Commodities Markets Are Broken. Responsible Supply Chains Can Fix Them.

The headwaters of global supply chains are opaque and turbulent. Because of the way raw materials such as iron ore, aluminum, and lithium are produced, bought, and sold, most consumer-facing manufacturers lack the faintest idea about the provenance of their inputs.

But now, for the first time in history, it is possible to see how this could change. Some companies have already demonstrated that real-time, complete visibility into the origins of their materials is achievable. On this foundation, a market-based system that rewards better sourcing choices can fix a paradigm that has been broken for centuries.

Whether it be the exorbitant carbon footprint of the less efficient aluminum smelters, or child labor in cobalt mining, many of the world’s most reprehensible industrial practices take place in dark corners of the global economy. These mineral supply chains are long and poorly integrated; as a result, they effectively launder away negative externalities. Out of sight and out of mind, they attract a sliver of the attention given to more visible issues. (Consider, for instance, the hullabaloo over plastic straws in recent years.)

Past efforts to account for the environmental harms from these extractive industries have mostly failed, occasionally in tragic fashion. In 2010, the U.S. Congress passed the Dodd-Frank Act, which issued rules requiring companies to disclose their use of “conflict minerals,” so named because of their ties to war criminals and human rights violations. But several years after the law took effect, 80% of the companies reporting conflict mineral purchases to the U.S. Securities and Exchange Commission conceded that they did not know the country of origin of their cobalt or gold, let alone the conditions under which those materials were extracted. Meanwhile, the planetary impacts from these sectors keep growing. The joint annual emissions from steel and aluminum production are roughly equal to the emissions from all global aviation and passenger road transit — every car, bus, taxi, and motorcycle on planet Earth — combined.

But narratives that categorically decry these industries as irresponsible are mistaken. Many mines and smelters operate responsibly, and some are leading innovators in renewable energy. Anglo American, a British mining company and major producer of platinum, diamonds, nickel, and more, operates 290-ton haul trucks powered by hydrogen. In Ontario, the Borden Lake gold mine runs on entirely electric equipment, reducing greenhouse gas emissions while protecting miners from the harmful effects of diesel exhaust. Globally, metals producers are scaling up breakthrough technology to produce nearly carbon-neutral aluminum and steel.

Yet there remains a massive barrier to expanding many of these technologies from the piloting phase to the commodity market. Despite the vast operating discrepancies between the best and worst performers, commodity markets are generally indifferent to goods produced responsibly and those produced in ways that shock the conscience. The inability for manufacturers (and consumers) to choose to procure responsibly threatens global sustainability goals. Good products are still coming from awful practices: In Xinjiang, China, forced labor from Uyghurs helps produce almost half of the world’s polysilicon, much of which winds up in solar panels. In the Democratic Republic of the Congo, the cobalt used to make electric cars has been labeled the “blood diamonds of batteries.”

Put simply, the world needs a market for responsibly produced commodities — akin to the robust systems already in place for coffee and chocolate. Progress will remain elusive unless producers and consumers are able to demand responsibly produced goods, either as direct purchasers or as citizens of countries willing to proactively regulate these damages.

The Three Transformations That Can Build a New Market

Building a new market that rewards transparency and encourages environmental justice is not such a tall order. Achieving more responsible supply chains requires three transformations. First, responsible miners, smelters, and manufacturers must shift from a paradigm of risk mitigation to one of value creation. Second, products must replace corporations as the unit of consideration for accounting and reporting. And third, rigorous standards and chain-of-custody models need to underpin commodity differentiation.

Here, we consider each of these transformations in turn.

Shift from risk mitigation to value creation.

The current paradigm: Supply chain traceability should focus on generating value, not just mitigating loss, but the status quo fails to trigger demand signals that could drive transformative change. This is because the paradigm of “due diligence” most often assuages concerns instead of producing certainty. There are abundant examples from other differentiated commodities where traceability underpins value creation. Diamonds, coffee, chocolate, and wine have differentiated markets where responsible producers are rewarded with a green premium for going beyond due diligence. Value creation rooted in sustainability — such as the Fairtrade certification label — can break apart entire commodity markets and reassemble them into two separate categories: traceable-sustainable and nontraceable-unsustainable.

Today, sustainability reporting on supply chain impacts is most often a tool to reassure consumers and placate investors. It serves to mitigate the reputational damage caused by criticism of weak environmental stewardship. At its worst, it has been used to make legal defense claims in the face of serious damages such as proven human rights abuses or tragic mine collapses — events that pose a sudden and material threat to the value of a company and the viability of its operations.

The solution: Differentiated commodity markets are already bubbling up in ad hoc arrangements between buyers and sellers. Tesla, for instance, recently struck a deal with BHP to source nickel from a reputable supply chain, allowing BHP to capitalize on its sustainability practices. Swiss watchmaker Breitling led a process to trace its gold supply to a single mine in Colombia. B2B arrangements like these are quickly becoming institutionalized: Recognizing the value left on the table, the London Metals Exchange is developing the infrastructure for commodities brokers to buy and sell low-carbon metals, including aluminum and lithium.

Shift from corporate-level to product-level accounting.

The current paradigm: Sustainability reporting grew up in the model of corporate data collection. The purview of these corporate reports does not normally extend beyond one company, its employees, and its assets. But in long value chains, each step along the chain of custody offers only a snapshot of a product’s journey from mine site to market gate. These snapshots have formed the backbone of a small industry of sustainability-reporting firms, but they don’t facilitate manufacturers making substantiated claims about their products’ materials. They are limited warranties.

Blue chip companies at the end of these supply chains remain uncomfortably in the dark, purchasing their products through a labyrinth of middlemen. They have little more than their suppliers’ word to evaluate whether the raw materials of their products are responsible.

The solution: Product-level sustainability accounting is the only way to shine light onto issues buried far upstream in supply chains, and to exert influence on all stakeholders. Transparency must begin with farmers and miners and end with retailers. A product-level, and even batch-level, perspective is essential for materials like metals, which are often smelted and mined by different companies, sometimes thousands of miles apart. For these goods, responsible production requires a multi-sited approach.

Iron ore for steel, for example, may be responsibly mined in Australia but made into steel in China in some of the world’s least carbon-efficient industrial plants. Knowing that one actor is behaving well but having no information about the other is hardly a strong foundation upon which to make claims about a product’s sustainability.

Recent technology developments — some blockchain-based, others not — can clear the traditional roadblocks to product-level reporting. Fraud-resistant accounting makes use of digital ledgers to record each instance where a product changes hands. Consumer-facing companies such as Unilever and Volkswagen are among the wave of early adopters of these digital traceability tools, but the potential for growth is vast. A small but mighty group of traceability startups is already pushing the envelope and educating producers on how much potential for improvement already exists. But to create differentiated markets for sustainable commodities, a final intervention is needed in the form of a coordinated effort to standardize responsibly produced materials — akin to the Fairtrade standards that govern coffee and chocolate.

Create standards to re-commoditize sustainable products.

The current paradigm: Few accounting practices today are sufficiently robust to drive commodity differentiation and produce a strong demand signal from markets. The lack of ambitious sustainability thresholds, as well as misalignments around measurement models (often called chain-of-custody models), creates more noise than signal.

Consumers rely on shortcuts to make complicated choices. The labels on organic produce and recycled paper are examples. Similar certifications are quickly evolving for copper, steel, aluminum, and a host of other materials. How these accreditation tools develop will set the stage for the success — or failure — of differentiated commodity markets.

Critically, the appropriate chain-of-custody model depends on the sector and, even more importantly, on the attribute being tracked. Choosing the wrong chain-of-custody model can undermine efforts to catalyze responsible production. More often than not, these systems do not trace physical batches of commodities and instead track only tokenized representations of goods through a method known as book and claim. This works just fine for measuring fungible damages, like greenhouse gas emissions — and it works well for commodities in which this is the key attribute, such as fuels — but it falls woefully short when it comes to mitigating nonfungible damages like child labor or biodiversity loss along mineral supply chains.

The solution: To separate the signals from the noise, sustainability performance standards must become sufficiently robust to withstand independent scrutiny and sustain consumer confidence. As part of this, chain-of-custody requirements for mineral supply chains must be grounded in the physical tracing of inputs and outputs. And setting a high bar is essential. A standard for low-carbon steel, for instance, that includes the best-performing half of the market rather than a more select narrow band is likely to fail. So, too, will a standard for responsible cobalt that fails to mitigate child labor at the specific mine site where this damage happens. Standards must be holistic yet commodity specific, rigorous yet transparent.

Reporting frameworks focused on greenhouse gas emissions are quickly addressing their own shortcomings, with many exciting and complementary efforts led by Greenhouse Gas Protocol and others. These tools, when properly deployed, will serve as a baseline for environmental standards by ensuring a basic level of quality while supporting sector-specific reporting frameworks. In the next several years, we look forward to high-performance standards emerging from many of the incumbent platforms, such as the Aluminum Stewardship Initiative, Responsible Steel, and the Copper Mark.

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The transition toward an integrated system of performance standards requires careful and deliberate stewardship. There is every reason to believe that sustainable commodities will emerge in two ways: gradually, then suddenly, to borrow a phrase from Hemingway. The market is currently teetering on the comma between those two ways. A small number of targeted interventions can begin this next chapter of scaling sustainability.

The greatest challenge is not technological but cultural. Incumbents tend to wave their hands and dismiss things as “just not possible,” even in the face of a thriving technology industry with readily available solutions that enable robust reporting. (Recall that traceability was a much taller order before the latest wave of digital innovation.) The skepticism also has an economic dimension, as certain innovations are economically viable but not yet cost-efficient — the counter being that cost-efficiency is reached through investment. Given the widespread hesitancy, it is encouraging to see first movers in the private sector making bold decisions. Breitling’s choice to source its gold from a single mine has resulted in a product whose marketing is built around responsible sourcing alongside a pledge to scale the practice for the company’s entire product line by 2025.

Innovation usually looks impossible until someone demonstrates otherwise. As market adoption grows, the impossible becomes inevitable. Supply chain traceability has a bright future indeed.