ESG risks take centre stage as MEA companies plan for the future

Companies in Middle East and Africa are accelerating efforts to build more resilient and sustainable supply chains to shield themselves from future shocks.

With the triple shock of Covid-19, supply and demand imbalances, and the precipitous decline in commodity prices, 2020 was a challenging year for companies in the Middle East and Africa (MEA). To get themselves back on an even footing, business leaders are seeking to address supply chain vulnerabilities – with climate risks and societal issues rising up the list of priorities, according to new research from Standard Chartered.

Standard Chartered’s Critical Indicators of Sustainable Supply Chains report, which polled 303 treasurers, CFOs and procurement professionals from the region, reveals that companies are accelerating efforts to build more resilient and sustainable supply chains in order to shield themselves from future shocks.

Risk management reigns supreme …

The events of recent months have taught consumers, investors, and policymakers that a lack of visibility into supplier risk can stop businesses cold, and respondents to the bank’s research in the Middle East and Africa were united in ranking the transparency and robustness of their supply chains as “very important”.

Perhaps unsurprisingly in such a heterogeneous region, priorities differ. For firms in Africa, which is already experiencing some of the worst impacts of climate change, environmental soundness of suppliers is top of mind. Indeed, 87% of survey participants in the continent emphasised that the risk of natural disasters would have a materially negative impact on the resilience and sustainability of their supply chains over the next 12-18 months.

Meanwhile, companies in the Middle East, which has experienced a liquidity crunch due to significantly lower oil prices, are most concerned with suppliers’ financial strength. Overall, companies’ environmental, social and governance (ESG) priorities have become more pronounced – with a growing focus on social considerations, such as workers’ rights, health and safety, fair treatment of suppliers, and community engagement.

But MEA corporates are worried that they’re not doing enough. While 57% of respondents in Africa and 51% in the Middle East stressed that building environmentally and socially sound and transparent direct supply chains is essential to their business, only 35% and 39% believe they have achieved this.

To try to close this gap, a growing number of companies are harnessing technology, with 41% of respondents in the Middle East making extensive use of data to evaluate potential suppliers, and 31% for tracing materials and goods through their supply chains. In Africa, these figures were 46% and 38% respectively. However, these figures are low compared to the global average, demonstrating that companies in the region still have some way to go if they are to achieve their goals of resilient, sustainable supply chains. Nonetheless, further progress is all but guaranteed by the growing acceptance of digitisation by companies and governments in the region.

… while boosting financing opportunities will be vital

Sustainable finance is fast becoming a means by which companies in MEA can bolster their suppliers’ financial resilience as well as drive ESG performance improvements throughout the ecosystem. A common approach in regions such as Europe and North America is to leverage supply chain finance (SCF), but the product is still relatively new in MEA, with just 33% of companies in Africa and 27% in the Middle East saying they make significant use of SCF programmes.

Although SCF is not available in all MEA markets, corporates in the region are looking to their banking partners for assistance in boosting supply chain resilience. To date, most existing sustainable financing solutions, though, are bilateral, between the bank and the company, as opposed to supporting the company’s wider supply chains. As a result, initiatives that reach further have seen growing demand, such as Standard Chartered’s sustainable trade financing solution, which includes ESG-related letters of credit to support import and financing needs in approved end-use categories, as well as invoice financing to connect payables and receivables to sustainability criteria.

The make-up of trade in the MEA region, particularly in sub-Saharan Africa where a large proportion of small suppliers are unbanked, means that as well as tackling the financial and environmental soundness of their direct suppliers, companies are also looking for more inclusive financing solutions to support deep-tier indirect suppliers.

Here, the proliferation of mobile money in MEA provides an exciting opportunity, and schemes such as Standard Chartered’s supplier finance programme, which enables payments to be made to mobile wallets, are an important way to achieve this objective, since they open up financing to unbanked suppliers that would not normally have access to such initiatives.

Identifying and accessing target suppliers requires a high degree of visibility across supply chains, and the vast majority of respondents – 78% in Africa and 75% in the Middle East – report that they are using data and insights to a moderate or high degree to achieve this.

A stronger future

MEA corporates have had to learn a tougher lesson than most about the resilience of their supply chains over the past two years, but the survey results demonstrate that they’re putting what they’ve learned into practice to defend themselves from future disruptions.

As companies within MEA take stock of the inherent vulnerability of their supply chains, they’re building in the capacity to monitor risks, support the long tail and do better on ESG metrics, all of which will translate into more inclusive growth in the years to come.

Critical indicators of sustainable supply chains – Middle East & Africa regional report

Take 10 minutes to read the full Middle East and Africa report here

Interested to know how your company compares with peers? Try our Supply Chain Performance Indicator assessment at www.supplychainindicator.com

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