What Are the Implications of New EU Mandatory Forestry Due Diligence Requirements for ACP Agricultural Commodity Exporters?

Due Diligence and the Cocoa Sector

On the eve of the launch of the EU’s forestry due diligence proposals, at an online Partnership Meeting of the World Cocoa Foundation, discussions were held on the subject of ‘European Union Due Diligence: A New Era for Cocoa Sustainability? Addressing this meeting the Director-General for International Partnerships at the European Commission, Koen Doens, pointed out that while ‘a common vision for sustainable cocoa production is emerging’, transforming the global cocoa supply chain will be a ‘complex process’. He maintained the EU’s ambitious sustainable cocoa initiative aimed to build on ‘the series of policy dialogues that we have convened between cocoa producing countries and value chain stakeholders’ so as to ‘improve the economic, the social, and the environmental aspects of cacao production.’

Doens pointed out how in Ghana ‘the EU has supported the national regulatory authority to set up a multi-stakeholder platform to advance the national dialogue’, while in Cote d’Ivoire the EU is ‘supporting the government to develop their national strategy on sustainable cocoa.’ He maintained all stakeholders agree ‘the number one priority was to ensure farmers earn a decent living income.’

confectionerynews.com, ‘Will EU legislation usher in a new era for cocoa sustainability?’, 18 November 2021

https://www.confectionerynews.com/Article/2021/11/18/Will-EU-legislation-usher-in-a-new-era-for-cocoa-sustainability

–          Getting to Grips with Realities

For the ACP the cocoa sector is the area of greatest concern. There are a multiplicity of initiatives in place which seek to halt deforestation. These range from the World Cocoa Federations’ ‘Cocoa Forests Initiative’ (5), through the Sustainable Trade Initiatives’ cocoa programmes (6) and multinational cocoa focussed NGO initiatives (7), to national government led, donor supported programmes (8). However, as is evident in recent data from both Ghana and Cote d’Ivoire, that despite earlier massive forest cover loss (9), deforestation continues apace (10).

This overall continuation of deforestation is occurring despite the laudable initiatives which are making changes in specific areas of cocoa production in both Ghana and Cote d’Ivoire. Recent data suggests ‘in 2018, Ghana saw a 60% increase in forest loss compared to 2017, the largest annual increase in the world’, while Côte d’Ivoire was in second place with a 26% increase in forest loss compared to 2017 (10).

According to analysis from a dedicated research programme at the University of Victoria in Canada, this is largely a result of three main challenges:

·         Problem of traceability during the “first mile” of supply chain.

·         A lack of data on the true number of cocoa farmers and their geographical distribution given the complexities of local land tenure systems.

·         The indirect nature of the supply chain, with purchases being made by local traders who operate informally largely outside of public oversight (10).

This raises critical questions in regard to:

·         How the new forestry due diligence requirements, which lay the responsibility for eliminating environmentally damaging cocoa production on consumer facing businesses (who place products for sale on the EU market) are to get to grips with these basic challenges?

·         What the impact of the new forestry due diligence requirements will be on cocoa farming practices which are continuing to lead deforestation?

·         How this will impact on farm level incomes in the cocoa sector, given a widespread recognition that enhancing earnings from cocoa farming (in a context where small increases in production can lead to dramatic price decline), is critical to fostering across the board changes to cocoa farming practices?

It is against this background that a multinational NGO coalition campaigning on cocoa farming environmental sustainability issues has called for an intensification of multistakeholder technical work to address:

·         Cocoa pricing and the implementation of the Living Income Differential (LID) (with action being required in Ghana and Cote d’Ivoire and the EU)

·         The drawing up of Cocoa-specific guidelines to accompany the operational application of the EU’s new regulations on deforestation, which take on board human rights and decent living income issues in a wholistic manner based on local realities.

·         Getting to grips with land tenure, tree tenure and land allocation which is central to full traceability.

·         Addressing deforestation at the local level

·         Accelerating the elimination of child labour, the use of which has increased in the face of Covid-19 linked labour supply disruptions

·         The impact of other sectors such as mining on deforestation (11).

The questions arise:

·         how will the new EU forestry due diligence regulation be operationalised so as to effectively address these technical issues in ways which bring about sector wide changes?

·         How will they avoid without generating commercial consequences which could simply drive illegal deforestation further underground and see smaller, more marginal farmers, driven out of cocoa supply chains?

–          The Benchmarking and Risk Assessment Process

The potential impact of the new EU forestry due diligence regulation mandatory requirements, need to be carefully assessed at the level of:

a)            The classification of production zones in light of the risk of deforestation and forest degradation. This requires clarifying the basis on which high risk, standard risk and low risk status of production zones be determined?

More specifically, it needs to clearly define at what geographical level such risk benchmarking will take place: at the country level, at the level of regions within countries, with reference to specific production areas or with reference to specific supply chains, with this being driven by the quality of traceability attained along specific supply chains?

This is important since the risk status allocated will determine the nature of obligations which companies and various actors in the supply chain will need to comply with these depending on whether commodities are sourced from high risk, standard risk, and low risk production zones.

b)            The combination of dissuasive sanctions, mandatory reporting requirements and mitigation measure obligations to be applied in cases where products are found to be sourced from areas where deforestation is occurring.

c)            The nature and extent of the administrative burden generated by due diligence reporting requirements, in a context where small scale producers and exporters are likely to face greater challenges than larger scale exporters in complying with traceability and reporting requirements.

d)            The unit cost implications of setting up the required traceability systems, with the potential for reporting requirements proving onerously burdensome for small scale suppliers, with this resulting in European buyers excluding smaller producers from their supply chains.

e)            The commercial implications for price formation of the new core traceability requirements placed on commodities sourced from high risk rather than low-risk production zones.

f)             The distribution of costs of establishing traceability systems and required mitigation measures along supply chains and the impact this will have on prices received by farmers and wider ‘decent living income’ objectives.

While the responsibility for compliance with due diligence requirements will lie with the business entity which places the good for sale on the EU market, from the perspective of ACP producers the critical issue is who will bear the costs of traceability requirements and any mitigation measures which need to be taken and how will this impact on the net farm gate prices received by producers?

Will the costs be borne by end consumers, traders, processors, or retailers, or will the cost be borne by primary producers in ACP countries through various deductions for traceability services?

ACP governments whose producers and exporters will be most seriously impacted by the new forestry due diligence requirements will need to intensify their engagement on these issues within the partnership structures the EC is proposing and has already established, so local production and deforestation realties are fully accommodated.

–          Bringing About Farm Level Change and Engaging with Local Priorities

Closely linked to the question of benchmarking and risk mitigation is the issue of how investments in more forest friendly farm level production systems are to be financed?

Will resources from the EU’s new € 1 billion pledge to support targeted Forest Partnerships include investment support to forest friendly farm level innovations? Or will the regulation be structured in such a way that adequate commercial incentives for more forest friendly production systems in the concerned supply chains are provided, with this enabling farmer to raise funds locally for necessary investments in more forest friendly farming practices?

To date, the EC has focussed on supporting national regulatory authorities in partner countries (4), including good governance, land tenure issues and enforcement capacity (5). Only initial steps have been taken to roll out cost effective, locally relevant forest friendly farming practices in areas where deforestation is proceeding apace.

It would appear that reconciling and harmonising mandatory forestry due diligence requirements and human rights and decent living wage due diligence objectives, alongside a clearer identification of vulnerable areas and greater support for enforcement of anti-deforestation measures, will be critical to halting sector wide deforestation and fostering forest regeneration.

This is implicitly recognised in the EC’s forestry due diligence regulation proposal, with a commitment being included to ‘taking into account the rights of forest dependent communities and indigenous peoples as well as smallholders’ needs.’ This needs to be seen in the context of the structural disadvantages small scale producers face in dealing with new regulatory reporting requirements; disadvantages which can simply make sourcing from smaller scale suppliers too administratively burdensome to warrant continued purchases.

In terms of reconciling forestry due diligence requirements and human rights and decent living wage due diligence objectives, the regulatory requirement for businesses placing goods on the EU market to guarantee the commodities used ‘have not been produced on land deforested or degraded after 31 December 2020’ and ‘have been produced in accordance with the laws of the country of production’, would appear to offer opportunities. If the governments of Ghana and Cote d’Ivoire were to establish a legal requirement to pay the Living Income Differential (LID) and make it illegal to make deductions in other areas in order to claw back the costs of the LID, (see epamonitoring.net article, ‘Challenge Thrown Down on Inclusion of Living Income Requirements Under Pending EU Due Diligence Regulations in the Cocoa Sector’, 18 May 2021) then an effective EU ban on selling cocoa products which did not comply with these requirements,  would strengthen the position of the Ghanian and Ivorian authorities in trying to ensure a living income wage is paid to cocoa farmers.

However, to be effective, this would require close monitoring by the EU of buyer practices and effective action to ensure cocoa buyers and processors serving the EU market do not simply switch supplies to countries where no such LID or similar decent living wage requirements are in force. This dimension needs to be incorporated into the design and implementation modalities of the EU forestry due diligence requirements. Achieving such a broader interpretation of how the new due diligence regulation should be applied will require active lobbying from the ACP governments most concerned with this issue.

–          Avoiding Unintended Consequences

In a context where revenue distribution issues along cocoa supply chains are seen critical to farm level production process adjustments towards more forest friendly farming practices, the inclusion of dissuasive sanctions in the EC’s proposed mandatory regulatory approach suggests a need to carefully monitor the commercial consequences of the application of the new regulation.

In terms of commercial incentives there is a real danger high-risk production zones with onerous reporting and mitigation measure requirements could see price discounting. Where this overlaps with small scale farming systems in sectors such as cocoa this would be most unfortunate, given the EU’s wider human rights and decent living wage aspirations.

Ideally, low risk areas with forest friendly practices should receive price premiums (similar to the price premiums offered for fully traceable sustainably sourced palm oil), with this being accompanied by programmes to assist farmers in moving towards more forest friendly production processors in higher risk zones.

The balance between providing commercial incentives for existing good practices (through higher market prices) and incentivising change in bad practice area (high risk zones) and the deployment of funding from the €1 billion forestry protection facility is something which the EC will need to pay close attention to.

An additional important development issue which needs to be borne in mind, is the potential impact of the rolling out of mandatory due diligence requirements on efforts by African and Caribbean producers to move up the value chain in the cocoa sector. This needs to be seen in a context where there are likely to be considerable economies of scale cost advantages in establishing traceability schemes. This could potentially generate a barrier to entry for new producers. This is likely to be the case unless traceability arrangements are accessible on an open-source basis.

Currently only 5 of 24 ACP countries which export cocoa beans to the EU27 produce and export cocoa paste, and cocoa butter to the EU, with only 2 of these 5 having substantial volumes of exports (Cote d’Ivoire and Ghana).