Enhanced supply-chain transparency and traceability support the governance and regulation of circular trade flows and streamline the customs and excise process. A transparent chain of custody informs both border officials and future buyers in secondary markets of a product’s provenance, including who manufactured it, its individual components (e.g. levels of toxicity), its usage history, the level of maintenance or repair it has received, and whether it meets the necessary levels of certification.
Despite this critical role in enabling legitimate circular trade, increasing transparency and traceability is extremely challenging, as it requires collaboration, coordination and trust between a wide range of actors along the entire length of the supply chain – and often across multiple jurisdictions. There are also few legal requirements on many actors to be transparent on circularity and, as a result, little data is collected or made available. Moreover, it can be costly to develop and run supply-chain-wide transparency and traceability programmes, and for individual firms to collect and present the necessary data (particularly for MSMEs in developing countries). Finally, lack of trust between supply-chain actors to divulge data – some of which may be regarded as commercially sensitive – also inhibits progress.
5.1 EU policy as a driver for global circular trade transparency and traceability
To accelerate supply-chain transparency and traceability, particularly with respect to circularity, the EU – as part of its European Green Deal and CEAP – is introducing a series of ambitious circular economy policy and legislative initiatives. If enacted, these measures promise to have profound consequences on transparency and traceability in circular trade. The likely impact of two of these legislative developments is discussed below.
The Sustainable Products Initiative
The EU’s SPI is considered an evolution of the Ecodesign directive in that it will look beyond energy efficiency requirements to a wider array of requirements on product circularity. As such, it will require all products sold on the EU market to be less toxic, more durable, more reusable and easier to recycle, remanufacture and repair. Conformity with the SPI will require significant improvements in supply-chain transparency and traceability. For example, a key element of the SPI is the requirement for a DPP as a mechanism to ensure that SPI requirements are met.
The DPP will enable the gathering and controlled sharing of data on both a product and its value chain. It will be gradually deployed from 2023 and will focus initially on three value chains – batteries, electronics and one other yet to be determined. Interoperable data collection, sharing and storage protocols will be key to the success of the DPP, as will more standardized digital solutions (such as AI, blockchain and smart sensors) that enable product identification, tracking and data-sharing at each stage of the product’s life cycle.
Corporate due diligence and corporate sustainability reporting
In 2021, the European Parliament adopted a resolution calling for mandatory environmental, governance and human rights due diligence standards for all companies operating within the EU single market. This will impose a duty on companies to ‘identify, assess, prevent, cease, mitigate, monitor, communicate, account for, address and remediate the potential and/or actual adverse impacts on human rights, the environment and good governance that their own activities and those of their value chains and business relationships may pose’. Improved supply-chain transparency and traceability will become increasingly essential to validating and verifying compliance.
5.2 Frameworks, metrics, standards and tools supporting transparency and traceability
To meet growing legislative demand for coherent and robust circularity metrics and transparent reporting – particularly in the EU – several circularity frameworks, metrics, standards and tools have emerged in recent years. Circular economy standards can be broadly divided into two categories:
(i) those standardizing circular organizational and management approaches, such as implementing product-service systems, procurement, reporting and eco-design (examples include the UK’s BS8001, France’s Pr XP X30-901, ISO/TC 323 and the ESRS E5 standard); and
(ii) those standardizing product circularity, such as phasing out hazardous material content and toxics, and increasing material quality, recyclability, repairability and performance of second-hand or remanufactured goods, as well as sustainable production requirements. Examples include those for recycling and waste-handling (e-stewards, R2 Standards, WEEELABEX), and refurbishment and remanufacturing (FIRA/REMAN001: 2019, IEC TC 111, ANSI RIC001.1-2016 and BS 8887–220: 2010), as well as product-specific standards (such as the BSI PAS 141:2011 for used electrical and electronic goods). In addition to standards, more than 520 policies or regulations relating to the circular economy have been passed by national governments (78 per cent of which have been produced since 2010). Many of these, such as waste management or recycling requirements or EPR schemes, have the same outcomes in mind but demand different requirements for businesses operating across multiple jurisdictions. Such a complex patchwork makes it difficult for organizations to comply with, and report against, regulations and standards.
In parallel with the development of circular standards, other standards for supply-chain traceability and transparency have been produced or are under development.
In parallel with the development of circular standards, other standards for supply-chain traceability and transparency have been produced or are under development. Examples include the GS1 Global Traceability Standard (GTS2), PR3’s standard for reuseable packaging, UNECE’s traceability standards for sustainable garments and footwear, or the circularity.ID Open Data Standard for fashion.
A range of circularity assessment and reporting tools and metrics have recently been or are under development to support companies with compliance and reporting. Leading examples include the World Business Council for Sustainable Development’s ‘Circular Transition Indicator’, the Ellen MacArthur Foundation’s ‘Circulytics’, the Boston Consulting Group’s ‘CIRCelligence’ and Circle Economy’s ‘Circle Assessment’. Numerous companies have also emerged to help companies embed circular traceability and transparency within both their own operations and the whole value chain. A. P. Møller-Maersk and IBM partnered to launch TradeLens, which enables immutable transparency and traceability of supply-chain data and documents for importers, exporters and other parties involved in global transactions.
The combination of the evolving policy landscape requiring greater levels of supply-chain traceability – alongside the metric, protocols and standards developments outlined above – will play an important role in helping to address the key traceability and transparency challenges facing circular trade. However, as these developments are relatively new and reporting standards take time to evolve, awareness of circular metrics and reporting among businesses and regulators remains low. If transparency and traceability are to be realized across whole value chains, they must therefore also be accompanied by an extensive capacity-building programme to provide dedicated support to those who may incur disproportionate burdens and costs to adapt and comply (such as MSMEs in low-income countries), and to ensure the transition is inclusive.
5.3 Blockchain as a tool for transparency and traceability
Increased transparency and traceability must also be underpinned by a new generation of digital and physical tracking technologies that provide robust verification and certification records, as well as real-time identification and tracking of products and components across their entire life cycle.
Blockchain technology offers particular value in terms of enabling transparency and traceability in circular trade. In simple terms, blockchain is a digitally distributed, decentralized and public ledger that exists across a network of computer systems. It offers a way to store and retrieve data and transactions that is difficult or even impossible to change, hack or cheat. It does this by duplicating the ledger across the entire network on the blockchain. Its original purpose was supporting cryptocurrencies such as Bitcoin, but blockchain technology is now being applied to a wide range of different applications from sharing secure medical data, to anti-money laundering and supply-chain transparency and traceability.
Benefits of blockchain technology for enabling circular trade
Blockchain offers numerous benefits when it comes to improving transparency and traceability across value chains and for facilitating circular trade flows. First, it can be set up to enable secure and verifiable transfer of data or information between different value-chain actors in ways which do not infringe on commercially sensitive issues. This is useful in business-to-business (B2B), business-to-customer (B2C) and business-to-government (B2G) scenarios. For example, an OEM can verify that remanufactured parts from a particular supplier do not contain hazardous substances and are certified, without the supplier having to divulge the entire material and chemical composition of the part. The OEM or supplier can also provide such data directly to customs officials when shipping these parts, which can speed up processing times and reduce risk of illegal waste trade. For example, Tradelens was created to facilitate such B2B and B2G information exchange and now has over 20 port and terminal operators around the globe, including in Benin, Côte d’Ivoire, Egypt, Liberia, Mauritania and Nigeria, demonstrating the demand for such blockchain-simplified solutions.
Blockchain also enables traceability right down to the individual worker, and can be used to conduct and verify due diligence on working conditions for informal workers such as waste-pickers. Several companies such as BanQu and Plastic Bank now use blockchain to serve the dual purpose of integrating waste picked by informal workers into the global recycling value chain and ensuring that those workers are rewarded accordingly.
The technology can also be used to streamline shipments from authorized economic operators (AEOs). This could be an effective way to reduce the administrative and compliance costs associated with the international shipment of high-quality secondary goods and materials for reuse or recycling via pre-verified operators. An example is the CADENA initiative between the customs administrations of Chile, Colombia, Mexico and Peru.
Challenges in scaling blockchain for circular trade
Despite offering numerous benefits, blockchain also faces key challenges. First is the growing concern about its impact on climate via its high energy-consumption requirements. In response, developers are working on potential solutions such as using trusted brokers, reducing the need for transitions or moving from a ‘proof of work’ model of validation to ‘proof of stake’, which has been demonstrated to reduce energy demand by 99 per cent.
Second is the challenge of dealing with the interoperability issues related to products passing through multiple blockchain protocols and systems in different countries throughout their life cycle. Numerous blockchain initiatives for circular supply chains have been established around the world within and across sectors ranging from cars to textiles.
The proliferation of different blockchain protocols creates numerous supply-chain and resource-security risks and inefficiencies. Each blockchain developed will likely use a different data-sharing protocol setting the rules for how data on that blockchain is used. It therefore creates a significant reporting and administrative burden on companies which are members of several different blockchains. Then, if a company in the supply chain or the blockchain operator itself ceases to operate, it is unclear what happens to that company’s data on the blockchain or to the functioning of the blockchain itself. This could lead to supply-chain fragility and major security risks if critical materials are involved. It also remains unclear how data can transfer seamlessly between different blockchains. This is particularly important for the circular economy, where secondary materials may re-enter a market as raw materials within a completely different value chain or sector. Finally, there is a risk that some governments may choose to prevent the use of blockchain technology for certain applications, citing data safety and accessibility concerns and lack of regulatory control (as has been observed for cryptocurrency bans imposed by China, Egypt and Iraq, among others).
The third challenge is the associated costs of participation, as running a large blockchain currently is expensive. This is particularly important for activities such as the trade in secondary raw materials, which as a sector operates on thin and fluctuating margins. For this reason, consortiums of public and private sector organizations often work together to pilot waste-trade blockchain solutions. An example is the ‘Traca’ framework pilot developed by Marine Transport International and the Recycling Association that aims to allow recycling companies in the UK to ‘provide essential information to producers, recyclers, regulators, and the end destination’.
Consideration should be given within multilateral forums as to how international consortiums can be financed to develop blockchain-based transparency and traceability protocols and systems across global value chains in a way that does not overburden those that may struggle to absorb the costs (particularly MSMEs and informal waste-picker cooperatives in low- and middle-income countries).
If these challenges are addressed, then blockchain can play an important role in enabling enhanced transparency and traceability in circular trade. Nonetheless, it will likely not be feasible in all cases, and simpler approaches are still viable. Moreover, the challenges associated with improved transparency and traceability cannot be fully resolved via technological solutions. Wider issues related to geopolitical tensions (particularly around data control and transfer, and economic competition) will also need to be overcome.
5.4 Enhancing transparency and traceability for circular trade
The previous sections in this chapter highlighted a range of different political and technical opportunities and challenges associated with increasing transparency and traceability for circular trade flows. Achieving the scale of transparency and traceability necessary requires collaboration and coordination between a wide range of stakeholders across multiple jurisdictions. This section provides an outline of key areas for collective action, including: (i) trade and economic cooperation agreements; (ii) cross-border B2B supply-chain data governance; and (iii) B2G and G2G data exchange (see Figure 13).
