ARTICLE
Is Blockchain the Key to a More
ESG-Compliant Supply Chain?
The retail industry will need to overcome unprecedented challenges if it wants to mitigate ESG
risks and improve visibility into its supply chains. Fortunately, help may be on the way.
Blockchain can help
companies focus on ESG and
sustainability tracking because
of improved visibility into all
tiers of the supply chain.
$3 billion
Spending on blockchain is
predicted to grow from $253
million in 2020 to more than
$3 billion by 2026
The information age continues to dominate the business landscape, bringing
with it the expectation of greater corporate transparency. The extent to which
an organization’s business practices, operations and culture are open and
accountable is a differentiator for consumers – and investors.
Today’s consumers and investors demand corporate transparency, monitoring
corporate actions to ensure they align with their own values. Businesses are
listening, and many companies recognize the need to put “purpose” on a par with
profits. As a result, leaders are beginning to prioritize environmental, social and
governance (ESG) policies in their business operations.
ESG issues in the supply chain
With the requirement to integrate ESG policies into business activities,
implementation presents challenges as businesses try to adapt. The retail
industry, in particular, is facing unique and broad challenges.
Consumers are focused on the retail supply chain due to frequent negative news
about manufacturing and sourcing of materials. It is difficult for retailer to identify
and mitigate these issues because of the global distribution of vendors and
suppliers. Often, tier 3 and 4 suppliers do not comply with agreed-upon standards.
Governmental and regulatory bodies recognize this issue and are forcing action to
reduce ESG-related issues throughout the supply chain. The European Green Deal,
IS BLOCKCHAIN THE KEY TO A MORE ESG-COMPLIANT SUPPLY CHAIN? FTI Consulting, Inc. 02

for instance, provides due-diligence guidance on forced Blockchain can also be used to track raw materials from
labor. Similarly, Germany recently passed a law mandating the farms through manufacturing, verifying that those raw
“corporate due diligence in supply chains.” materials were sourced from sustainable locations and
The Sustainability Accounting Standards Board (SASB) trusted suppliers.
identifies supply chain risks as material to a company’s Blockchain has also helped companies focus on ESG
financial performance, recommending retail companies on reducing carbon footprints, ESG disclosures and
audit tier 1 suppliers for wastewater discharge, sustainability tracking because of improved visibility into all
environmental assessments, labor code of conduct and tiers of the supply chain.
third-party certified raw materials. SASB also suggests that So, what’s keeping some companies from making the
companies require their tier 1 suppliers to perform similar investment? For one, there is the skepticism that comes
audits with their vendors1. with adopting a new technology and the seemingly
imponderable nature of blockchain. Some managers may
be under the impression that adoption will cost millions of
Supply chains face an existential threat
dollars of R&D budget. Others may believe that blockchain
With the profound instability in global supply chains, will replace all their systems, resulting in the need to build
companies should deploy a comprehensive supply everything from the bottom up.
chain risk assessment and risk mitigation process
The barriers to entry are far lower than most would suspect.
using best practice analytical protocols. The goal is
to test supply chain sourcing and processes, apply Let’s start with cost savings. One of the most innovative
technologies to provide visibility into all tiers of the components of blockchain technology is the “smart contract.”
supply chain and provide a framework to manage risk Essentially, this is an algorithm that runs a “if X, then Y”
and provide supply chain resiliency. sequence. When companies can implement an application
that automatically reacts to variables along the supply chain
and inform a contract, both money and time are saved.
The bottom line is that without full, consistent visibility
into their suppliers’ operations, organizations struggle
to monitor, mitigate and comply. Fortunately, the retail Blockchain efficiency rides the rails
industry and others are deploying a technology-driven Using sensors placed on rail cars, a Canadian oil
solution to improve supply chain operations: blockchain. transport company monitored location and inventory
of a shipment of crude oil from Western Canada to
Blockchain adoption
the Gulf of Mexico through blockchain. Working with
The benefits of blockchain, including greater security, the company’s insurance provider, the team at FTI
accuracy and cost efficiency, are making significant Consulting was able to help reduce the insurance
improvements to supply chain management. Spending costs by issuing a “smart contract” that would cancel
on blockchain is predicted to grow from $253 million in premium payments automatically should a set of
2020 to more than $3 billion by 2026 as companies now criteria be met — all of which could be monitored
use blockchain to track and trace materials and products through blockchain in real-time. By ensuring the oil was
throughout the entire supply chain. completely offloaded and each car was empty for the
Pharmaceutical companies leverage blockchain to prevent return trip, the company met the right criteria to cancel
counterfeit or stolen products from reaching consumers. premium payments resulting in significant cost savings.
Similarly, food companies utilize blockchain to track their
food supply, providing traceability and helping monitor and
control the spread of foodborne illness.

1. Sustainability Accounting Standards Board (SASB), Apparel, Accessories & Footwear: Sustainability Accounting Standard (October 2018).
IS BLOCKCHAIN THE KEY TO A MORE ESG-COMPLIANT SUPPLY CHAIN? 03

Then there’s security. Because blockchain is decentralized, it’s
virtually secure from hacking making blockchain all the more
attractive. This comes at a time when cybersecurity costs are
set to grow in the next four years to nearly $190 billion.
Finally, there’s the accuracy and trustworthiness of the
data because the data is not corruptible and is verifiable
and allows all parties to have visibility into the information
contained on the blockchain.
— Data security and privacy: New regulations and
guidelines are emerging, raising questions about whether
blockchain may disclose sensitive and confidential data.
Prudent companies should carefully consider what
data is put on-chain and add customized blockchain-
related data protection and privacy provisions to their
commercial agreements, as well as imposing obligations
upon counterparties to comply with such regulations.

Blockchain is not the be-all, cure-all to issues such as
labor exploitation or other human rights violations, but
it’s a step forward for companies who must comply with
growing regulatory expectations and ethical questions
asked by the public.
Legal considerations around blockchain
While blockchain technology certainly has the potential to
bolster supply chain operations, there are several legal and
regulatory considerations that must be taken into account.
Here are a few key factors to consider:
— Enforceability, performance assurance and liability:
Consider a blockchain-based smart contract. While it is
often used to automate and protect the supply-chain
process, it does not eliminate the need for a robust legal
framework. Whether it be unintended programming errors,
reliance on traditional legal documents or the need for
human oversight, all of these challenges must be addressed
through traditional means (i.e., contracts, court rooms).
— Governance, consensus and documentation:
Blockchains being used to oversee supply chains will
require a certain degree of permissioned functionality
given the technical concerns regarding transaction
processing time, data privacy, AML, KYC and other
regulatory issues. This means limiting platform access
to known participants and restricting the rights of those
participants on the platform.
Certainly, having transparency, accountability and visibility
into every aspect of your supply chain is critical for supply
chain management. It has become crucial, in fact, for
businesses trying to provide accurate information to all their
stakeholders. Whether companies are looking to improve
ESG-related issues, better manage suppliers and vendors or
create a true business differentiator, blockchain represents a
dynamic tool for today’s business leaders.

RODOLFO ARAUJO, CFA STEVEN S. MCNEW BILL POST

Senior Managing Director Senior Managing Director Senior Managing Director
Head of Corporate Governance & Activism Global Head – Blockchain Technology and Digital Assets Supply Chain Global Solutions Practice Leader
1.202.346.8816 1.936.232.9994 1.415.602.4554
rodolfo.araujo@fticonsulting.com steve.mcnew@fticonsulting.com bill.post@fticonsulting.com

GUY FLYNN LIN PANG

Partner, DLA Piper Attorney, DLA Piper
Co-Chair, Blockchain and Digital Assets Group 1.410.580.4490
1.410.580.4149 lin.pang@dlapiper.com
guy.flynn@dlapiper.com

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