Yet rather than a binary outcome, the global economy actually faces multiple scenarios which could heavily impact global trade, many of which are the result of means meant to actually bypass the debt ceiling and avoid default.

Thus, it’s important to map out the potential impact of the different options so that companies and organizations can both understand the implications of different strategies and prepare for the surprisingly varied outcomes, many of which would still massively impact global trade.

The trillion-dollar coin

One of the most talked about but seemingly comical scenarios involves the minting of a trillion-dollar coin. This possibility utilizes the U.S. Treasury’s relatively uninhibited ability to mint money to generate the funds necessary to continue government spending without increasing the debt.

The issue is that this amounts to little more than turning on the money printer, a measure which has historically caused intense inflation, an economic challenge only starting to come under control. While this would keep the United States from default, inflation would not be the only cost, as confidence in the U.S. government and the dollar would likely take a significant hit. Global financial markets could see a bout of instability due to this decrease in confidence, which may make financing operations more difficult.

This workaround is nothing new, as the temptation for government to print its way out of a debt crisis has been a longstanding fantasy with often dire results. One can think of this as the Ford Pinto scenario, a classically dangerous vehicle rolled out despite far superior options being available.

Premium Treasury bonds

If the trillion-dollar coin scenario is the Ford Pinto, then the strategy of issuing a series of premium Treasury bonds is the Ferrari Daytona: more powerful, more refined, and slightly more likely to get you to your destination uninjured.

This scenario relies on a legal quirk, where the debt ceiling applies only to the face value of outstanding government debt. Here, what the government would do is reissue already outstanding bonds with an additional payment premium, basically promising a higher interest rate in exchange for a burst of upfront cash. This both avoids default by injecting additional revenues into the government’s cash flow and avoids the inflation-fueling effect that minting a trillion dollars would have.

In addition, the savviness of the solution may bolster confidence in the U.S. government’s ability to manage itself, as well as lessen the potential impact of future debt ceiling crises if found to be a workable solution. For global trade, the primary challenge would be the possible mixed market reaction, but the turmoil here would be light.

The primary threat would be the exact opposite of the trillion-dollar coin. Rather than sparking inflation, the premium bonds could result in deflationary pressure. For global trade, deflation in the U.S. could be a greater threat than inflation, sapping consumer spending and creating a myriad of other issues which are relatively exotic and potentially dangerous. Some economic concerns already exist that suggest that the U.S. could go into a deflationary cycle soon, so adding further deflationary pressure could add fuel to this concern.

The sticking point is that this scenario is unlikely given the remaining time before the U.S. hits the default point. Bond programs like this take time to set up and every day closer to default-day the United States approaches, the less likely premium Treasury bonds can be implemented. Depending on how the current conflict resolves, premium bonds may be a more tempting solution in the future.

14^th Amendment Constitutional crisis

The 14^th Amendment of the constitution states that: “The validity of the public debt of the United States… shall not be questioned.”

This gives an opening for president to declare the debt limit itself as unconstitutional and the issue null and void. But this does not mean that the potential impacts of a debt ceiling crisis would be swept away. Rather, they would hang over the heads of the global economy like a sword of Damocles as an inevitable court battle rages though the U.S. legal system.

An unfavorable Supreme Court verdict could plunge the U.S. into default with little warning, throwing the global economy into turmoil and actually making things worse than if the U.S. defaulted on the original date. Simply the heightened uncertainty preceding a verdict could make currency markets unstable and roil other financial markets until the constitutional crisis is resolved. Any instability in such markets will only make global trade more difficult and riskier.

In the long term, if this move were to be upheld, it could potentially strengthen international confidence in the U.S.’s ability to meet its debt obligations and bolster its stability by removing the possibility of another debt ceiling conflict. This would thereby bolster U.S. trade negotiating positions and reinforce its standing as a central hub of global trade.

Non-technical default

As addressed previously, another option available to the Treasury to avoid default in the technical sense is to redirect its remaining cashflow towards paying back debt holders. Think of it like having a pitcher and two glasses: there may not be enough water to fill both glasses, but instead of evenly distributing the liquid, you could instead focus on filling one glass to satisfaction. Doing so with bonds would keep the U.S. from technically defaulting and deter the worst of the consequences.

The issue is that, with more of the cash flow going to bonds, there will be even less to go towards government spending such as social security, pay for government employees/military, and economic programs. The likely result is a deep domestic recession which could spread globally. Yet for global trade, this would resemble a more traditional economic crunch, one already well-explored. Some rearranging of global trade away from the United States and a loss of trade prestige for the dollar would be probable, but not quite to the scale as a full default would have.

Full default

The fallout of a full default is simultaneously well-explored and completely alien, with few available historical examples to guide expectations. What is most likely is global economic distress and financial market chaos as the most risk-free asset in the global market suddenly fails. The shift away from the United States both as an economic hub and the head of the world financial order would be a likely and swift outcome, with a large scale-rearrangement of global trade.

Indeed, the global ramifications would be deep and contagious, likely pulling the rest of the world down with the United States into recession.

A full default is the worst-case scenario, one where winners are defined by those who lose the least. This remains an unlikely outcome, in the same way that a nuclear war is unlikely due to its promise of mutual destruction. In the same way, however, its possibility cannot be ignored.

Negotiated Settlement

The traditional way that the debt ceiling crises has been resolved in the past remains the most likely. Congress and the president will find a negotiated settlement to raise the debt ceiling in exchange for some level of concessions.

For global trade, the only likely result is slightly higher interest rates and some minor movement in the financial world, escalating as negotiations approach the deadline. Fears will fade and the mainline expectations for global trade will reassert themselves as if this never happened in the first place… until it happens all over again.

Shifting from linear to circular economies

Circular economic principles differ from the more standard linear economic process of take, make & dispose, and instead focus on adding value for customers through the entire product lifespan. Instead of centering strictly on reducing or abating the generation of carbon or other greenhouse gases, a circular economy reimagines waste as a new resource. Linear economies focus very little on the reuse or repurposing of products, whereas circular economies are centered on product reuse — rather than disposal.

A 2021 Presidential Executive Order on federal sustainability initiatives established a goal for federal agencies to minimize waste, advance pollution prevention, support markets for recycled products, and promote a transition to a circular economy. Specific benchmarks for this order note landfill diversion of at least 50% of non-hazardous solid wastes by 2025 and 75% by 2030.

Technology is nearly universal in government service delivery, and managers can relate to the inherent challenges in retiring and replacing old technology. The Victoria (Australia) State Government developed guidelines and an Application Lifecycle Rating matrix to help government officials identify which technology and programs are candidates for retirement and when to begin the transition process. Older software programs may pose integration issues, have limited vendor support or warranty provisions, and may exacerbate hiring challenges as legacy programs may not be a match for employee skills in the marketplace. Legacy systems also may pose cybersecurity threats or be poorly suited to be adapted to the changing needs of some government agencies or organizations.

Government leaders understand the importance of investing in tools and systems that allow for future growth, and which are modular in nature. Modular systems allow you to add on or expand in the future as your organization grows or its needs shift. Even before the global pandemic, for example, the IT Director for the City of Las Vegas noted that the organization struggled to keep pace with the demand for more connections and hardware. Similarly, the Sacramento Public Library found that while it had in the past simply upgraded with its previous technology vendor, a new bidding process was exploring relationships with new vendors and sourcing products that better suited the library’s current and future needs.

E-waste from technology obsolescence

Many technological devices simply aren’t built for longevity. The average laptop has a high likelihood of breaking within 3-4 years, and software upgrades make it increasingly difficult to utilize older models of smartphones. We exist in a technological mirage in which we buy new, but we don’t have to see the climatological impact of the upgrade-and-replace life cycle. It may be good to know, however, that 85% to 95% of a smartphone’s carbon footprint comes from the manufacturing process — in particular, the mining of rare earth elements for these devices. Mining of these elements is a dirty business, being highly toxic and damaging to local ecosystems. Lithium — the element in virtually every device battery — is often referred to as gray gold in reference to the unregulated labor practices, kidnapping, human trafficking, and violent conflict involved in the mining of this element.

Once a device is replaced, e-waste must be managed. E-waste generation globally has increased by 21% in the past decade, and it is estimated that just 12% of smartphone upgrades involve older devices being sold or traded-in for a new one. The United Nations has identified e-waste as one of the fastest growing waste streams, estimating that only 17.4% of e-waste globally is formally collected and recycled. Harmful elements — as many as 69 separate elements from the periodic table — can be found in electrical and electronic devices, particularly mercury, cadmium, and lead.

Why are we cycling through devices more quickly? Trends in edge-to-edge glass on phone and tablet screens mean that devices are increasingly breakable. Other causes include: intentional design elements such as batteries being glued in place; the use of proprietary screws in device cases to prevent opening; more sophisticated techniques such as slowing down older devices to spur replacement; and using federal agencies like the Department of Homeland Security to block independent repair shops from accessing replacement parts. Device manufacturers have gone to great lengths to ensure that individuals are more likely to replace rather than repair their devices.

Circular economic principles in practice

Due to their scale and leverage, government agencies have a unique opportunity to push for better environmental outcomes in their technology procurement including the ability to repair and increase device longevity and compatibility.

Some ways government agencies can make a difference by:

• • • • exploring bundled services that include devices, software, wi-fi, and a guarantee of a minimum battery life, as well as allow for older hardware to be used, including refurbished devices;
      • considering product lifespan in procurement decisions and, whenever possible, aim to purchase products that can accommodate in-house repairs;
      • prioritizing software systems that are modular in design and can be expanded upon in the future; and
      • engaging in competitive bidding processes to continuously seek out vendors that follow best environmental practices in procuring hardware and software.

Procurement decisions involving systems (software) and devices (hardware) that are made by government agencies are an important part of shifting away from a disposable culture to one that values waste as a resource. Extending the lifespan of both software and hardware and ensuring that when devices are retired that they are recycled responsibly further reduces the need for new raw materials, reduces e-waste generation, and opens up economic opportunity. Research estimates that $4.5 trillion in additional economic growth could be generated by 2030 through the advancement of circular economic principles.

This means that only products that have been produced on land that has not been subject to deforestation or forest degradation after December 31, 2019 may be placed on the E.U. market or exported.

This is just one more sign of the ongoing expansion of regulations focused on risks related to environmental, social & governance (ESG) issues — in this case, those with a focus on the E. However, E is not the alone in this regulation, as respect for human rights will be considered an obligation for a product to be considered deforestation-free.

While this regulation would not ban any country or commodity specifically, companies will not be allowed to sell their products in the E.U. without this type of statement. This means that companies will also have to verify compliance with relevant legislation originating out of the country of production, including those on human rights and the rights of concerned Indigenous peoples.

Scope of legislation

The products covered by the new legislation include cattle, cocoa, coffee, palm-oil, soya, and wood, as well as products that contain, have been fed with, or have been made using these commodities (such as leather, chocolate, and furniture). The MEPs also successfully added rubber, charcoal, printed-paper products, and a number of palm oil derivatives to the list. In addition, the legislation also allows for the addition of new commodities to the list.

Additionally, all banking, investment, and insurance activities of financial institutions are required to take additional action around due diligence in the legislation. Specifically, financial services firms would only be allowed to provide financial services to customers if it concludes that there is no more than a negligible risk that the services potentially provide support directly or indirectly to activities leading to deforestation, forest degradation, or forest conversion.

This is just another global regulation that reinforces the need for companies to conduct ongoing due diligence with respect to their business partners and make every attempt to map their supply chains to the lowest tier possible.

The competent E.U. authorities will have access to relevant information provided by the companies, such as geo-location coordinates, and be able to conduct checks. They can, for example, use satellite monitoring tools and DNA analysis to check where products come from. The final text of the regulation also includes the obligation to precisely geo-locate the specific plot of land involved in the production or farming of the commodities and products in question.

The European Commission (E.C.) will classify countries, or part thereof, into low-, standard-, or high-risk categories within 18 months of this regulation going into effect. Also, the proportion of checks on operators will be performed according to the country’s risk level: 9% for high risk, 3% for standard risk, and 1% for low risk. For high-risk countries, member states would also have to check 9% of total volumes.

​​​​​​​Penalties for non-compliance and lack of due diligence shall be proportionate and dissuasive, and the maximum amount of a fine is set for at least 4% of the total annual turnover in the E.U. of the non-compliant operator or trader. All products linked to deforestation will be required to be withdrawn from the market if they are already present in the E.U. market.

Although the final technical details of the exact wording are still being worked out, the goal is to introduce mechanisms to avoid duplication of obligations and reduce the administrative burden. The final text will also include language that small operators will be able to rely on larger operators to prepare due diligence declarations. This is another example of how the E.U. is taking smaller businesses into consideration when drafting these new requirements.

Next steps

The MEPs and Council will need to formally approve the agreement, which is anticipated. The new law will come into force 20 days after its publication in the E.U. Official Journal, but some articles will apply 18 months later.

The E.C. will step up dialogue with other big consumer countries and engage multilaterally to join efforts, so companies should monitor how these discussions proceed and to what degree these requirements could apply outside the E.U. in the future. For example, a new bill was introduced in the current U.S. Congress in November 2022 that is seen as a response to the E.U. legislation.

While this regulation would not ban any country or commodity specifically, companies will not be allowed to sell their products in the E.U. without this type of statement.

This is just another global regulation that reinforces the need for companies to conduct ongoing due diligence with respect to their business partners and make every attempt to map their supply chains to the lowest tier possible. As the first reports will likely be due to the E.C. by April 2024, putting solid due diligence practices in place now are part of a responsible sourcing strategy. Tools to certify that small suppliers of raw materials are sourced from areas that are not degrading forests no doubt will be required. Moreover, tools that allow users of raw materials in their products to monitor them on an ongoing basis is equally important to ensure compliance is maintained.

At the same time, uncertainty remains. Currently the regulation avoids a clear directive for producer-countries to require standards for human rights or to define what the term deforestation means. Without this, companies may seek to source products from jurisdictions in which relatively weak legal frameworks exist, and thus, could undermine the E.U.’s intent with the regulations.

The need for the E.U. to seek input from all stakeholders— including producer countries; local communities in producer countries; small land users that produce in-scope materials and products and mostly reside in Southeast Asia; local buyers of raw materials that sell them to small-, medium-, and large-sized companies; and multinational companies that purchase the in-scope materials — is necessary to effectively achieve the intent of the overall legislation, which is to ensure sustainable sourcing and avoid deforestation or forest degradation.

Further, these findings were recorded before the U.S. Securities & Exchange Commission (SEC) proposed that public companies begin reporting their carbon emissions for Scopes 1, 2, and 3. Since then, the ESG regulatory landscape has changed dramatically with an increased likelihood that the percentage of legal buyers viewing ESG as important is much higher.

The question remains, however, whether or not U.S. companies will be ready once the rules are finalized. Indeed, only 30% of U.S. organizations currently are reporting Scope 1 and 2 emissions and only 21% of U.S. organizations are reporting Scope 3 emissions. Overall, 32% of U.S. organizations currently have no greenhouse gas (GHG) reporting at all as of October 2022, according to Reuters Insights Sustainability research.

Tech tian Intel falls into that 21% of companies that are already reporting on carbon emissions throughout their supply chain (Scope 3 emissions). In fact, Intel has committed to some level of corporate social responsibility reporting since the 1990s. Adam Schafer, Senior Director of Supply Chain Sustainability at Intel, who has been in the role since 2017, explained how the company’s industry collaboration enables more efficient and effective management of its supply chain sustainability programs.

In his role, Schafer says he oversees Intel’s complex supply chains — which include manufactured outsourcing, direct manufacturing and fabrication, and equipment and indirect materials — to ensure due diligence and global compliance in the company’s human rights, code of conduct, responsible minerals, and Scope 3 supply chain commitments. Intel’s effort also includes operational components of supplier diversity, equity & inclusion (DEI) and the company’s green chemistry program.

Schafer describes Intel’s ESG program as mature and complex with a commitment to staying ahead of the curve when compared to its peers. The foundation of the company’s ESG strategy concerns transparency and ethics, he says, adding that to enhance transparency, the company unified its ESG goals around its RISE (Responsible Inclusive, Sustainable and Enabling) framework in 2019, which outlines 27 goals and targets for achievement by 2030. And to simplify how it communicates its ESG strategic progress to its stakeholders, Intel integrated its reporting mechanisms across its annual and quarterly SEC filings in 2021 as well as its corporate social responsibility report.

Driving compliance in complex supply chains

One of the most time-consuming and complex areas of sustainability compliance across Intel’s supply chain is its responsible minerals program. As a semiconductor company, Intel uses several raw materials that need to be traced to the source of their extraction.

One of the key mechanisms that helps Intel’s ability to trace its raw materials to their source is its leadership in the responsible mineral initiative (RMI), which is part of the Responsible Business Alliance (RBA), the largest industry coalition dedicated to corporate social responsibility in global supply chains.

By using RMI requirements as the centerpiece of its program, Intel set its due diligence requirements in responsible minerals around the ability to track and trace down the origins of their minerals from which smelters these raw minerals were extracted down to the mine from which they came. The RMI outlines the requirements for certification of smelters for hundreds of companies which use these raw minerals. And last year, 98% of smelters for these materials that Intel used were RMI-certified, Schafer says.

Part of the challenge for Schafer is keeping up with the evolving expectations of stakeholders on carbon emissions and responsible minerals while maintaining rigor in the areas for which he is responsible. For example, the responsible sourcing movement has expanded beyond minerals quickly over the last 5 years. “The regulatory demand signal is shifting, but one important point to underscore is that the standards aren’t necessarily changing, but the degree of traceability — to be able to understand as a company what are you making, where it all comes from, and how was it made — are evolving,” Schafer explains.

“Using responsible minerals as an example, going to the smelter-level and doing our due diligence and reporting is getting more detailed,” he adds. “Right now, we know the percentage of our responsibly sourced minerals, but where it is going is [for us] to identify where every kilogram of particular material comes from. This is traceability — and this is the real challenge across our supply,” he elaborates.

Participation enables efficient monitoring

An important but often overlooked element of creating ESG due diligence and compliance programs is collaboration with industry participants for better efficiency among both the suppliers and the buyers. Indeed, Intel’s participation with the RBA makes responsible minerals compliance many times more efficient compared to having Intel use its own framework, notes Schafer.

One of the key drivers for Intel’s leadership in the RBA is the fact that 75% to 80% of its revenue is represented through the RBA membership. Participation in the RBA enables the company to demonstrate the importance of being a responsible business to its customers and suppliers, which are two key ESG stakeholders. It also helps the company stay up to date on the materiality of these two key stakeholder groups.

“We can’t make progress alone, and we can’t accelerate achievement of our goals alone,” Schafer says. “If we tried to do this alone, it would be less effective and more expensive, so we have to work with others to get them on board, and make sure they understand their obligations and what it is that we all need to meet those stakeholder demands.”

Option 1: Non-technical default

The U.S. Treasury has a couple different options if the “extraordinary measures” which are forestalling the crisis reach their breaking point. The Secretary of the Treasury could make the choice to continue paying bond holders, prioritizing them in order to avoid a technical default. Such an action would avoid the common meaning of default, as the U.S. would continue to fulfil its obligations to its lenders. This would also give the government cover to avoid the greatest harms to international trade and the currency regime, but it is unlikely to escape without significant harm to its standing and reputation.

While technically avoiding default, reaching this point would expectedly lead to downgrades in the country’s credit rating and increased interest rates more broadly, as was seen in the near default of 2011. The more significant impact this time would be to the domestic economy. Prioritizing bonds would result in substantial domestic spending cuts as the Treasury would divert its already insufficient cashflow to repay lenders. Payments to state programs, healthcare, Social Security, and military spending would thus see a larger contraction in funds than they would be otherwise. The U.S. would almost certainly enter a recession with high unemployment.

The U.S. plunging into recession would cause other fragile economies to enter into recession as well, pulling down global economic demand. However, this scenario would more resemble a traditional global recession, the type of which has been navigated and documented previously. While having its own unique challenges, non-technical default would be more familiar to organizations and businesses than Option 2.

Option 2: Classic default

In this circumstance, domestic spending has been given priority over bond holders and the U.S. government defaults on its debt. Immediately, the U.S. dollar experiences a sharp decline in value relative to other currencies, as last-minute hopes of a political compromise are dashed. Subsequently, import prices skyrocket and inflation could spike rapidly. Investors will then begin to sell off U.S. Treasuries at a high volume, likely at a loss that will hamper global access to liquid capital.

The U.S. plunging into recession would cause other fragile economies to enter into recession as well, pulling down global economic demand.

With the loss of the supposedly most safe and stable asset, financial institutions’ balance sheets would become fragile in a way that they haven’t since the Global Financial Crisis of 2007-’08. The Federal Reserve would need to immediately announce emergency measures to support financial markets and prevent a total collapse of the financial system.

This then would likely be followed by other countries reducing their dependence on the dollar as the international reserve and trade currency. The U.S. has greatly benefited from its place as the standard currency for international finances, trade, and economic stability. A default on its debt from something as innocuous as failing to raise the debt ceiling will end this status. Other countries, namely China but also potentially the European Union, India, and Japan will try to push their currencies as the new standard-bearer, but this process will be messy, and it will take time.

Meanwhile, the rapid exchange of currencies will cause chaotic fluctuations in exchange rates and make global trade immediately more difficult. Combined with the crisis in the international financial system that the Federal Reserve will be struggling to hold together, a liquidity crisis becomes possible, which would strangle global trade in the short term. Ships will be stuck in ports as companies and governments alike struggle to raise the funds to free them while valuable commodities lie frozen in the supply line as buyers work to stabilize their balance sheets and avoid illiquidity. The resulting seesawing of prices will only make trade more difficult and more expensive.

Bond holders will not be the only ones seeing their cash flows stop. State spending and major social programs in the U.S. will also see funds frozen, though to a lesser extent than a non-technical default would see. The combination of fiscal cuts combined with a financial crisis will still plunge the world’s largest economy into recession.

It’s difficult to do more than hypothesize what global trade would look like in a post-default world, but it would most likely be dramatically more costly and less accessible.

The price of oil and other commodities will experience significant fluctuations. Global inflation will probably reignite as the benefits of a sole global reserve currency are lost, and the additional costs of more expensive trade will be felt broadly. Countries will seek to reduce their reliance on the U.S. in as many ways as possible, including creating new trading blocs which would become more isolated from one another as the global economy becomes more splintered. The resulting barriers to trade and global supply chains will likewise make global trade more difficult and, again, more expensive.

The long-term impacts

In the medium- to long-term there would be a global recession and higher costs of doing business for everyone involved. Without a dominant global trade regime, trading blocs will vie for supremacy, perhaps erecting barriers to trade such as requiring business to be done solely in the bloc’s currency of choice, be it the euro or yuan. Money will be tight, and importers and exporters will face delays or maybe even find their jobs impossible for long stretches of time until the new global market dynamic has a chance to emerge.

Despite rising labor costs in countries such as China, the economic disruption may further hamper movement of manufacturing to lower-cost developing countries, further pushing up costs and hampering global economic growth. Yet, out of everyone impacted, the U.S. will be the one left the most scarred. Thrown into a deep recession, its financial system and credit facing the greatest challenge since not 2008, but rather 1929, the prosperous United States at the center of a global economy will become a memory.

It’s difficult to do more than hypothesize what global trade would look like in a post-default world, but it would most likely be dramatically more costly and less accessible. The good news is that default remains unlikely. As stated previously, the United States has always managed to raise the debt ceiling before reaching the default state. After all, countries tend to avoid courting economic collapse simply to score domestic political points. Given events such as Brexit however and the failure of some countries to properly respond to global crises like the pandemic, such cataclysmic events cannot be ruled out entirely. Companies and governments alike should be prepared for the previously unthinkable to possibly happen.

The necessity to focus on Scope 3 emissions, in particular, is evident from the Reuters Insight Sustainability Survey 2022, which surveyed senior sustainability practitioners and C-Suite executives. Results showed that 79% of respondents were concerned with their Scope 3 emissions, demonstrating an incentive for companies to invest in improving their emissions data. This increased concern, in part, is because of growing pressure from investors for further granularity in disclosures but also from internal pressure from corporate boards to make more informed decisions.

Likewise, addressing Scope 3 data accuracy sits within the top three of organizations’ priorities as it requires engaging with their supply chains, aids in the reduction of organizations’ climate or carbon impacts (in other words, their decarbonization efforts), and enables further granularity within sustainability reports.

Scope 3 data, however, is difficult to collate as it requires gathering data outside of the company’s four walls. By concentrating on improving the data quality of Scope 3 emissions, organizations can move toward achieving their net-zero transition plans as well as developing the credibility of their reporting and disclosures.

Enhancing supplier engagement is one way to tackle the Scope 3 data challenge by using a spend-based approach, using questionnaires, or calculating emissions by product. Whatever the method, enforcing supplier engagement as a condition of business and the use of contract clauses to mandate data collection can ensure organizations maintain continued dialogue with the intention to improve data quality and reporting.

The challenge does not stop there, however. Achieving sustainable supplier engagement also requires a number of stages which begins with confirming a unanimous commitment within the organization and with the collaboration and cooperation of all internal teams. Investing in data management improvements as part of supplier engagement will also ease the resource burden of aggregating and reporting Scope 3 emissions. Yet, 54% of those currently engaging in their Scope 3 emissions were using a manual process, including using Excel spreadsheets, according to a Reuters Insight survey.

Manually gathering information, however, is not scalable and requires scarce resources and additional bandwidth on activities that are more easily automated. More than 50% of respondents who said they use a manual process to manage Scope 3 emissions described the process as being poor in all three categories of ease (57%), effectiveness (52%), and efficiency (52%).

Management of Scope 3 data

Still, there is investment taking place. In fact, the top three technologies in which Scope 3-engaged organizations already are investing include clean energy (67%), data analytics (44%), and more efficient IT solutions (37%). Although investing in clean energy technologies is more widespread in order to combat Scope 1 and 2 emissions, investing in data analytics and more efficient IT solutions contribute towards the overall improvement in emissions measurement and reporting.

Since Scope 3 emissions are considered to be the most difficult emissions to accurately disclose, technology investment in this area will be especially beneficial to this category of emissions. Organizations’ planned investment across the next 24 months follows a similar pattern, with analytics and more efficient IT solutions remaining within the top three investment areas.

Technology investment for those engaging with Scope 3 emissions

Organizations should determine which software works best for them to create a more streamlined process that reduces errors and further establishes traceability for audits in the future. Data platforms foster mutual benefit in streamlining the internal greenhouse gas (GHG) data management process for organizations, but they also helping other organizations to report on their Scope 3 emissions.

The ultimate aim to improve the quality of Scope 3 emissions data and reporting is likely to result in greater confidence within organizations, discouraging the trend of green-hushing, and preventing further greenwashing.

This is an abridged version of a report that was originally published on Reuters Insight Sustainable Business.

While these contract clauses are not yet commonplace, companies should be aware that adding these provisions will introduce a host of new concepts, terminology, and practical implications, which may make their contract drafting and review process more complex.

There are two basic issues to consider when drafting or reviewing climate-conscious clauses in supply chain contracts, such as sale of goods contracts. First, the parties must consider the enforceability of the clauses; and then, the parties must draft the clauses to work well together with the rest of the contract.

Enforceability of climate-conscious clauses

When drafting or reviewing climate-conscious clauses, counsel must first consider their enforceability. For example, the parties should pay attention to climate-conscious clauses that set out their own contractual remedies, such as liquidated damages provisions. A liquidated damages clause requires the breaching party to pay a predetermined amount to the non-breaching party for the types of breaches that are specified in the clause. The predetermined amount can be a fixed amount, or an amount based on a predetermined formula.

Liquidated damages clauses are only enforceable if they reflect the parties’ compensatory rather than punitive intent. The primary purpose of these clauses must be to compensate the non-breaching party for losses, not to punish the breaching party. This means that climate-conscious liquidated damages clauses that require the breaching party to make payment to the non-breaching party’s favorite environmental nonprofit organization (rather than directly to the non-breaching party) may be unenforceable.

Before inserting any new clauses into a contract form, counsel first should check how well they work together with the contract’s existing clauses.

The enforceability of liquidated damages clauses also generally requires that the clause specifies that the liquidated damages are the exclusive remedy for the specified type of breach.

Internal consistency in contracts

Before inserting any new clauses into a contract form, counsel first should check how well they work together with the contract’s existing clauses. For example, most contracts include a general termination provision that allows a party to terminate the contract if the other party breaches it. The provisions are typically tailored to include different notice, cure period, and other requirements for different kinds of termination-triggering events. In addition to breach of contract, these may include, for example, a party’s insolvency or change in control.

Broadly drafted general termination provisions typically include catch-all language to capture all breaches of contract that are not more explicitly set out as a termination-triggering event in the clause. Many broadly drafted general termination provisions may therefore already cover breaches of newly included climate-conscious obligations.

Problems can arise if, in addition to a general termination clause, the contract also includes a dedicated clause providing early termination rights for breach of climate-conscious obligations with its own requirements. Unless climate-related breaches are specifically carved out from the general provision, it may be unclear which provision applies.

A thorough review and comparison of the contract’s climate-conscious and other clauses will enable the parties to detect these and other unintended inconsistencies. Indeed, other unintended inconsistencies can arise if the contract includes such items as:

• • • Different standards to determine whether different types of breaches have occurred. For example, the contract might include a materiality qualifier for the breach of the supplier’s delivery obligations but not for the breach of the supplier’s climate-conscious obligations.
    • A dedicated limitation of liability clause that aims to limit the types or amounts of damages recoverable for the breach of climate-conscious obligations in addition to a general limitation of liability clause.
    • A dedicated indemnification provision for breach of climate-conscious obligations in addition to a general indemnification provision.
    • Special price adjustment provisions that are triggered by climate-related events as well as a general price adjustment clause.

As climate-conscious clauses in supply chain contracts become more commonplace, companies should make themselves aware of how adding these provisions may make their contract drafting and review process more difficult and prepare now for that.

This article was written in conjunction with the Practical Law Commercial Transactions group. For more information on including climate-conscious clauses in supply chain contracts, you can contact Practical Law here.

As a result, visibility into supply chain actions and outcomes has catapulted to the top of many corporate wish lists — but many business leaders become frustrated when their operations and technologies don’t deliver. Still, experts say, better visibility into corporate supply chains can be achieved, but only if companies are willing to think about their sustainable supply chain initiatives in a more innovative way.

According to a September EY report on sustainable supply chains, visibility has become one of the top priorities among supply chain leaders. Of the 525 large corporations surveyed, 58% said that increased end-to-end visibility in their supply chain was among their top two priorities in both the past two years and the upcoming two years. However, despite that desire, just 37% of supply chain leaders reported achieving supply chain visibility over the past two years, indicating a large gap between the desire for more visibility and the progress many organizations are practically achieving.

Rae-Anne Alves, ESG & Sustainability Supply Chain Leader at EY Americas and co-author of the report, said that visibility is the key first step to compliance. “When companies are thinking through their supply chain and trying to make it more sustainable, they need end-to-end visibility to know is what is happening,” Alves said. “Companies are lacking the transparency that they need from their suppliers through logistics, especially in areas outside of their four walls.  Achieving this transparency will give them the visibility they need across their supply chain.”

Recent research from the Thomson Reuters’ Market Research & Competitive Insights team mirrored these findings. In interviews conducted with senior leaders of US-based companies charged with tracking ESG efforts, large numbers of companies say they have established dedicated ESG efforts but collecting data and measuring those efforts remains disconnected and lacks consistency.

The issues in raising visibility

When it comes to trying to raise the visibility of supply chain practices and outcomes, many corporate leaders have run into an unfortunate reality: the difficulty of gathering and mingling data that lives in disparate systems. One public company ESG head explained that a common supply chain review pulls data from systems as broad as risk management and operations software, human resources software, and procurement and supplier-oriented software.

Combining all of these types of data into one truth remains difficult. “I don’t even know how they collect their data,” said the supply chain head of another public company. “Every vendor has their own process.”

This problem is only increasing as companies are beginning to scale up the types of data that they collect, EY’s Alves added. To take a firmer grasp on their supply chain, many companies are looking to catalog not only emissions from scope 1 (directly owned by the company) and scope 2 (indirect use of energy the company purchases), but increasingly scope 3 emissions that result both up and down the company’s value chain as well. Indeed, the more a company’s data collection scope expands, the more complex the visibility question becomes. Many supply chain-centric software providers have arisen in recent years to try and compile and display all of these data sources, however, currently, there is not a leader that has captured a substantial share of the market.

Some companies have been able to achieve more supply chain visibility, becoming sustainable supply chain “trailblazers” with an “extreme focus on transparency”

“It’s unclear yet whether there will be a provider that is able to deliver the end-to-end capability needed for a digitally network-connected supply chain,” explained Gaurav Malhotra, Partner and Americas Supply Chain Technology Leader at EY. “There are many factors that have to come together, versus just a singular platform from a control tower or visibility standpoint to enable the orchestration.”

Instead, many companies have tried to apply other technological fixes to the issue, often without much success. “Almost everything is run on Excel. It’s truly terrible,” a public company’s supply chain head told Thomson Reuters Institute. “We have very few tools for environmental stuff. Everything is reported through Excel, everything is measured in Excel, everything is rolled up in Excel and it’s extremely inefficient because we have all these different teams.”

Supplying more visibility

Still, some companies have been able to achieve more supply chain visibility. EY’s report designated certain companies as sustainable supply chain “trailblazers” and noted that one of the traits they have in common is an “extreme focus on transparency” through which “[t]hey can significantly or moderately peer into Tier 2 and 3 supply networks.”

EY’s Malhotra said these leaders often undertake two simultaneous shifts to aid this transparency. One involves automating individual supply chain functions so that they can run more efficiently and be consistently reliable. The second involves integrating those individual functions and making sure their output data is portable to enable the needed effective real-time communication, both internally and with external supply chain ecosystem partners.

Currently, he explained, most supply chain networks are “not digitally integrated in their true sense” because they operate in multiple stages. Data is processed by one organization that controls their section of the supply chain ecosystem, then it is transmitted to be able to be consumed or processed by other organizations. While Malhotra concedes that it takes “time and effort to ultimately get to a mostly autonomous state,” he believes combining, integrating, and automating these steps will be the future of supply chain management.

“What we have found is that some leading companies have moved towards an integrated process and singular platform that allows the right level of visibility, orchestration and actioning with their supply chain network partners,” Malhotra said. “Enabling trust, effective execution and accountability with the overall network in play, resulting in a highly efficient, highly integrated, differentiated and reliable supply chain.”

Leading companies are also pushing for data standardization among common supply chain suppliers, Alves added. Many sustainability frameworks are available, and increased regulatory attention continues to add more complexity. Increased standardization can make supply chain data more actionable, and auditable, potentially lowering a company’s risk profile. When asked about top supply chain priorities for the coming year, the ESG head of one public company was clear: “We want to make sure that we have auditable processes in place, that the data is sound.”

However, Alves added that for sustainable supply chain measurement and reporting businesses are “definitely not there yet.” As both public and regulatory attention in the space continue, expect that visualization into supply chain processes and data will become even more important, and leading organizations will continue to invest resources and personnel to get their supply chain data house in order.

In this week’s podcast available on the Thomson Reuters Institute channel, we speak to Suzanne Offerman, Senior Product Manager at Thomson Reuters, about how this current environment in which companies that import and export goods must operate has become an ever-evolving puzzle to solve with shifting paradigms that some might say are moving at speeds not previously experienced before.

Of the companies surveyed in the Global Trade Report, many reported more significant concerns arising around retaliatory taxes and fees for those companies in the United State and the United Kingdom. In fact, more than 60% of US companies and about 40% UK and European Union companies surveyed said tariffs were greatly impacting their businesses. At the same time, companies doing business in Asia saw supply chain risk as a significant concern.

Given changing sanctions regimes and regulations, companies exporting from Asia must exercise caution in selecting with whom they do business. Indeed, companies utilizing Asian vendors in their supply chain are now required to know more than before about the identity and labor practices of their suppliers.

Talent & trade

To keep pace with the new and evolving landscape, companies are looking for new and additional trade management professionals to increase their available pool of expertise, skills, and technology prowess. In regard to talent, Offerman says in the podcast that the role and requirements of a trade manager are quite different now than they were when she started in the industry.

You can access the latest Thomson Reuters Institute Insights podcast, featuring a discussion about the recent Global Trade Report 2022: Turbulence Tempered with Technology, here.

In the podcast and in the Global Trade Report, Offerman points out that there is a list of must-have skills for today’s global trade managers. “The technical know-how of an engineer, the legal sense of an attorney, the carefulness of an accountant, the organizational skills of a project manager, the business acumen of an executive, the cultural awareness of a diplomat, and the communication skills of a leader that says a lot — and that’s one that’s supposed to be one person,” she explains, adding that this description underscores the importance of this role and how global businesses are coming to rely on trade managers to mitigate and manage more of the day-to-day operations of trade.

As the podcast explains, this situation has left global businesses challenged as to where to find the right talent and skillset to fill these roles. Businesses have looked at consulting firms, colleges, and even competitors to find the right professionals, but that has proven daunting.

Offerman explains that historically, someone got into global trade management by coming up the ranks within a company’s supply chain, working at a warehouse and then being promoted while receiving hands-on training throughout their employment. Now, universities are offering undergrad and graduate global trade classes (or eLearning classes for working professionals), alongside the study of such subjects as trade law, for example.

The technology solution

In regard to technology, the Report showed that more than 80% of the companies surveyed said they need technology to solve many of the issues they face today — a fact made all the more clear by recent events. “Because of the severe disruptions in supply chains and international trade, companies realized they couldn’t get their goods just from sourcing from one country,” Offerman says, adding companies learned they needed to move production to another country in the region or closer to their own home base. Thus, companies were pressured to come up with point solutions for specific regions.

However, Offerman says in the podcast, this may not be the best solution, and she urged companies to move to a holistic approach by using technologies that cover the entire supply chain, not just specific problem areas or regions.

Indeed, the need for the right technology goes far beyond increasing efficiencies — it’s needed to keep pace with governments that are increasingly leveraging more technology in order to gather more information and collect taxes and tariffs. “Companies cannot focus on only one aspect, talent, or technology but must be intentional at all aspects of trade in this way,” Offerman notes. “It is talent plus technology that get you to the finish line.”

In fact, as the podcast demonstrates, one will drive the other. To compete for the necessary talent, the technology that companies need to utilize will be a factor in attracting the very type of trade management professional with the skills they need. No one wants to work on outdated software or equipment, of course, especially when it can impact their quality of work. Therefore, any investment companies make in trade solution software that keeps them in compliance will also ease additional work processes and drive further efficiencies.

Trade compliance rules and work will not get less busy, Offerman explains in the podcast, it’s that businesses will grow and evolve along with the regulatory space. And that means that companies must enable their top professionals with the right technology in order to stay compliant and competitive.

Episode transcript. 

The continuation of the human species to thrive with clean air, land, and water in which to produce enough oxygen and food and ways to earn a living on the Earth is the main reason, of course. Indeed, the environment is the habitat that enables the survival of all living things.

Understanding all of the various pieces of the S can boiled down to various components, from product liability factors to workforce issues, community matters, and human rights.

Clarifying human rights

The link between business and human rights — defined in a 2017 NYU Stern Center for Business white paper as “the operational effects of a company on the labor and other human rights of the people and communities it touches” — is well established. In another white paper published by an ESG Working Group (on which the Thomson Reuters Foundation was a member), this foundation was underscored.

In fact, a multilateral approach to the link between business and human rights dates back a decade with the adoption of the United Nation’s Guiding Principles on Business and Human Rights in 2011, UN member states adopting the UN Sustainability Goals in 2015; and the establishment of the Corporate Human Rights Benchmark, which is a collaboration among investors and civil society organizations to create a public and performance benchmark of corporate human rights.

Since then, many countries and states have passed “transparency regulation”, such as the UK Modern Slavery of 2015, Australia’s Modern Slavery Act of 2018, and California’s Transparency in Supply Chain Act, to ensure that companies are not engaging in labor exploitation and forced labor within their own organization and that of their suppliers and vendors.

Part of the need for increased visibility of the social side of ESG is to bust the myth that it is not quantifiable. Matt Friedman, CEO of the Mekong Club, which is private sector-based membership organization dedicated to bringing about sustainable practices in the fight against modern slavery, encourages this myth-busting, suggesting two ways to quantify the social aspect of ESG, including:

• Conducting supply chain audits — Supply chains account for up to 40% of corporate ESG impacts, according to the ESG Working Group white paper that included analysis of 1,600 MSCI World Index companies. Friedman suggests companies give questionnaires to be collected during the procurement process from suppliers and vendors. These questionnaires can be analyzed and audited in order to identify potential incidents of modern slavery.
• Establishing grievance mechanisms — One of the newest ways companies are using technology is to use an app in creating their grievance mechanisms. For example, Friedman says that Mekong uses an app that allows auditors to ask workers on the factory floor (using a mobile device and headphones in their native language) a series of questions about potential exploitation, such as if there is indebtedness associated with the job, and whether or not there’s a modern slavery violation taking place.

Knowing where to start with DEI

When it comes to diversity, equity & inclusion (DEI) issues as part of the social metric disclosure, the first step is determining what parts of the S are material to each company’s various stakeholders, including shareholders, customers, employees, and residents of communities in which the company operates.

A common area for the S for any company is the internal representation at higher levels of those individuals with underrepresented identities or backgrounds. Indeed, at the start of the social journey for any company, it is important to understand the current status of representation of each level for each underrepresented identity, based on gender, LGBTQ+ status, race or ethnicity, disability, and veteran status, among others. In addition, knowing the timing around promotion and advancement and median pay for each underrepresented identity relative to the median timing and pay of comparable professionals are important to determine fair promotion and proper pay equity.

Capturing how companies improve social mobility and progress for employees and contractors is another area that impacts the S, but it can differ quite a bit depending on what is used as key performance indicators to measure impact. Luckily, there are companies tackling this challenge. Just Capital, for example, details corporate performance on a range of social, pay, and diversity issues, offering easy-to-use data and insights, according to the ESG Working Group’s white paper.

Too often social performance considerations have been dismissed as either immaterial or a lesser priority. However, numerous research efforts over the last decade suggest the opposite, including Stanford’s Social Innovation Review, a 2014 report that shows positive correlations between good environmental and social performance and overall financial returns within its equity portfolio for private and public companies; and McKinsey & Co.’s years-long research into ethnic and gender diversity that shows an increasing correlation between being in the top quartile for diversity and financial outperformance.

Further, regulators around the world are paying attention to the interplay between social considerations and financial risks. For example, the European Union (EU) introduced the concept of double materiality, stipulating that companies disclose the financial risks posed by social and environmental issues.

Luckily, many global companies, their suppliers, and vendors are not waiting around. “Factories in Asia see the writing on the wall,” Friedman says. “I had one factory person basically say that we understand that ESG is big for large companies.” So, to gain a competitive edge, many suppliers and vendors are gathering the necessary data in anticipation that the supply chain questionnaires are coming.

Join us on October 26 & 27 for Trust Conference, the Thomson Reuters Foundation’s annual event, dedicated to tackling critical issues at the intersection of socio-economic inclusion, sustainability, media freedom, and human rights.