Summary
In response to growing consumer pressure and pending regulatory initiatives, FMCG companies are updating their policies and seeking out innovative solutions to enhance the effectiveness of efforts to halt deforestation, promote sustainable farming practices, enhance livelihoods opportunities, and improve working conditions. This is an ambitious agenda which will need to get to grips with the twin questions related to: who bears the costs of the required innovations and how will this affect the distribution of revenues to different actors in the supply chain. To date the necessary search for technical solutions has seen these core questions set to one side. However, as mandatory ‘due diligence’ requirements come ever closer, it is increasingly important that these twin questions are systematically addressed.
According to reports carried by confectionerynews.com, in response to ‘ever-increasing societal pressure from consumers and governments’ the ‘rate of deforestation around the world has noticeably declined’ over the past 30 years. Fast-moving-consumer-goods-companies (FMCGs), have recognised significant commercial advantages can be gained if they ‘can prove they leave the world’s forests in a better state than they found them’. A particular focus has been on the sourcing of palm oil, cocoa and increasingly sugar, which are all seen as commodities which are driving deforestation (1).
Currently corporate efforts are focussed on ‘traceability, transparency and certification.’ This involves ‘updating policies, setting targets and establishing contractual obligations for supply chain partners.’ This is seen as contributing to a year on year decrease in deforestation. Industry initiatives such as the Roundtable for Sustainable Palm Oil (RSPO) certification, multi-stakeholder action plans such as the African Palm Oil Initiative as well as deployment of technological solution such as satellite-based monitoring of deforestation, are all seen as playing a part in this reduction in the rate of deforestation (1).
However, there are concerns that ‘what looks good on the wrapper’ is not actually delivering in terms of halting deforestation and getting to grips with halting the process of climate change. The hard reality is forests are still disappearing, though be it at 2/3 of the pace of 30 years ago. In this context ‘deforestation needs to decrease by a rate of some 1 million hectares a year to achieve a target of 0% deforestation by 2030’ (1). This raises the question: what more can and should be done beyond the existing efforts of corporate players in the FMCG sector?
The critical issue is seen as being ensuing accountability throughout the supply chain from ‘farmers or plantation owners through processors, manufactures, traders and retailers.’ While the inclusion of ‘no-deforestation clauses’ in contracts is becoming increasingly common, the question remains: how are such clauses to be effectively monitored and enforced?
Analysts have suggested this should not be an unsurmountable challenge given ‘much of the world’s sugar, cocoa, and palm oil come from a handful of sourcing landscapes’, and there is now the technology available to monitor developments and intervene in ‘real-time’, where deforestation processes are underway.
Since October 2020 ‘Ferrero has started using the Starling satellite monitoring and verification service across its palm oil supply chain’, with the aim of combing ‘satellite imagery and on-the-ground expertise to monitor land cover change and forest cover disturbance in near real time.’ This is intended to enable Ferrero to identify where potential deforestation is occurring and respond to violations of sustainability objectives along its supply chains.
Ferrero is also supporting a pilot programme to promote ‘Integrated Pest Management (IPM) and biodiversity conservation practices at the farm level for palm oil producers.’ (2)
Against this background Ferrero’s latest Palm Oil Progress Report has reiterated its commitment to sourcing ‘100% RSPO certified and segregated, and traceable to farms’. While currently ‘all of Ferrero’s original products source their palm oil sustainability, its recently acquired companies have yet to meet 100% RSPO Certification.’
Meanwhile, Nestle has launched a new action plan ‘to prevent and remediate human rights violations in its palm oil supply chain’. According to Nestle’s Global head of Sustainable Sourcing and Climate Delivery, the company’s vision is to ensure a ‘sustainable palm oil sector – where nature is protected and restored, where human rights and labour rights are respected, where workers and smallholder farmers are offered decent working conditions and livelihoods.’
It is maintained, Nestle’s corporate action plan ‘provides a clearer, more robust guideline to take action in its supply chain to help tackle the root causes’ in collaboration with palm oil sector stakeholders. It has developed a ‘framework that will help the company prioritize supplier engagement and systematically take action based on suppliers’ risk profile and their capacity to address labour rights issues.’ It will ‘work with external partners to develop corrective action plans for suppliers and put monitoring systems in place to track against a set of key performance indicators.’ It will also establish ‘specific guidance and tools to improve recruitment practices and the working and living conditions of workers’ (3).
A critical question identified in the recent confectionerynews.com analysis is how to encourage cooperation throughout the supply chain. This analysis sets out 5 areas where FMCGs companies could take steps including:
- Working with companies in their supply chains to ‘take on some of the responsibilities their partners are committing to.’
- Sharing ‘information about deforestation efforts, targets and methods.’
- Setting tangible targets with clear benchmarks for areas to be preserved, trees to be planted and landscapes to be restored.
- Commit to ‘monitoring and enforcing … supplier’s commitments.’
- ‘Pool resources and data across supply chains and industries, enabling more targeted, focused and cost-efficient action against deforestation.’
The analysis calls for FMCGs companies to be proactive and lead the process not simply respond to consumer demand and government regulation (2).
| Comment and Analysis Clearly, closer cooperation to ensure sector wide monitoring and enforcement, which leaves no market space for commodities produced through deforestation is essential, if the process of deforestation is to be halted. While the technology is available to monitor deforestation in real time and expel offending suppliers from individual supply chains, if other commercial outlets are available for the palm oil, cocoa and sugar produced through deforestation, the process of deforestation will continue apace. This would appear to be an important point of interface between business led initiatives and public policy based ‘due diligence’ initiatives. While only through effectively preventing offending production from entering the EU market can European policy initiatives generate a disincentive to continued deforestation, this will only be effective if the governments in other major markets for these products adopt similar measures. Unfortunately, the hard reality facing EC policy makers is the global economic significance of the EU market is in decline, as the focus of global economic growth and agri-food sector demand shifts to Asia and Africa. The challenge facing the EU would thus appear to be to find an appropriate means of using its regulatory weight to effectively incentivise all major private sector actors in the concerned supply changes to adapt to EU requirements throughout their production activities, regardless of the markets being served. This is a tricky policy challenge, when seen in the context of wider EU international trade policy objectives. While only a ‘handful of sourcing landscapes’ account for much of the world’s sugar, cocoa, and palm oil, these sourcing landscapes are located in countries which constitute major export markets for EU goods and services. EU regulatory interventions to exclude en masse imports of offending products from these countries, would be likely to draw the EU into ‘trade wars’ which could damage EU export interests. This further complicates the policy challenge facing the European Commission and wider EU institutions. Additional complications also arise from the growing public policy focus on using ‘due diligence’ regulatory initiatives to ensure better working conditions and livelihood opportunities which make a substantial contribution to poverty reduction and ending child labour within these same commodity supply chains. While some companies are increasingly seeking to take on board livelihood considerations in their engagement with stakeholders within their supply chains, a critical issue remains unaddressed, namely: who within the supply chain is to bear the costs of production process changes and monitoring and verification required to ensure deforestation and wider sustainability objectives are met? Efficiency and productivity gains will only be able to achieve so much if livelihood and poverty reduction objectives are also to be addressed in parallel with climate related concerns. With discussions under way over regulatory ‘due diligence’ requirements related to livelihoods and working conditions (particularly in regard to the use of child labour) in response to growing consumer concerns, FMCG companies are going to need to get to grips with the question of who within the supply chain pays for the changes in production practices required. Will FMCG industries come to accept the progressive expansion of their revenue share which has been underway since the 1980s will now need to be reversed? (see companion epamonitoring.net articles ‘Challenge Thrown Down on Inclusion of Living Income Requirements Under Pending EU Due Diligence Regulations in the Cocoa Sector’, 18 May 2021). Or will FMCG companies engage with their customers on how they need to bear some of the costs of more sustainable and equitable production processes? Or will FMCG companies continue to exhort others in their supply chains to ‘up their game’ through ever more ambitious contractually binding sustainability requirements, aligned with evolving EU regulatory requirements? Given the stark choices faced, a key public policy issue will be the nature of the ‘due diligence’ requirements established and whether these ‘due diligence’ requirements address the core issue of the distribution along supply chains of the costs and revenues linked to more sustainable patterns of production of palm oil, cocoa, sugar, and other commodities of concern. It would appear necessary to ensure that FMCG companies not only commit to ending deforestation, promoting more sustainable farming practices, and enhancing producer incomes and working conditions, but also take on board the cost and revenue distribution issues which will need to be addressed if these multiple objectives are to be met simultaneously. |
Sources
(1) confectionerynews.com, ‘The road to 0% deforestation for confectionery FMCGs’, 3 May 2021
https://www.confectionerynews.com/Article/2021/05/03/The-road-to-0-deforestation-for-confectionery-FMCGs
(2) confectionerynews.com, ‘Ferrero releases Palm Oil Progress Report, looks to make all its supply chains 100% RSPO certified’, 3 May 2021
https://www.confectionerynews.com/Article/2021/05/03/Ferrero-releases-Palm-Oil-Progress-Report-looks-to-make-all-its-supply-chains-100-RSPO-certified
(3) confectionerynews.com, ‘Nestlé announces new action to address labour rights issues in palm oil sector’, 3 May 2021
https://www.confectionerynews.com/Article/2021/05/03/Nestle-announces-new-action-to-address-labour-rights-issues-in-palm-oil-sector