Logistics, a magic bullet for sustainable trade?

Logistics, a magic bullet for sustainable trade?

29 Mar 2024

BATTLES are won with tactics. Wars are won with logistics, Tesla chief executive officer Elon Musk said. Indeed, improving performance of logistics helps organisations and economies further engage in local and international trade. This makes logistics a powerful driver for growth and development.

According to the World Bank, performance of a country’s logistics industry is a great deal for its competitiveness on export markets, and its ability to reliably, affordably secure importation of goods needed for production and consumption.

Hence, the development of the Logistics Performance Index (LPI) to help economies identify areas where logistics could be improved. The LPI measures the ease of establishing reliable supply chain connections and the structural factors such as quality of logistics services, trade and transport-related infrastructure, as well as border controls.

Malaysia scored well in the LPI 2023. It climbed 15 notches to the 26th place – emerging as the second-best performing Asean country after Singapore. This is due to significant contributions from entities such as the Investment, Trade and Industry Ministry (Miti), Malaysia External Trade Development Corporation (Matrade), Malaysian Investment Development Authority (MIDA), and more, in driving the environmental, social, and governance (ESG) agenda and fostering sustainable export practices.

However, there is still much to be done in driving ESG adoption among small and medium enterprises (SMEs). The Organisation for Economic Cooperation and Development (OECD) suggests there is an ESG scoring bias in favour of large-cap companies, and against SMEs. OECD notes that this burden, may be due in part to the ability of large firms to dedicate more resources to reporting and poses a market inefficiency to the extent it affects both relative cost of capital and corporate reputation.

All is not doom and gloom for SMEs, which are likely hovering at the adoption crossroads amid whirlwinds of an uncertain business landscape that is rapidly changing based on the latest ESG strategies and practices. This is an opportunity for SMEs to kickstart their sustainable journey and up their game in the business arena — ultimately through transforming operational procedures, increasing brand exposure and boosting trade locally and intentionally. Tackling logistics can be a starting point towards the net zero path, while boosting business.

A trade requirement

Saloodo! – the Carrier Management Portal for DHL, defines trade logistics as the management process that includes the entire flow of goods and information between suppliers and companies and between customers and companies. Trade logistics also includes the internal flow of goods.For trade logistics to be as efficient as possible, the use of computer-based merchandise management systems is indispensable, as they enable item-specific inventory tracking and disposition. Trade logistics’ aim is to ensure availability of goods at the point of sale. By continually refining and strengthening its logistics capabilities, countries can solidify their positions as great players in the global trade arena.

Furthermore, cost efficiency is paramount in a globalised world. Robust logistics infrastructure, including well-developed ports, airports, road networks, keep transportation costs down, giving any exporting nations a competitive edge in international markets. It is crucial to explore the importance of logistics and how it helps SMEs to venture further into the global market.

Describing logistics as the lifeline of international trade, PKT Logistics Group Sdn Bhd managing director and chief executive officer Datuk Seri Michael Tio notes that the logistics sector is a major contributor of carbon emissions and urged the industry to reduce carbon emissions by aligning with ESG ideals.

Sharing the same sentiment, DHL Express (Malaysia and Brunei) managing director Julian Neo says: “Logistics is inextricably linked to trade. In its very essence, it is the engine that drives the movement of goods and services across borders.

“Local and international supply chains are dependent on the efficiency of transit amidst multiple stakeholder, tax, customs, and regulatory considerations. High performing logistics operations increase countries’ ability to compete on an international scale, connect sectors across geographies, and ensure continued trade flows.”

Noting that the concept of ESG has long been woven into the fabric of logistics, Neo explains that the first and arguably most scrutinised facet for companies is environmental impact. He emphasises that companies are under increasing pressure to report and mitigate emissions — and will soon be mandatory.

“Europe’s Non-Financial Reporting Directive and Corporate Sustainability Reporting Directive; United States’ SEC Climate Disclosure Rule; and Japan’s endorsement of the Task Force on Climate-related Financial Disclosures all point to a rapid shift towards greater environmental transparency.

“Most relevant to the logistics sector, Scope 3 emissions, refers to the indirect greenhouse gases produced in each company’s value chain, including downstream transportation and distribution.

“This has given rise to alternative energy and mobility solutions as logistics providers seek to decarbonise while balancing market demand. For DHL, we have invested in the use of sustainable aviation fuel through contracts with BP, Neste, and World Energy, and are allowing customers to benefit via our GoGreen Plus insetting service as well,” shares Neo.

Securing a future

Many remain sceptical about ESG, the most famous one being Tesla’s Musk, who called ESG a “scam”.

Tio and Neo beg to differ. Given that the world population is projected to increase from the current 8.1 billion to 10 billion by 2050, Tio notes that ESG can preserve and nuture the planet for future generations but suggests governing ESG bodies, like the United Nations and governments, to set differing net zero timelines for countries according to their level of development.“The Paris Agreement called for the Race to Net Zero by 2050. However, differing net zero targets should be set for different parts of the world as third world countries are still struggling with basic economic, social and political stability. Perhaps, the deadline for developed countries should be 2050, developing countries by 2060, third world countries by 2070 and beyond,” says Tio.

Neo says: “ESG is simply a natural extension of efforts to invest and give back to people and the planet. It should not be discounted because it has become a key differentiator in business today, and one that serves a very positive purpose.

“We recognise sustainability as a nonnegotiable requirement to ensure the long-term viability of our company. A person’s most basic moral obligation is to do the right thing. This is a core value for DHL, extending across our company and informing how we conduct our business, treat our employees, and serve our communities.”

Meanwhile, DHL’s recent Global Connectedness Report 2024 found that globalisation reached a record high in 2022 and remained close to that level in 2023.

“The growth of international trade flows is keeping pace with and in some cases exceeding domestic trade activity. In the face of geopolitical crises, flows of trade, capital, information, and people between countries have proven resilient. At the same time, we must ensure that this growth does not come at the expense of our environmental, social, and governance responsibilities,” says Neo.

Emulating the how-to’s

Neo recommends SMEs to familiarise themselves with established ESG frameworks such as the Global Reporting Initiative, Sustainability Accounting Standards Board, and Task Force on Climate-related Financial Disclosures as they provide guidance on ESG reporting and materiality assessment.“Armed with this knowledge, SMEs should then be able to determine ESG issues that are most relevant to their business, industry, and stakeholders. This will help companies pivot their efforts and prioritise areas that leave the greatest impact.”

Neo also advises startups and smaller organisations to take an incremental approach to ESG tracking and monitoring by utilising available resources.

“Gradually build capabilities over time. This allows for flexibility and ease in managing costs effectively. Engaging logistics partners can help to jointly address ESG challenges and share best practices.”

It might seem that a company’s ESG compliance is limited to reporting frameworks, transparency, target monitoring, regulatory adherence, but Neo says there is much more beyond that and companies can consider compliance partnerships as an enabler of sustainability goals.“A benefit is the sharing of ESG priorities, which drives greater innovations if aligned between two parties. Some examples include transport fleet electrification, further strides in eco packaging, or enhanced facility energy management.”

Leveraging on AI

Neo shares that there are multiple subsets of interactive Artificial Intelligence (AI) that have seen varying trade applications ranging from geolocation and navigation, optical character recognition (OCR), chatbots, digital assistants, speech-to-text dictation, and e-payment, to name a few.

“Within the supply chain, this brings greater operational efficiency. Among use cases, the deployment of AI algorithms for trade data analysis to identify patterns, predict demand, and optimise inventory is most widespread.”

He also notes that OCR is growing in sophistication as companies extract and digitise information from trade documents, reducing manual data entry errors and improving documentation accuracy.

“Used together, they can produce more efficient Natural Language Processing (NLP) for ESG disclosures. Through analysis of textual data like ESG reports and non-financial reporting directives, alignment of disclosures with current frameworks and guidelines can be quickly assessed,” he says.

In PKT’s experience, AI has been harnessed to enable Machine Learning where it uses it in conjunction with Optical Character Recognition (OCR) for data entry, storage, analytics and manipulation using Robotics Process Automation.

“This improved data capture capability and reduced paper usage, greatly helping us to perform logistics-related administrative processes such as customs declarations, trade-compliance, analytics, reporting and more.”

Pointing out that the business of logistics is to be efficient and lean, Tio says PKT’s GAP #1 of LEAN before MEAN pushes this ideal.

“This means opting for measures that reduce costs through efficient planning and efficient practices before we consider ESG initiatives that incur additional costs to roll out. However, if it is consciously chosen — for example to use only certified sustainably sourced packaging materials which are more costly — then this will be jointly undertaken with our customers,” says Tio.

Pains of non-compliance

The ultimate pain SMEs would and are facing for not adopting ESG is to lose their respective market segment share, in addition to hindering their own development. Research by Xiamen University Malaysia and Universiti Teknologi Brunei found that investors prefer companies that share information about their ESG.

Fndings by the Sustainable Finance Institute Asia 2022 estimates that Malaysian SMEs risk losing RM292bil in revenue due to non-ESG compliance. SMEs without incorporating ESG principles in their business operations are losing out in the eyes of investors, customers, government tax incentive, and financing bodies.

The United Nations Global Compact Network Malaysia and Brunei also mentions that when companies do not provide enough ESG information, it is seen as a sign of business risks, like issues specific to that company, not the overall market. These risks can negatively affect a company’s image and decrease its brand value.

Overall, small businesses that do not follow ESG rules are seen as having bad management and not caring about the environment or long-term sustainability.

Reiterating that “If there is no ESG, there is no MSG (Multinational Sales Growth)”, Tio says planning out a roadmap to achieve net zero emissions by 2050 is a good start that would assist SMEs’ competitiveness as they scale their business to another level or work with multinational companies.

“Aligning production processes with ESG will appeal to conscientious stakeholders – customers, investors and partners who are more inclined to do business with reputable companies who place sustainability at the core of their operations.

“Akin to PKT’s Green Action Plan (GAP) #1, LEAN before MEAN – we believe in embedding lean principles before managing our environmental agenda needs, optimising production processes resulting in minimising waste, resource consumption and emissions.

“In addition, positively impacting our social practices by prioritising workplace safety, and increased operational efficiency for better governance and transparency, all attractive on the global front for enhanced trade partnerships.”

Another challenge of ESG adoption for SMEs and large-cap companies is that the rules of the ESG game are still being developed and there is no one clear path or paths towards ESG compliance, says Tio.

“However, the logistics industry is already playing its part by helping shippers make their supply chains more efficient e.g. the setting up of Regional Distribution Centres (RDCs) that place products storage closer to their intended consumption locations while shortening lead times and improving reaction times.

“This RDC model in itself reduces the carbon footprint by reducing cross border shipping compared to a disaggregated, criss-cross supply chain. Therefore, enabling our customers to pursue a lean supply chain is already an ESG initiative on its own.”

A helping hand

Although the industry is lacking in ESG experts, it certainly makes up for it in terms of other types of aid to help Malaysian SMEs get into the ESG space. Miti Minister Tengku Datuk Seri Zafrul Tengku Abdul Aziz has urged businesses to “view ESG as an opportunity”, saying that ESG is not just as a risk management strategy against regulations and customer demand but also as an economic opportunity to tap new areas.

“Big companies are not in danger because they understand and they also have stakeholders who want them to meet ESG requirements. But targeting the whole supply chain means big companies also need their suppliers to be ESG-compliant.

“This is where SMEs in Malaysia need to realise the importance of ESG. There’s a timeline and they are not expected to adopt it overnight, but they need to start investing in knowledge and capacity building in both systems and processes,” said Zafrul on his social media platform.

The government and other entities have launched a slew of initiatives to ease businesses’ way towards sustainable development and trade.

Miti released the i-ESG Framework, which includes a free assessment tool, after which companies are given a guide on how to begin the sustainability journey. Clinic sessions and outreach programmes called KenalESG are being conducted by Miti across the country.

There is also the New Industrial Master Plan (NIMP2030), whereby funding is a key enabler. Budget 2024 allocated RM200mil for NIMP2030 activities, a portion of which is dedicated to helping companies implement ESG initiatives. The process of identifying qualified export-oriented companies is being done by Matrade and the grant allocation is starting this year.

Other incentives include RM20bil in guarantee funding by Syarikat Jaminan Pembiayaan Perniagaan Bhd for SMEs involved in the green economy, technology and halal fields, as well as tax deductions of up to RM50,000 for each year of assessment on ESG-related expenditure from 2024 to 2027.

Mida supports the growth of companies undertaking integrated logistics services (ILS) by offering the ILS incentive and International ILS (IILS) status. As of 2022, Mida had approved 257 ILS projects, of which the majority of the applicants were Malaysian-based companies.

ILS incentives include the Pioneer Status incentive on statutory income of five years and 60 per cent investment tax allowance on qualifying capital expenditure incurred within five years, which can be offset against 70% of the investor’s statutory income for each assessment year.

Besides the government, external parties are also lending a hand. The United Nations Global Compact Network Malaysia and Brunei has developed the SME ESG Hub, to provide SMEs with fundamental understanding and free practical tools needed to kickstart their ESG journey and incorporate ESG practices into their businesses.

To sum up, adoption of ESG is a must for efficient supply chain management and logistics, improving the resilience of value chains and adjusting them to trade patterns reshaped by climate change and digital technology is crucial to boost trade.

Source: The Star