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Trado: New technologies to fund fairer, more transparent supply chains

This is an excerpt from the “University of Cambridge Institute for Sustainability Leadership (CISL). (2019). Trado: New technologies to fund fairer, more transparent supply chains. Cambridge: University of Cambridge Institute for Sustainability Leadership” report. Based on the work undertaken by the Trado consortium, in which the role of Provenance was pivotal.

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Foreword

The United Nations Sustainable Development Goals (SDGs) are the cornerstone of a peaceful world that places protection of the environment and people at the core of economic prosperity. Yet it is becoming increasingly clear that these will not be achieved if we follow the path of business-as-usual, and that deep and broad innovation will be vital for the systemic change needed to deliver a safe, fairer future.

The complexity of the climate, environment and geopolitical challenges at hand means that developing effective innovations to contribute to the SDGs requires a different kind of collaboration – one with new types of partners and roles, between corporates, financiers, start-ups and governments. These parties will need to go beyond traditional operational comfort zones to understand their position in a system that can improve social and environmental sustainability, while still offering an attractive bottom line.

This report focuses on the results of one such collaboration across sectors and expertise, where an experimental model that could contribute to achieving SDG 12’s focus on sustainable consumption and production was trialled in an existing tea supply chain in Malawi.

The project was supported by BNP Paribas, Barclays, IDH the Sustainable Trade Initiative, Rabobank, Sainsbury’s, Sappi, Standard Chartered and Unilever, with funding from the UK Department for International Development (DFID); the start-ups were Halotrade, Meridia and Provenance, and the project was led by CISL.

The positive outcomes of this experimental project have given us a glimpse of what the new business-as-usual might become – where partnership and collaboration can bring greater sustainability and environmental information, lower financial risks, and improve the opportunities for small-scale farmers and businesspeople; where a new business-as-usual can help deliver a safer future through the SDGs.

Jacques Levet
Head of Transaction Banking EMEA
BNP Paribas

Pierre Rousseau
Strategic Advisor Sustainable Business
BNP Paribas

Executive Summary

Overview

This report describes the process and results of a consortium-based project called Trado, established to test whether preferential access to trade finance using new financial technologies could drive positive social, environmental and economic impact.

The report focuses on the outputs of the project, as follows:

  • a new model for sharing sustainability data that enables traceability in supply chains with the potential for broader applications beyond this project;
  • an innovative blockchain supply chain finance structure;
  • pre-shipment financing for a tea supply chain in Malawi, with potentially real, long-term benefits for a group of at least 225 smallholder farmers in that supply chain;
  • no indication of any price increases to end-consumers because of using the Trado model.

The Trado model

The Trado model is the result of an experimental project of a consortium which included: Barclays, BNP Paribas, University of Cambridge Institute for Sustainability Leadership (CISL), Halotrade, IDH the Sustainable Trade Initiative, Meridia, Provenance, Rabobank, Sainsbury’s, Sappi, Standard Chartered and Unilever. The project was supported by the UK Department for International Development (DFID). The Trado consortium’s aim was to apply new technologies to enable large-scale system change in supply chains to contribute to SDG 12: Responsible Consumption and Production.

The project emerged from a Fintech Taskforce run by CISL’s Banking Environment Initiative (BEI). The Taskforce was created at a summit convened by HRH The Prince of Wales in early 2017, with a mandate to design multisector collaboration between multinationals, financial institutions and start-ups to harness fintech for sustainable business.

At Trado’s core is a data-for-benefits swap between a buyer and a supplier in a supply chain. This data is provided by the supplier and can contain ‘first mile’ social or ecological factors that may not be previously available to the buyer. In exchange for the data, the buyer enables provision of benefits by allowing their (lower) financing rate to be applied to working capital financing of the supplier.

This can make a difference to the supplier because they often borrow money to cover their working capital needs, and their cost of borrowing is often higher than that of the buyer. The transaction takes place using a bank’s regular supply chain financing processes. The Trado model acts as an add-on, causing minimal disturbance to the bank’s business processes.

Both the first mile production data in the swap, as well as the overarching data on the Trado transaction itself, were entered into and accessed via a decentralised depository (a blockchain). In the model the first mile producers (who, in this case study are also smallholders) benefit from the financing cost difference, which is made transparent and controllable.

The Trado model could enable access to sustainability data by many parties in a given supply chain, or across multiple supply chains. Included data could reflect any number of topics, for example: deforestation, land management, biodiversity, socio-economic development, the distribution of Trado-generated benefits, and so on.

Trado design and testing

At the project outset, consortium members defined a set of propositions against which the efficacy of a model could be assessed. To test these, start-up-style trials were conducted by dry running historic data through the Trado model. This to identify which propositions could make up a workable model design for live testing.

This live pilot involved a Malawian tea supply chain, with actual deliveries of tea and actual payments. The pilot’s supply chain involved a large end-buyer, an intermediate processor, an international bank and 225 first mile smallholder producers.

Trado blueprint

Without necessarily adding costs for end-consumers, the Trado model was found to provide financial savings to reward sustainability practices in the first mile of production. The data generated through the model can enable multiple applications, including marketing, reporting and innovative lending or investment products. As a result of these positive outcomes the consortium decided to publish the Trado model as a new and potentially useful data-exchange concept, delivering a blueprint for wider replication.

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