What is Financial Traceability?

Financial traceability, sometimes called asset traceability or asset tracing, is a process through which investigators ‘follow the money’ by using an audit trail to trace a particular piece of financial information or data back to its source. Financial traceability gives management teams the opportunity to share data with stakeholders, providing transparency. 

“Demand for supply chain transparency is off the charts, whether it’s to help companies make claims about their sustainability initiatives, keep their supply chains running in the face of swings in supply and demand, or to stay compliant with a swath of new supply chain due diligence regulations,” said Leonardo Bonnani, Founder and CEO of Sourcemap, a leader in supply chain due diligence. 

Why is Financial Traceability important?

Financial traceability should be at the top of the agendas of corporate management, not only for the corporation but also for shareholders and equity investors. 

Here are three reason why financial traceability is important:

Customs Compliance

Compliance encompasses all manner of laws and regulations from deforestation to the Uyghur Forced Labor Prevention Act to the newly passed European Union due diligence law. Customs compliance regards all of an organization’s processes and procedures that ensure it complies with domestic and international trade rules, regulations, and laws. It includes interrelated concepts like import compliance, export compliance, and import and export controls. 

Sustainability

More recently, CEOs have made promises on sustainability issues such as lower carbon emissions or outlining a net zero strategy. To meet these commitments, financial traceability will be required, especially for Scope 3 targets, such as emissions from purchased goods and services, or transportation and distribution by companies not directly owned by the reporting corporation. Financial traceability will provide environmental, social, and governance data beyond a carbon footprint. It will allow management to analyze other sustainability data – for instance, child labor or deforestation – which can expose both corporations and investors to reputational and/or legal risk. 

Profitability

Although corporate management teams may recognize that financial traceability systems are desirable, they will also need to be convinced that the investment and operational costs provide a suitable return. Financial traceability is a corporate necessity and investors should demand the adoption of financial traceability tools if only for reasons of self-interest – for example, reducing their exposure to hidden supply chain risks.

“I also think traceability is becoming a business imperative rather than just a nice thing to have,” said David Williams, Corporate Social Responsibility Manager at Williams-Sonoma. “When we set more and more ambitious goals for ourselves as a company, we need more and more detailed data about where our materials come from and as a US retailer and operating in other countries, there are legislative requirements that we have to meet and I think this is actually good for the industry as a whole.”

Financial traceability helps corporations comply with US and EU due diligence laws, stay on top of sustainability initiatives, and share data with stakeholders, ensuring sustained corporate profitability.