The Secret to Unlocking a Sustainable Retail Future Through Blockchain

Introduction

What’s the Story?

Coresight Research has identified sustainability as a key trend to watch in retail. Our EnCORE framework for sustainability in retail provides a model through which retailers can begin to internalize a sustainability strategy. We introduced the EnCORE framework in Coresight Research and IBM’s report, The Time for Sustainability Is Now.

In this report, sponsored by IBM, we focus on the benefits and opportunities that blockchain presents for the future of retail, exploring how this technology can facilitate and accelerate the adoption of sustainable business practices across the five elements of EnCORE.

Why It Matters

The importance of sustainability is growing among multiple stakeholders: consumers are increasingly demanding that the brands and retailers they buy from improve sustainability and transparency; employees want to work for sustainable companies; and investors screen for ESG (environmental, social and corporate governance) to limit exposure to risks related to unsustainable businesses.

To meet stakeholders’ expectations around sustainability, retailers can turn to technology such as blockchain to support their sustainability initiatives as well as to realize further benefits in reducing risk and improving efficiency in the supply chain.

The Secret to Unlocking a Sustainable Retail Future Through Blockchain: Coresight Research x IBM Analysis

What Is Blockchain?

As defined by IBM, blockchain is a shared, immutable, digital ledger that facilitates the process of recording transactions and tracking assets in an online business network. Blockchain enables multi-party integration where each participant can connect, share data and increase transparency across their supply chain ecosystem. Each participant controls what data they share and whom they share it with.

Due to the immutability and distributed visibility of the blockchain ledger data, blockchain works to increase trust between organizations and allows for more informed and timely decisions—leading directly to improved efficiency, reduced costs and reduced risk. Ultimately, by creating synergies among value-chain partners, blockchain enables the creation of entirely new, transformative, sustainable and profitable business models.

Blockchain is employed across multiple industries today. For example, consumers want to know that the food they eat is safe and sustainably produced: blockchain provides traceability and provenance in the grocery industry, where strict refrigeration protocols must be followed across dozens of different parties to assure product integrity through the supply chain.

Another prevalent use of the technology is smart contracts (digital contracts stored on a blockchain). In addition to providing a permanent record of a contract’s iteration, smart contracts are automatically executed based on certain terms (along the lines of “if/when X occurs, then Y is triggered”).

While many common retail supply chain issues are hard to trace, blockchain technology can increase transparency around ethical issues like child labor abuses and human rights. Blockchain provides retailers with the visibility consumers desire, proving their goods are sustainably and responsibly sourced and produced, and ensuring ethical business practices.

For brands and retailers with sustainability goals, blockchain provides visibility across the supply chain. By enabling trusted data capture and exchange across supply chains, blockchain offers companies the tools needed to measure how sustainable their products and supplies are.

How Can Blockchain Enhance Sustainability?

Blockchain provides benefits and presents opportunities to brands and retailers across the five components of Coresight Research’s EnCORE framework for sustainability in retail. We highlight the applications of blockchain in Figure 1 and discuss each component in detail below.

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Figure 1. The Applications of Blockchain Technology Across the EnCORE Framework for Sustainability in Retail

 

1. Environmental Awareness: Auditing and Data Sharing

The first component of EnCORE is the starting point in developing a sustainability strategy: Companies should build a clear picture of their environmental footprint through internal and external audits. Assessing materiality can point out low-hanging fruit where supply chain parties can focus their efforts to have maximum effect on sustainability for minimal cost. Once companies understand the issues they face, they should be bold in developing a plan for immediate and direct impacts as well as establishing a longer-term sustainability strategy.

Retailers should look to collaborate across their business ecosystem and work with vendors, service providers and other retailers toward reducing the environmental and social impacts of their supply chain. This is where blockchain’s instrumentality is most useful. Data sharing during compliance audits enables large organizations to ensure traceability by providing a digital chain of custody, with a single shared ledger presenting opportunities to focus on sustainability in a company’s business model and extended business ecosystem. Furthermore, the automatic activation of smart contracts on a blockchain saves costs through reduced clerical activity.

IBM and tech company Farmer Connect are connecting coffee farmers with consumers using digital identity and blockchain. Consumers can see where, how and by whom their coffee is being grown. Farmer Connect’s solutions are built on IBM’s Blockchain Transparent Supply platform. Blockchain connects all players in the value chain—farmers, processors, exporters, importers, roasters and consumers.

In many coffee-producing countries, the cost of production is greater than the cost of coffee futures on the commodities market, impacting the profitability of coffee farms. To help combat this, Farmer Connect is helping to increase visibility for farmers to connect with buyers and consumers, thereby driving efficiency and transparency (and potentially unlocking cost savings via increased speed to market) in coffee and cocoa supply chains through digitalization, which also provides digital traceability and data sharing.

Farmer Connect also offers embedded sustainability metrics and consumer engagement programs. ThankMyFarmer, powered by Farmer Connect, helps brands build engagement and trust through the supply chain. Kristian Doolan, Head of Innovation and Partnerships at Farmer Connect, said, “By scanning on-pack QR codes, consumers can engage with blockchain-based traceability maps with product information and stories of origin. They can also donate to sustainability projects in farmer communities at source as a way of giving back to those communities.”

 

2. Circular Models: Reducing Waste

An important aspect of sustainability in retail is circularity—minimizing the use of resources and eliminating single-use products and materials. The key to building circular models is to reduce waste through the supply chain and choose materials that can be used in closed loops—i.e., materials are brought back into the production process, and resources are continually repurposed in a recycle-and-reuse loop.

Many businesses are unaware of the exact location and quality of leftover or unused textiles, a significant portion of which ends up in a landfill. Before the Covid-19 pandemic, an estimated $120 billion worth of excess fabric was created annually, which sits idle in warehouses around the world, according to Stephanie Benedetto, CEO and Co-Founder of Queen of Raw. The pandemic saw this number increase to an estimated $288 billion in 2021, she told Coresight Research. Queen of Raw is a marketplace for the apparel and textile industries to buy, sell, recycle and donate dead stock.

By improving visibility into the supply chain, blockchain provides an opportunity to reduce this waste and, in turn, increase company/industry profits. Queen of Raw uses its blockchain tool, Raw Chain, to reduce waste in the apparel and textiles industries, connecting buyers with sellers and surfacing the company’s own fabrics from previous seasons that are scattered across warehouses globally. According to Benedetto, blockchain’s “ability to track a product through its lifecycle—spanning product inception, raw material sourcing, cutting and sewing, shipping, customs and point of sale—is valuable.” Benedetto told Coresight Research that blockchain’s transparency can help companies “recoup 15% or more of their bottom line by eliminating textile waste,” and they can “improve their conversion rate by 3X by sharing this circular journey with their end consumers.”

Benedetto said:

Blockchain technology is revolutionary for supply chain. It means that we are able to verify data at every single step of a really complicated supply chain… We know who said what when, who’s doing what when in that supply chain, and, really, in real time, control the data and the analytics.

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Figure 2. Traditional vs. Blockchain-Powered Retail Supply Chain

 

Single-use plastics have a significant impact on the environment. An estimated 8 million metric tons of plastic go into the ocean annually, according to industry experts. Plastic Bank is a social enterprise that collects, recycles and reprocesses ocean-bound plastic waste while improving the lives of collector communities in developing nations. According to Plastic Bank, collectors receive a premium for the materials they collect, which helps them provide basic family necessities such as groceries, cooking fuel, school tuition and health insurance. Transactions are conducted via Plastic Bank’s Alchemy blockchain platform, which provides “transparency, traceability and rapid scalability” through real-time data visualization, the company states. The collected material then becomes “Social Plastic,” as dubbed by Plastic Bank, being reintegrated into products and packaging as part of a closed-loop supply chain. Plastic Bank currently operates in Haiti, Brazil, Indonesia, the Philippines and Egypt.

 

3. Optimized Operations: Identifying Opportunities for Energy Efficiency

There are many opportunities for retailers and brands to optimize their operations to put sustainability at the center. EnCORE highlights natural resources here and points to using a more resource-efficient infrastructure as well as decarbonization technologies. Optimization to reduce food waste, not addressed in this report, represents an enormous opportunity to improve sustainability while reducing food insecurity worldwide.

Last year saw heightened interest in climate change, supported by US domestic energy policy. The Paris Agreement calls for global warming to be kept at no more than 1.5°C, which requires emissions to be reduced by 45% by 2030 and reach net zero by 2050, according to the United Nations. This is a monumental goal that requires an extensive overhaul of the global energy sector as coal, gas and oil-fired power is replaced by renewable energy sources such as wind or solar.

Blockchain enables increased transparency across supply chains, allowing companies to report Scope 3 emissions more accurately—the majority of a company’s emissions are usually found in their supply chain—providing a significant opportunity for impact. Today, measuring and monitoring Scope 3 emissions is difficult due to limited data exchange and data privacy concerns.

Similarly, blockchain can capture the end-to-end water footprint of a company. According to the US Environmental Protection Agency, the industrial sector consumes 18.2 billion gallons of water daily or 5% of total public distribution. Apana, which offers “Water Efficiency as a Service,” claims that the total costs of water—including sewer charges, leaks, misuse, unplanned downtime, asset destruction, repair and business disruptions, as well as the wasted energy used to heat, cool and distribute water—are three times direct water costs (see the image below for direct and indirect costs). There are clear financial and environmental benefits to reducing water waste, and using blockchain to capture data on water usage can help companies identify such opportunities. Blockchain’s entitlement feature enables the triggering of a turn-on/turn-off valve when certain conditions are met, such as triggering a sprinkler system when the temperature exceeds a preset limit; this, in turn, allows water to be used most efficiently and only at times when absolutely necessary. Additionally, blockchain could simplify and reduce the cost of recordkeeping and reporting for audit review and compliance purposes.

 

Warehouse club Costco has achieved water savings by working with Apana. Josh Dahmen, Director of Financial Planning and Investor Relations at Costco, said that in the company’s most recent fiscal year (ended August 29, 2021), gallons of water per US dollar of sales declined by 10%. Water usage is more efficient as Costco is able to detect and fix mechanical failures in real-time, identify operational waste and modify behavior. Consuming less water reduces Costco’s environmental footprint and operational costs due to lower energy usage. Bringing the sustainability strategy full circle, the visibility that Apana’s platform provides has enhanced awareness of water use and stewardship throughout all facets of Costco’s operations, according to Dahmen.

Although Apana’s solution is not blockchain-based, it is a precursor to blockchain as an advanced data analytics and cloud computing technology platform. Blockchain’s decentralized and transparent ledger would allow Costco to trade with other water users with the ability to tokenize water data and, via smart contracts, reduce administrative and payment costs when/if trading water with other parties.  

On a market scale, blockchain’s impact on the management of water resources can be significant. Numerous academic journals have addressed the issue of water management due to the inefficiencies and market distortions caused by information asymmetry and high transaction costs, which have a high social cost along with unnecessarily high financial costs. Water scarcity is projected to remain a problem through 2050, according to the United Nations’ “World Water Development Report.”

In January 2020, Australia-based blockchain company Civic Ledger looked at the feasibility of improving transparency and efficiency in the water trading market of the Murray-Darling Basin by creating a blockchain peer-to-peer trading platform called Water Ledger. According to Civic Ledger, the single ecosystem reduced market complexity by eliminating the need for intermediaries while providing transparency—tokenization provided clarity of water ownership and its history. In addition, verification of real-time trades and traceability reduced perceived risk from participants.

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Figure 3. How Blockchain Can Solve Water Market Waste

 

4. Responsible Supply Chains: Tracking and Transparency

A responsible supply chain is a key part of any retailer’s sustainability strategy, which should entail less resource-intensive processes, responsible sourcing, enhanced product traceability and greater overall transparency for the consumer. Supply chains vary significantly by firm but are universally complex, spanning raw material sourcing, production, packaging, storage and warehousing, and shipping and distribution—each node of which can have multiple participants (hundreds or thousands). Supervising a supply chain is a massive undertaking, and blockchain’s ability to provide transparency across its entirety offers a major benefit to retailers.

Responsible sourcing is growing in importance among consumers; they are increasingly interested in the origin and manufacturing of the products they purchase. Blockchain can be used by consumer products companies—from apparel and beauty to furniture and household goods—to track the origin of materials. From the ethical sourcing of cotton to the factories where a product is made, consumers and companies alike can trace a product from cradle to gate (from raw material sourcing through production and sale) using smart tags. Its sustainability certifications of raw materials provide brands and consumers with a heightened level of trust, mitigating the risk of greenwashing (providing misleading information around sustainability claims or obfuscating the harm done in other parts of a company’s supply chain) and presenting opportunities to increase customer loyalty. 

Blockchain enables the exchange of data between parties across the supply chain, which allows for more informed decisions as retailers have visibility into the availability of raw materials, factory processes and transportation. As such, companies can capture the data necessary for compliance, reducing business risk and enhancing the scope of ESG reporting (the final “E” of EnCORE, as discussed in the next section of this report).

Through blockchain, beauty firms specializing in sustainable or vegan beauty formulas can track and trace all material ingredients and provide their clients with transparency regarding where product ingredients came from and how they were produced. Shoppers can be assured of clean, non-toxic ingredient tracking from origin to manufacturing processes, which discerning beauty shoppers demand. In today’s retail landscape, brands perceived as greenwashing are quickly called out on social media and risk the loss of customers and brand value. Providing a high level of transparency to consumers enhances trust and loyalty.

The Green Claims Code, published in September 2021 by the UK’s Competition and Markets Authority, attempts to eliminate misleading environmental claims for all products and services available in the UK (including imports) across all industries. The code outlines six points to ensure that environmental claims are genuine, and reviews are required to demonstrate compliance. Blockchain-powered data collection and immutability provide clear solutions to such a mandate. We believe that more countries will follow suit.

Recently, mica (a popular cosmetics ingredient used to create a sparkle or glow in the skin, lips and nails) has been the subject of consumer focus due to reports of child labor and deaths at Indian mica mines. The Responsible Mica Initiative (RMI) is an India-specific strategy formed to address a mica supply chains that are fair, responsible, sustainable and free of child labor. In the Supply Chain Mapping and Workplace Standards program, each RMI member traces the mica in its products and maps the ingredient back to its processor and mine suppliers—and they are required to share this information on a blockchain-based traceability platform. Additionally, each RMI member is obligated to prohibit child labor and adopt environmental, health, safety, legal and economic workplace standards and fair labor practices.

In the food industry, transparency and trust are pivotal to consumer choice. Global consumer demand for information about the food they eat—where it came from, who made it and how it was made—is increasing. IBM Food Trust has partnered with the Norwegian Seafood Association and Atea in a cross-industry collaboration to share supply chain data across the seafood industry.

Kvarøy Arctic, a family-owned salmon farm, is a sustainable producer of salmon and the first salmon farm to use IBM’s blockchain. Kvarøy Arctic wanted to communicate its differentiated market position—as a sustainably grown salmon farm—from its competitors. In partnership with IBM Food Trust, the company gathered relevant data in a traceable record—covering the feed used in raising the salmon, the conditions of the farm and how the salmon is packed, certified and shipped around the world. Using blockchain, the company secures transactions and enhances consumer trust in Kvarøy salmon farms. The data collected allows Kvarøy farmers to improve multiple business functions iteratively—a virtuous cycle enabled by blockchain.

Blockchain can provide grocers with supply chain transparency and inventory visibility, enabling them to reduce waste by optimizing inventory levels or discounting products approaching their shelf-life expiration. Blockchain, in combination with AI (artificial intelligence) and IoT (Internet of Things), can detect and respond to supply chain disruption and provide insights for the real-time analysis of current business performance and rapid problem solving. This supports greater organizational innovation and competitiveness.

• Read Coresight Research’s recently published report, Sustainability in Sourcing, for more information on green supply chains.

5.  Excellence in Reporting and Communicating: Building Consumer Trust

Consumers are demanding more transparency across the supply chain than ever before. We see retailers and brands sharing more granular details across business processes—communicating and taking responsibility for their choices, and demonstrating a willingness to be held accountable for their actions. These actions build consumer trust and loyalty.

Communicating a corporate commitment to sustainability and transparency includes audits, stakeholder engagement and being a role model in the industry—championing sustainable business practices with a focus on people and the planet. By enabling transparency across business functions and enabling visibility and data exchange within the supply chain, blockchain becomes a communications tool that enhances ESG reporting.

Restart Energy, a supplier of electricity and natural gas in Romania, launched a tokenized carbon-offset platform, RED, in late 2021. According to Restart Energy, the platform allows individuals and companies to calculate their carbon footprint and obtain tokenized carbon credits for their positive environmental actions, certified as NFTs (non-fungible tokens) on the blockchain. Whenever any environmental action is taken, it can be registered on the RED platform. Once validated, an equivalent CO2 footprint is calculated, and tokenized carbon credits are issued that can be used to buy green energy or obtain the cash equivalent. The RED platform provides certification to renewable energy producers of the origin of green energy produced on the blockchain in the form of tokens called REO-G, in accordance with the European Guarantees of Origin. These certificates can be used to validate the company’s sustainability in an ESG report.

 

What We Think

The environmental sustainability and ethical business practices of consumer-facing industries have material implications on a firm’s value, opportunities and relationships with consumers. Blockchain provides retailers and brands with greater visibility into their supply chains, as well as trust in data accuracy and data immutability, which support improved operating decisions. Blockchain has a wide variety of applications for retailers to enhance and achieve their sustainability strategies and goals, spanning each of the building blocks of Coresight Research’s EnCORE framework.

Blockchain’s transparency surfaces pockets of unused raw materials, allows companies to monetize deadstock and facilitates the repurposing of materials. The technology can reveal opportunities to reduce waste and improve efficiency in operations and energy/resource use. Blockchain also supports internal and external audits that surface opportunities to enhance organizational sustainability and assists in creating meaningful ESG reports.

Blockchain unlocks value and reduces costs, as information can be shared, aggregated and filtered across different organizations and people, enabling insights, driving innovation and increasing operational efficiency to achieve gains in profitability.

We expect blockchain technology to become table stakes in ESG strategies over the next few years. As more companies use blockchain, visibility across the industry ecosystem will improve, providing additional opportunities for efficiencies to surface. Blockchain as a fundamental ecosystem technology creates synergy among value-chain partners, enabling the creation of entirely new transformative business models. We see blockchain as supporting the “flywheel effect”—creating a virtuous cycle across retail networks.