Episode 5: Get Set for The Future

Full transcript

Ivy Kuo: Hello, I'm Ivy Kuo, Asia Pacific ESG leader at PwC, and you're listening to PwC's podcast, ESG in Asia Pacific, for bite-size updates on the latest ESG trends, from climate change to social and labour rights due diligence. The aim is to bring together ESG practitioners to discuss and solve today and tomorrow's sustainability challenges, which will reflect PwC's The New Equation strategy of building trust and making a lasting difference.

This first series is all about sustainable supply chain, and I'm delighted to introduce you to PwC's subject matter expert, Jeremy Prepscius.

Jeremy Prepscius: Thanks, Ivy, for the introduction. In this podcast series, we will be exploring the issues and changes driving the field of supply chain sustainability. This field is vast and there are many important parts of it, but we'll be focusing on a few key areas, particularly human rights, modern slavery, decarbonization, and the governance aspects which will impact accountability. We have a great lineup of speakers, including a broad set of professionals, from those in the trenches of implementation to the top of corporate leadership. Let's get started with this episode.

Jeremy Prepscius: Welcome to this fifth episode on sustainable supply chains. As we get started, just a short reminder, all opinions are our own and not reflective of any organisations with which we may otherwise be associated. I've been taking the opportunity in these podcast conversations so far to explore the big issues facing supply chain sustainability. 

Today's discussion puts the prior conversations together and tries to answer the question, how should companies react to and prepare for the imperatives that are driving sustainable supply chains? I'm very pleased to have three guests on this discussion, who both understand the issue and can point to the future. 

My first guest is Andrew Chan, a colleague of mine at PwC and is based in Kuala Lumpur, where he is a partner. 

Andrew, you've been around the world of sustainability and consulting for a very long time, tell us a little bit about the experiences that you bring into this conversation.

Andrew Chan: Hi, Jeremy. Thank you for inviting me to this podcast series. So as mentioned, I'm based in KL, where I cover across most of the emerging Asia markets. I started on the sustainability journey now 15, 16 years ago, when I actually helped set up our sustainability practices in the region. Since then, we've logged close to 500 projects with clients, so that covers a broad range of spectrum.

 In my role, leading strategy and transformation, it's very much to do with helping organisations not only set their focus areas around sustainability and what issues they want to address, the key material issues, but also what does that mean in terms of cascading that down into operationalization. 

And that's the key wave we're seeing right now.. is.. beyond all the nice targets that are being set, how are we actually making this happen? And one of those key functions is within the procurement and the supply chain function, what does it mean for those functions to support those sustainability targets?

So looking forward to getting to a lot more discussion with you on that.

Jeremy Prepscius: Thanks, Andrew, I really appreciate you joining us for this conversation. My second guest on this podcast is Louise Halliwell, PwC's Director in the Assurance and ESG Team, based in Melbourne, Australia. Louise, you've also had some interesting experiences related to sustainability, both inside and outside of PwC. Tell us a little bit about your background and how this connects to ESG and sustainable supply chains.

Lousie Halliwell: Thanks, Jeremy. Yeah, I've held a dual role at PwC Australia, which means that I've led our own firm's responsible business strategy and I also advise clients on their responsible business strategies as well. And when I say responsible business, that picks up topics like climate change, net zero, human rights and modern slavery, ESG reporting, and of course, the topic of sustainable supply as well. 

And outside of PwC, I've held leadership roles, which have been pretty varied, that includes being the chief operating officer of a mental health technology company, and also as programme director at a charity. And so both of those roles have really been focused on the S of ESG or social issues if you like.

And I suppose one of the things that I take away from those roles is that I have experience in both setting strategy and developing ESG strategy. And so, that's very helpful in the context of working with companies in this space because you won't often hear me say too many times that there are lots of quick wins here. I know firsthand that something that looks like a quick win on the outside may not be as straightforward when it's being implemented internally. So looking forward to this conversation as well, and thank you for having me here.

Jeremy Prepscius: My pleasure. And our third guest on this podcast is Kiyoshi Wakai-san, who is a consulting director at PwC in Japan. Wakai-san, you've had a long and distinguished consulting career here at PwC for the last 15 years plus, tell us a little bit about your connection to ESG and sustainable supply chain.

Kiyoshi Wakai: Okay, thank you for the introduction, Jeremy. So first of all, my name is Kiyoshi Wakai from PwC Japan. 

So I have been in enterprise risk management for quite some time, and as our clients pay more attention to ESG issues, I'm making some shift from traditional enterprise risk management to more like ESG risk management. 

And our clients are particularly interested in the opportunity side of ESG issues, not just risks, but also how they can try to translate the ESG issue into the new business opportunity. 

So these are some of the areas that I'm particularly interested in helping our clients with.

Jeremy Prepscius: Thank you, Wakai San. So we have assurance and risk and ESG and consulting, Australia, all over Southeast Asia, Japan, trying to bring all of this together. And maybe to round out the introductions today, I bring a few interesting bits and pieces of fieldwork on supply chain into this conversation, mostly in terms of engaging suppliers and working towards what we all want to see, real on-the-ground change. 

So I think between the four of us, we have an interesting interlocking experience set for this conversation. So, let's get it started. And we're going to structure our conversation today pretty simply. Let's explore E, S, and G issues and talk a bit about what we're seeing in our markets now, what you anticipate for the future, and how companies start getting ready for that future today.

Now, in the prior podcasts, I've explored with a variety of guests the past history of supply chains and sustainability, starting from the world of social compliance and bridging to the changing expectations for accountability today. 

We've explored the E issues with a particular focus on climate change and the imperatives that are driving supply chain decarbonization. We've explored the S issues, particularly through the lens of human rights and modern slavery.

So today, let's start with a market-based perspective. Andrew, Louise, Wakai-san, what sustainable supply chain issues are showing up in your markets today? Maybe Andrew, let's start with you, please.

Andrew Chan: Thanks, Jeremy. So in Southeast Asia, with obviously a lot of manufacturing going on there, high degrees of agriculture-based industries as well as construction to fuel the growth of Southeast Asia. We have that typical range of issues that you've covered previously in your podcast series. So one of the big areas increasing further is labour rights and human rights in the supply chain. That lens has been magnified by investors as well as the push from governments.

So for example, Malaysia has been downgraded by US Customs Border Patrol to tier three in the US trafficking in persons report, Thailand is on tier two watch list. So that big focus around forced labour issues is key. We've seen that manifest itself in some products being stopped from being sold in the US until some of these issues can be reviewed and confirmed that there is actually no modern-day slavery. We've also seen some supplies cut from multinational companies supply chain as well, also pending assessment and review. So those issues are actually adding additional friction to business, the cost of doing business within Southeast Asia. So where international companies are looking to start new contracts with those companies in Southeast Asia, more due diligence is needed to ensure that those companies are not introducing and buying into their supply chain additional force labour issues. 

When we talk about the construction sector, I'm glad to see that our clients are looking across the cycle. So it's not only in the construction phase, but they're also looking in the operations phase. So what does that mean for facilities operators and maintenance of buildings? Are those workers being given fair treatment as well? So the S issue is throughout the life cycle of the business, and obviously on the environment side, the imperative, the commitments that we've seen across Southeast Asia around net zero and now that's filtering down into the supply chain.

How can companies work together with their suppliers to decarbonize? Okay, so we're still at the early stages of that journey. A lot of that focus is now, how do we measure first, and then start looking at working together to reduce the emissions and climate risk through the supply chain. 

So I'd say those are the two overriding issues, obviously underpinned by governance. Southeast Asia has been on a continuous journey to improve the quality of governance and that journey arguably started long before the shift in focus towards environmental and social issues. So hopefully that gives you a bit of a landscape view for us to drill into more conversation later.

Jeremy Prepscius: Hugely helpful. Thank you, Andrew. It strikes me, so we've got the issues, the ability to count and measure and understand them, but also the management systems that need to drive those issues going forward. These aren't points in time.

 Louise, over to you. Australia, what are you seeing there when it comes to sustainable supply chains?

Lousie Halliwell: Yeah, look, I'd say there are two or three big issues that jump out for me. Some similar to what Andrew ran through there. I'd start with, there's decarbonization, there's also modern slavery, which I would say is perhaps a specific focus within Australia because of legislation we have in place and also engagement with First Nations run and owned businesses and seeing some of that in supply chain discussions as well. 

So if I start with decarbonization, as Andrew said, more and more net zero commitments are being made and that means that businesses do need to drive down their scope three emissions. So that is a big focus here. It will become a bigger focus, particularly as we get closer to 2025 and 2030, which is when many of these net zero commitments are centred on.

The second, as I mentioned, being modern slavery. We've had legislation in place here in Australia for three years now, and that legislation has required businesses to identify the risks of modern slavery within their supply chains and report on how they're managing those risks. 

Now, that legislation is still new here in Australia, only in place for three years, but it has led to more dialogue and more action and more attention, I think, on issues like forced labour, human rights, modern slavery, some of the situations that can arise as a result of human rights being breached, and so forth. And there is certainly a growing awareness of businesses becoming more aware of the processes and controls they need to have in place to best manage those risks.

Now, that legislation here in Australia is currently under review. Certainly, the signals seem to be at this stage that there will be more expectations and obligations of businesses in this space. So we're also watching that in our market as well. And then the third issue to flag is engagement with First Nations running their own businesses in the supply chain. And so, more and more businesses here in Australia are looking to support the growth of First Nations businesses and more and more companies are committing to contestable spend targets in this space as well. And that often comes through in commitments that businesses are making with reconciliation action plans. And so, that sets supplier spend targets and it sets reporting requirements as well. And so again, that's been another driver of sustainable supply chain focus in our market as well.

Jeremy Prepscius: Really interesting. Thank you, Louise. And you can see the massive shifts in Australia towards decarbonization and you described the broadest level of reconciliation and social driven issues driving through supply chains, not to mention the whole fascinating evolution of the modern slavery discussion there. Okay. 

Wakai-san, let's move further North. Japan, what are you seeing when it comes to sustainable supply chains?

Kiyoshi Wakai: Yes, let me talk about some of the major trends we are seeing in the environment or E space in Japan. So more and more of our clients are regarding ESG issues as not just an operational issue but as a strategic issue affecting their future growth prospect, becoming more interested in the opportunity side of ESG, particularly E. 

And one of the hottest areas in E space is the circular economy. In particular, Japanese chemical companies have been very active in undertaking various new business development initiatives. For example, one of the leading Japanese chemical companies is trying to develop new technology solutions to extract oil from plastic waste purchased from third-party vendors in order to use that extracted oil at their factories.

And they're undertaking this initiative in a partnership with another Japanese oil company as well as UK technology companies. So that's one of the examples for showing that a company is trying to turn the ESG issues into a new business opportunity. 

Another example is that the same Japanese chemical company is trying to develop new technology to convert CO2 emitted from their factories into raw material for making plastic. And then they're trying to sell the raw material in the open market. So these are some of the examples showing that environmental issues can be a good source of new business opportunities.

Jeremy Prepscius: Thank you, Wakai San. The opportunity side of sustainability of ESG and how that plays out through supply chains, either selling downstream or looking upstream is going to be what needs to pull all of this together.

And maybe that's the transition to the next topic we might want to dive into. 

Let's look five to seven years into the future. So we've got these S issues, we've got the environmental issues, we've got the governance challenges that we're working through. We're looking to both mitigate the risk, but we have to create opportunity. 

From a markets perspective again, but also bringing these issues into play, how is sustainability within supply chains in your markets going to be different in the next five to seven years? What are the good practises you expect companies to have in place by that time? Maybe, Louise, this time let's start with you, please.

Lousie Halliwell: Yeah, sure. I think good practices will begin with greater business engagement on engaging with suppliers as critical stakeholders as opposed to contract-based transactional relationships. So I think there'll be much more emphasis on mutually beneficial trust-based ongoing relationships with suppliers. I also think that we will see continued engagement around access to quality data within the supply chain. That will continue to be a focus. And I think legislation that's emerging around that will be another push for that. And I think that there will be just more focus on businesses needing to really understand and probe their supply chains and taking on that responsible business ethos for the other businesses that are enabling their business to succeed in the market. So if I just hit each of those points maybe with a little bit more detail, I guess I think that supply chain sustainability will be a key differentiator for business more so than it is today.

And I think bringing in that point I made earlier around trust-based relationships, I think that we'll start to see more of that because I don't think that there'll be much room for businesses in five to seven years to be prioritising engaging with the cheapest supplier, say, if it also means that their emissions targets will blow out or their modern slavery risks will increase beyond risk appetite levels and so forth. 

So I think that this will become more of a pointy issue for businesses as we move closer to 2030 and we see more and more of the proposed legislation in this space become enacted. I think the second issue I mentioned was around data and the disclosure of data and quality being a key feature of that data as well. I think that it will become more and more important for businesses to be able to tell the story of their supply chain and really demonstrate that it's working with others who share their values, ESG priorities, and so forth.

And finally, I do think that we are very used to businesses undertaking supply chain risk assessments within their standard practices. But I think that that will start to shift towards opportunity assessments as well. And so, what I mean by that is I think that it'll be about businesses not just looking at a supplier's potential negative impacts on people or planet, but also the supplier's positive impacts on people and planet to really build that narrative and that differentiation for businesses in this space. 

So I think that is where having suppliers as critical stakeholders will be really important and it'll be much less about those transaction-based relationships and much more about what is mutually advantageous for both parties.

Jeremy Prepscius: I fully agree with all that. And to be honest, when we think about data transparency and the future ubiquity of data, I think we've just started to scratch the surface on what is going to be traceable, transparent, and accountable.

 Wakai-san, maybe coming back to you next, do you see some of these same trends in Japan as well?

Kiyoshi Wakai: Well, I think yes. I think one of the key drivers for transforming the sustainable supply chain management at Japanese companies, I think that, regulations, for example, let's take a look at human rights. Human rights haven't been looked at by many Japanese companies before the Japanese government released the human rights guidelines, I would say. 

And once that guideline was released by the government, we are taking lots of inquiries from our clients as to how they should start undertaking these new initiatives. Where to start, how to start. Then we are building up new business around this human rights topic. But before the guideline was released things were very slow around human rights in Japan. So I think it depends on the new regulations and this is my personal view about what would be the key driver for transforming the supply chain.

Jeremy Prepscius: Great. And that echoes what Louise was talking about, which is, call it a values-based, a rights-based starting point. And as that comes into being that we'll need to transfer and proliferate through supply chains. Okay. 

Andrew, coming over to you, what do you see as good practices in Southeast Asia in Malaysia seven years from now?

Andrew Chan: Thanks, Jeremy. So I echo all of the points already highlighted, but what I would say that would see a big focus really around upskilling, around the supply chain procurement function because supply chain procurement as we know it now is going to be different. So as mentioned, it's going to be less about the transaction and maximising cost savings. It's going to be very much around optimization and moving to partnerships and collaboration to work around the joint outcomes. As already mentioned, data will support that, but there will need to be different types of data as well.The input-output data standard. I think we'll be seeing more around impact-based metric data, especially because of the push towards a Just Transition. So let's talk about SMEs. SMEs is an area that many, many companies right now even finance providers are struggling with to say how do we have them included as part of the transition to lower carbon economies. 

As an example, I spoke with an international oil company and asked them, what is your focus around SMEs as part of your net zero transition? The initial response was that we're so large, we actually don't have SMEs in our supply chain. I said by being top of the food chain, you support thousands of SMEs in this sector. So what you do at the top cascades down. So if you hit net zero by 2050 but you've reconfigured or a whole heap of those SMEs have actually lost their business, is that still success?

So they said, actually no, it's not considered success even though we've achieved our climate target. So we actually need to integrate this together. So the mindset around where responsibility lies is where we're seeing the term Just Transition occurring more. I think instead of overall rhetoric now over five to seven years, there is time to get deeper into this agenda. And to me, the issue with Just Transition is really where is the cost incurred, who is incurring it, and is it fairly allocated across? Because it's not a Just Transition if the cost all goes to the SMEs to bear and the big companies benefit more commercially from that as opposed to distributing that across the value chain.

So that to me is one of the big issues that needs to be addressed over the next five to seven years. And I say that would also support us, to Wakai-san's point around circular economy. We're seeing early-stage responses within Southeast Asia. Notably, in Southeast Asia, we've become, well, we've generated our own plastic waste, but we've also become one of the plastic waste dumping grounds of the world and have a huge amount of plastic waste inventory stored up. More solutions like Wakai-san's been mentioning would need to be employed to deal with those.

Jeremy Prepscius: So the world that I see seven years from now is a world where these issues that we're talking about today and the cascade of sustainability trends, Andrew, you just talked about, how does that play out through a just transition, which echoes, actually reinforces and amplifies what Louise was talking about of how do you think about first nations engagement and reconciliation. It's really about including the broader society, in this case via the lens of SMEs through the overall decarbonization process and how that plays out through supply chains, how that plays out through partnerships with increasing data, and as Wakai-san talked about as increasing legislative requirements play through, this is a big cascade coming towards companies. 

So let's talk about what might companies start with, what are they starting with, how are they preparing for that world now? So Wakai-san, maybe starting with you, how should / how are smart companies preparing for a sustainable future in their supply chain?

Kiyoshi Wakai: I think one of the sort of typical approaches to assessing the current state of the supply chain management in the context of sustainability is to take a look at the disclosure documents such as the integrated report, annual report, ESG report, and try to figure out and compare disclosure documents from other companies. I mean, in doing benchmarking, to see whether there are any notable gaps between our clients and their peers. And that's then to try to figure out what could be the major issues they have to deal with in order to improve the sustainability management. I think that's the typical way to start working on this type of project.

Jeremy Prepscius: And what I find really interesting is companies begin looking at CSRD for example, and the double materiality requirements of that, it really pushes out the horizons of where is the external impact of a company on people and society and the environment, and how do those play out over time. Which really, I think, will end up with a much more rigorous approach towards companies saying, yes, we do need to work on understanding and engaging on these key issues. So transparency, reporting, and strategy. Absolutely the starting point. Andrew, what are other smart companies doing now to prepare for this future?

Andrew Chan: So right now, Jeremy, I think it's still fairly early stages. So we're seeing more what I'd call input and process-related activities, as has Louise already highlighted, trying to capture data that's useful. I think that's got many, many years to run as mentioned till we get to real insightful data, impact metrics, accuracy of data, what are the comparable boundaries between companies. 

A good starting point is to try to streamline the data being asked for. So we're in that initial data-gathering phase. There is so much friction there. Investors are asking for one set of data from suppliers, different multinationals, different domestic champions. They've also got a whole bunch of different data sets.

 So if you are a supplier to multiple companies, which obviously pretty much everyone is, you're getting bombarded with so many different requests, slicing and dicing climate data, labour force data, you almost need a full-time resource just to manage the volume of data requests.And again, for us in Asia, that's just not efficient, especially with the number of SMEs we have. How many SMEs recovering from the COVID pandemic can afford to put so much investment into just data gathering? So that's a huge burden that we see potential to really collaborate and streamline. 

Now, whether regulators come in and decide we need to step in and streamline this, that is something up for debate. Do we have a block across Asia, across the Asia-Pacific region that can streamline that sufficiently enough, or are we relying on international standards bodies to try to encourage that sort of streamlining?

 Going back to my earlier point, I would say upskilling, and this isn't just for supply chain and procurement functions, this is actually across the whole organisation. I think we've reached a point now where we've got over 80% of global GDP under some form of net zero commitment.

So great, fantastic. We've done the commitment wave, we now do the implementation wave. And to enable implementation, you really have to focus on upskilling and getting that into the corporate functions. 

And just to illustrate, again, I spoke to a multinational company whose CEO and strategy has been talking about net zero for many years now. And I spoke to the Head of Asia Pacific procurement and asked, how are you embedding net zero into your procurement decision-making and parameters? The answer was we haven't yet. Okay, so it needs to cascade in, if not pointing fingers, we see it as a wave. You've got to go from the commitment, but after that commitment, you've got to back that up with implementation. Otherwise, what we will unfortunately see is accusations around greenwashing. We've made these nice-sounding commitments, but we're not seeing the action and the progress. So those are two key areas that I'd say right now is what we should see happening.

Jeremy Prepscius: So Louise, Wakai-san started us with strategy and disclosure. Andrew has brought us into data and upskilling and taking that into integration. What are some of the other elements that smart companies are starting with today to prepare for the future?

Lousie Halliwell: Jeremy, you've got a great panel today because I completely agree with all of the comments that have been shared. I think that they're really practical and strategic steps forward. I would add a couple of things. I think that the bombardment of suppliers with requests for data is a really important issue that businesses will need to help solve as well. And there'll be greater energy and focus on doing that the more we shift to engaging with suppliers as key stakeholders. And so, I would encourage businesses that don't yet have a supplier engagement strategy to develop one. They are a critical stakeholder and you will be able to engage with your suppliers on your sustainability priorities, incentivize them to join you in those, and then you can work to prioritise and preference those suppliers that also help you meet your shared ambitions. So supplier engagement strategy, if you don't have one, you need one.

In terms of the data point, I won't labour the points that have already been made. I would just emphasise though that verification of data is also an important issue. And in Australia, we are seeing this here as well as many other jurisdictions. But one of the issues that is particularly relevant in our market is we have some proposals being suggested by our federal government around the need to potentially require companies who are importing certain goods from certain locations to ensure that those goods aren't being made with forced labour. And so, thinking through that data verification point is also important and may well become more important in years to come as well. The only other thing I'd mention here is that this is a fast-evolving space. So I think progress over perfection here. There are no quick fixes in this space. It's an ongoing maturity sort of progression. And so, my main point would be just to get started.

Jeremy Prepscius: So we start with strategy and disclosure. We look at data, what do you know, what do you count, what do you measure? The knowledge and capabilities of our own staff, our own people, and how we then use that to integrate these ideas into our supply chain or procurement operations. Suppliers need to be engaged and get onboard because what we're trying to do at the end of the day is to respect the rights of workers, to decarbonize and keep the world at 1.5 degrees. That progress needs to start, but we also need to be able to account, measure, and verify that, to see that we're actually going down the road that we want to go down.

So Wakai-san, Louise, Andrew, thank you very much for the discussion today. I really appreciate this and I've learned a lot. In summary, as supply chains evolve over the next decade, how they integrate environmental and social factors, governance, and accountability. These are directly going to relate to the world we inhabit, from the impacts of climate change to the opportunities for inclusion, good jobs, and a Just Transition. These will create the world we live in and hopefully we'll create the world we want.

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