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Blockchain for good?

Improving supply chain transparency and human rights management

Home / EOS Blog / Blockchain for good? Improving supply chain transparency and human rights management

Following the launch of bitcoin futures on 10 December 2017, it is a good time to look at the technology that has enabled their ascent and application in many sectors – blockchain.

Bitcoins originate from Satoshi Nakamoto’s 2008 paper called Bitcoin: A Peer-to-Peer Electronic Cash System. The standardised, decentralised blockchain registration process serves as an ongoing cryptographic proof-of-work, providing transparency of the value chain.

The development of bitcoin technologies has led to an increase in applications. Two Australian banks, for example, use the technologies as a bank guarantee for commercial property leasing, eliminating the need for physical documents for multiple transactions. The technology is also increasingly more frequently used in the management of supply chains – from seafood and tea to diamonds.

From January 2018, the Seafood Import Monitoring Programme requires specific data about seafood imports to be provided electronically to the US Customs and Border Protection. The origin of seafood, for example, is recorded in a global tracking system. In trade, fish from Europe could be sent to China, get filleted and then be shipped to freezers in South Korea for large retailers. Without such a transparent monitoring process, we are exposed to significant food safety risks, as well as the possibility of the involvement of child or slave labour.

A group of companies, including Nestlé and Unilever, joined a food supply chain project in August 2017. As part of this, due to improved data, small-scale farmers are able to get bank loans with more favourable terms, thus improving their productivity and quality of life. Blockchain technology is also used to ensure certification, for example when it comes to organic food.

In November 2017, we participated in the International Council on Mining and Metals (ICMM) roundtable on the application of blockchain technology in the minerals supply chain. Technology company Everledger described its experience in monitoring the diamond supply chain. Knowing the origin of a diamond helps to reduce counterfeits, insurance fraud and smuggling from conflict regions because digital certificates are more difficult to forge than their paper counterparts. As the only investor representative at the roundtable, we urged companies to find reliable, transparent and cost-effective ways to certify that their supply chains are sustainable and free from slavery and corruption.

We have long highlighted the challenges of monitoring the cobalt supply chain engaged to understand the root causes of human rights violations in the chain. Since then, cobalt prices have rocketed by over 40% as demand for cobalt continues to rise, boosted by an increase in the number of electric vehicles whose batteries require the mineral.

The companies we have engaged with have done well in improving their cobalt supply chain. US technology company Apple, for example, has expanded its responsible sourcing efforts beyond tin, tungsten, tantalum and gold to include cobalt. Samsung SDI, a key battery manufacturer for Apple and Samsung Electronics, has published a supply chain responsibility report, in line with the OECD Due Diligence Guidelines for Responsible Supply Chains of Minerals from Conflict-Affected and High-Risk Areas. Together with other members of the Responsible Cobalt initiative (RCI), the two companies also led a collaborative academic study in order to create sustainable societal impact on local communities.

The Chinese cobalt smelter and refinery, Huayou Cobalt, which had been heavily criticised by Amnesty International for allowing child labour in its mines, conducted a detailed presentation at the OECD Responsible Supply Chains Conference in Paris in May 2017. The presentation gave an update on the company’s engagement with the local community, as well as on improvements on training and health and safety improvements in its operations in the Democratic Republic of Congo. While we were pleased to see this progress, the application of blockchain technology still failed to meet our expectations. Fortunately, RCS Global, the responsible sourcing advisory and audit group that has worked with many of the aforementioned companies on this issue, came up a potential solution. It has mapped out a 12-step blockchain-based chain of custody system for the minerals supply chain. To make it work, the key players in the chain must agree a set of input data to define its features. The system can, for example, create a mineral fingerprint of cobalt, which is a by-product of copper, that analyses its content for impurities.

During the multiple stages of transformation of minerals, there needs to be a clear approach to ensure that all the materials used are child and slave labour-free, not just cobalt. Downstream buyers should therefore agree common production and material stewardship standards and associated purchasing terms to promote best practices.

With improved traceability, companies can also improve the quality of the end product and the use of recycled materials, thus contributing to the circular economy. We are only at the beginning of this journey, although I am confident that given the progress in many sectors on blockchain applications, we are closer to our goals than ever before.

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Christine Chow Dr Christine Chow manages the team of engagement associates at Hermes EOS and is responsible for the financial services, technology and extractive sectors in Asia ex-Japan. She has over 20 years of experience in portfolio management, research and investment consulting. Christine's PhD thesis on shareholder engagement for responsible investment was short-listed for a UN award in Sweden for industry relevance and academic excellence. Christine is a member of the Court of Governors of the London School of Economics and a member of the School’s Investment Sub-Committee.  She was an adjunct associate professor in the Department of Finance at the Hong Kong University of Science and Technology. She was also a member of the greater China committee of the Hong Kong Retirement Funds Association between 2014-2016. Christine has worked at a number of multinational corporations such as Merrill Lynch, Schroders and Hewitt. In the 1990s, she was responsible for establishing strategic partnerships in fund management for the Schroders Group, especially in Mainland China. Christine is a graduate of the London School of Economics and the University of Melbourne. She also completed an executive education course on financial engineering at Stanford University.
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