidents will continue to occur, but if companies become more transparent, and use the data that this provides to improve their operations, investors will be able to see which companies are best prepared to tackle future issues — and which ones remain in the dark about their potential supply chain risks.
Heather Gadonniex is the Director of Sustainable Building and Construction at PE INTERNATIONAL where she drives strategic direction and growth for the building and construction practice.
Josh Hendry is a Senior Consultant at PE INTERNATIONAL with a primary focus on helping material-producing sectors maximize their sustainability performance.
PE International is a software, data and services company focusing on helping organizations to create value by operating sustainably