Last year, the COVID-19 pandemic tested companies and pushed supply chains to their limits. It turned vulnerabilities, some of which were known but didn't seem relevant or were never prioritized, into catalysts for the disruption and breakdown of international supply chains. The start of the new year calls for reflection on the events, processes and decisions of 2020, while also looking ahead to what organizations and supply chains must prioritize in 2021.
An Evolving Supply Chain Finance Landscape
The importance of working capital management and liquidity management has increased immensely due to the COVID-19 crisis. According to a recent study by Traxpay and DerTreasurer, 78 percent of companies surveyed said they are struggling with liquidity shortages fueled by the pandemic. Overall, a quarter of respondents extended payment terms with suppliers in 2020 in response to potential liquidity shortages, while at the same time, one-third received requests from their suppliers asking for the early payment of invoices. These results clearly show the dilemma of securing your own liquidity while simultaneously stabilizing suppliers financially to prevent them from defaulting or falling into insolvency – outcomes that could compound your issues. Unilever, for example, offered its suppliers up to €500 million in cash flow relief at the beginning of April, as well as early payment options and extended credit to support SMEs on the one hand and secure its own supply and distribution chains on the other. The long-term economic effects of ongoing restrictions and lockdowns worldwide will increasingly be felt in 2021. For example, credit insurance company Euler Hermes estimates that, despite falling 17 percent in 2020 due to various government support measures, insolvencies in the Eurozone are expected to spike by 29 percent in 2021. Some European countries will be much harder hit than others, with Italy facing an increase in its insolvency rate of up to 79 percent. However, at the same time, the crisis has highlighted the resiliency of companies and supply chains that had already taken significant strides toward embedding sustainability throughout their operations. A recent McKinsey study on supply chain finance showed there are plenty of opportunities for innovative players to seize. And, according to Deloitte, compounding this is the potential for a fundamental shift in the finance landscape that will favor companies and industries that demonstrated such resilience during the pandemic.
Sustainability and Decarbonization in a Post-Pandemic World
The pandemic has forced our society to rethink what we do and how we do it, with a clear focus on the need for resilience. However, resilience means much more than just "pandemic preparedness" and is a key component of sustainability. As sustainability becomes an increasingly core issue for companies, stakeholders are demanding greater accountability from companies in terms of their social and environmental actions and the impact of their products and business activities. In 2020, corporate commitments to sustainability and climate neutrality increased significantly both in number and scope. Announcements should be followed by action: Mercedes, for example, recently included climate neutrality in its contract terms as part of its Ambition 2039 strategy and has made its so-called Ambition Letter a key criterion for awarding contracts to suppliers. With a record increase in 2020, more than 10,000 companies now report their data to CDP, with which over 500 major investors are affiliated. The COVID-19 pandemic has not only led to increased awareness, but also to a reduction in CO2 emissions. In 2020, for example, Germany slightly exceeded its reduction target of 40 percent with a reduction of 42.3 percent compared to 1990 – in part due to the pandemic restrictions. According to calculations, the actual figure would have been 37.8 percent. However, experts are already warning of a rebound in 2021 and are calling for companies across all sectors to rapidly implement reduction and compensation measures. Just before the end of the year, the Governor of the Bank of England warned that "companies and industries that fail to move towards zero carbon emissions will be punished and bankrupted by #investors."
Cybersecurity and Resilience
The sudden changes in work practices and remote work have created an environment that cyber attackers are only too happy to exploit. As a result, it is essential for companies to not only continuously monitor and improve their own cybersecurity measures but also review their suppliers and vendors' information security management systems for weaknesses. The recent SolarWinds hack – in which attackers used the company's server software to penetrate the systems of several companies and government agencies – is an example of such cybersecurity vulnerability and shows how important the cybersecurity performance of suppliers and business partners is to a company's business. In September of 2020, the BKA named ransomware the "biggest threat" to businesses. A recent study by CyberVadis, based on the information security management system assessments of 680 companies across 56 countries, found that only 15 percent of assessed companies conduct security audits for “bring your own device” programs and only 28 percent of companies have an authorization process to grant personal devices access to information systems. According to a recent Gartner CFO survey, 74 percent of organizations surveyed intend to permanently transition some employees to remote work after COVID-19. This makes increasing cybersecurity maturity and performance within companies and third-party vendors an important factor in risk management and resilience.
Preparedness for Health and Environmental Crises
Worker health and safety became another focus issue as a result of the pandemic. The EcoVadis 2020 Business Sustainability and Performance Index showed that overall health crisis preparedness levels in dedicated sustainability management systems are worryingly low across all sectors – more than a quarter of suppliers have no health crisis measures in place. Such deficiencies in sustainability management systems have already led to strikes in emerging markets as factory workers see their right to health compromised. Thus, supplier industry data on health crisis preparedness points to looming human rights abuses and reflects the disruption of global supply chains that is occurring on the ground in the wake of COVID-19. However, it is not just about the health and safety issues exposed by the global pandemic: The climate crisis and its associated impacts will be far greater. For example, bushfires have cost the Australian economy $100 billion and California's wildfires have cost the U.S. economy $10 billion. According to research by Munich Re, natural catastrophes caused a total of $210 billion in losses last year – not to mention the associated losses of biodiversity, destroyed ecosystems and humanitarian crises and sacrifices that are financially unquantifiable and irreplaceable.
Financial markets and investors are already driving issues such as sustainability, human rights and decarbonization at an ever-increasing pace around the world, demanding proven performance from companies. However, pressure on companies is also increasing from the legislative side. Significant in this regard is the new EU taxonomy for sustainable activities as part of the "Sustainable Finance Action Plan", which is to be applied to all reports published from January 1, 2022. The European Commission has also committed to introducing legislation in 2021 that will make human rights due diligence mandatory for all companies in the EU. This is based on a study that found that "only one in three companies in the EU carefully assesses its global supply chains with regard to human rights and environmental impacts." In Germany, there has been significant public and political debate surrounding the Supply Chain Act, which aims to promote the implementation of human rights due diligence in global supply chains and ensure that human rights are respected as much as possible. An official draft of the Act, one that critics claim has been diluted since its proposal, will soon undergo the parliamentary process. The debate echoes similar concerns raised during the development of France’s Due Diligence Law (Devoir de Vigilance), which was ultimately adopted in 2017. However, unlike this Law “the German draft law does not include a civil liability provision and only marginally incorporates environmental standards.”
At the same time, European member states have endorsed a target for the European Union to reduce greenhouse gas emissions by at least 55 percent from 1990 levels by 2030. To mark the fifth anniversary of the Paris Agreement, French authorities and regulators have supported the adoption of the recommendations of the Task Force on Climate-related Financial Disclosures by large companies listed on the CAC40. Taking this further, carbon pricing has been in force in Germany since January 2021, obliging companies that bring heating oil, natural gas, gasoline and diesel to the market to pay for their carbon. The price has initially been set at €25 per metric ton and will gradually rise to €55 by 2025.
In 2021, more and more companies will find that familiar approaches, such as supplier diversification and nearshoring, do not address the core challenges exacerbated by the pandemic. True resilience will require companies to transform their sustainability management programs with a focus on supplier relationships, continuous improvement, long-term performance and positive impact. At the same time, it will require implementing Commitment in Action, prioritizing human rights due diligence and establishing effective carbon reduction strategies and policies that align with the Paris Agreement’s 1.5°C goal. As 2020 has shown us, there can be no more "business as usual”. The start of 2021 represents a symbolic shift, allowing us to reorient our thinking and actions, and embed sustainability and resilience in our corporate strategies and investments moving forward.
This article was originally published in our German blog.
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