Governance

On April 23^rd and 24^th, Nike announced the LAUNCH System Challenge 2013 – focusing on revolutionary new materials – during a LAUNCH event at their headquarters.   Founded by NASA, Nike, the U.S. Agency for International Aid (USAID), and the U.S. Department of State, LAUNCH is a global initiative that aims “to identify and support the innovative work poised to contribute to a sustainable future and accelerate solutions to meet urgent challenges facing our society.” LAUNCH does this by showcasing and supporting innovative approaches to global challenges through a series of forums.

The LAUNCH System Challenge 2013 “seeks innovations that will transform the system of fabrics to one that advances equitable global economic growth, drives human prosperity and replenishes the planet’s resources. (LAUNCH is) interested in innovations with potential to scale in 2 years, as well as game-changing early stage technologies and prototypes. Innovations can be business models, financial instruments, technologies and programs that accelerate research, education and capacity building.” Please see the LAUNCH System Challenge 2013 website for additional detail.

Hannah Jones of Nike kicked off the event by setting the stage not just for the event at hand, but also for how we can all remain a part of LAUNCH in the future, contributing to what LAUNCH calls “collective genius for a better world.” LAUNCH is about big, bold, disruptive change that will lead to system innovation – quickly and collaboratively.

This week’s event brought together approximately 150 “change agents” – experts, innovators, and manufacturers from various fields that ranged from sustainability to human rights, policy, diplomacy, international aid, academia, and more.  We didn’t know what exactly the event would involve, or even who would attend. What we did know was that we were honored to be included and we didn’t want to miss an opportunity to be involved in something big – after all, the organizations behind LAUNCH don’t shy away from big challenges. I was pleased to assist in getting representatives from Cotton Incorporated to the event.

None of us was disappointed. Just having the opportunity to meet with and learn from the many passionate, knowledgeable pioneers was worth the trip. I’d like to highlight some of the most memorable experiences from our two days and evenings together.

The real treat was on day one when we played an interactive game modeled after Monopoly. We began by selecting from various investment opportunities, which we would follow over a span of seven years. The winning team would be the one that achieved the best financial, environmental, and social results. Each team represented an apparel supply chain with subgroups of brands, manufacturers, chemical companies, and farmers. Investment options included some that involved investments by all supply chain actors (e.g. open source data systems), and some that were made individually (e.g. brand marketing), while others were significant enough to pursue cross-industry cost sharing (e.g. scaling up water efficiency technology). The investment options were only presented during each subsequent round of play that represented a year in time. Some investments with the largest benefits, such as bringing pilot initiatives to scale, were introduced in later years but required prior investments such as completed pilot projects. Along the game’s timeline external forces (e.g. rising sea level due to climate change, increases in fuel prices, civil unrest due to food shortages) were introduced, which resulted in bonus points for teams who had positioned themselves well for such events.

Through our experiences playing the game, we learned the value of collaboration – across a supply chain and across industries – and the importance of balancing efforts across sustainability criteria (e.g. toxicity, water, energy and climate, social, and waste) and against costs and cost savings. We determined that investments in foundational systems (e.g. open source data), pilot programs that would later be scaled up, and marketing to raise awareness among consumers were important factors.

What I found most interesting were the social and tactical factors that came into play, and how representative of real life our interactions were. Our team stumbled when each supply chain actor made individual investments rather than pursuing options that resulted in shared costs and shared value for each member of the supply chain. As a result, my subgroup (brands), ended up collaborating with other teams’ brands subgroups more than with our own team members. The teams that invested in foundational system investments seemed to fare best. In addition, we soon learned the value of playing off of our innate competitive natures. The determination and energy we put into each decision and the desire we felt to differentiate ourselves from other teams – while at the same time needing their collaboration on investments that individual teams could not afford – required a balancing act that was just as important as weighing costs and impacts. Each of these observations is true to life. We need to foster collaboration in pre-competitive spaces and play into competition to help us get further faster.

Day two of the event began with the announcement of the LAUNCH System Challenge 2013 as I mentioned earlier. We then heard from members of a partnership that uses market opportunities to lower environmental and climate impacts while improving the health and well-being of 4.5 million people – and counting. The partnership is between a Swiss company, Vestergaard Frandsen, and the Kenyan Ministry of Public Health and Sanitation that resulted in the making of LifeStraw, a low cost, passive water filter that eliminates the need to boil the water over a fire as well as Carbon for Water, a financing program.

The last work session of the event allowed each of us to get into small groups to discuss various elements and aspects of the systems that we aim to change for the better. These sessions included looking at topics at each stage of the supply chain (e.g. processing, manufacturing, and branding) and again through the lens of issues that spanned the supply chain or industry as a whole (e.g. systems thinking, transparency, traceability, and standards). The results of each of these discussions will be sent to all participants.

I was encouraged by the many in depth and thought provoking discussions throughout the two days and evenings. Tough issues were discussed frankly – the need to approach solutions through a systems approach – not one issue at a time, challenges with certification, full transparency and traceability in an apparel value chain, the need to develop stronger partnerships along the entire value chain, the importance – and limitations – of policies, and more.

I believe it is to the cotton industry’s benefit to participate in this and similar collaborations. Many stakeholders could benefit from the industry’s perspective but we can also benefit partnering with others to develop game changing solutions. If we don’t we may likely be left on the sidelines while other innovative fibers advance from the benefits from being part of the “collective genius.”

I recently read an informative and insightful report that looked at sustainability trends and prioritized recommendations on opportunities to expand supply and improve productivity of energy, food, water, and materials resources. The report, Resource Revolution: Meeting the world’s energy, materials, food, and water needs, was put together by the McKinsey Global Institute. The relevance of this report is not simply that five of the top 15 opportunities for improvement relate to agriculture (cotton), I believe that the cotton industry would benefit from gaining an understanding of where improvements in agriculture fit in with other sectors (e.g. energy, construction, transportation, minerals). While I recommend reading the report (or executive summary) on your own, I would like to share the following information that I found to be most compelling and relevant to the cotton sector here.

During the 20^th century the global population had quadrupled and global economic output had expanded roughly twenty-fold. Things are very different in the 21^st century. The past ten years have wiped out all of the price declines that occurred in the previous century. Forty-four million people were driven into poverty with rising food prices in 2010. It is predicted that by 2030, there will be 3 billion more middle-class consumers (increasing demand for resources). Resource price volatility is at an all-time high and expected to remain so. The cost of accessing resources will increase significantly over time.  

Resources are increasingly harder, and more costly, to obtain (e.g. more pumping in lower water tables) and are experiencing lower productivity (e.g. soil infertility, degraded water bodies). Social issues – such as 925 million people are undernourished and 884 million people lack access to safe water – may give rise to social unrest. This may increase as technology connects even the most rural communities.

The report claims that 30 percent of the demand for resources in 2030 could be met with increased resource productivity alone. This increase would be at an estimated value of $2.9 trillion in 2030 ($3.7 trillion if a price were placed on carbon at $30 per ton). However, meeting future demand for steel, water, agricultural products, and energy will require capital investments of $3 trillion annually.

To increase productivity to the magnitude needed will require a complex framework and commitment from a variety of countries, industries and partnerships and on a global scale. Land and water will likely present the largest challenges on the supply side, with predicted demand increases up to 250 percent for land and 140 percent for water when compared to today’s demand.

Governments should consider reducing subsidies – which are often quite significant for water and agriculture – that keep resources artificially low, and encourage over production or inefficient use of commodities. Higher resource prices are likely to accelerate the pace of innovation that will be needed to meet future demands.  Policy makers should also consider mechanisms to enable needed capital investments as well as safety nets and other resilience building measures.

Companies will need to pay more attention to issues related to their primary resources and factor these into business strategies. Companies should actively engage with other stakeholders as most solutions will more efficient and effective at an industry level.

The report also mentions that organic chemistry and genetic engineering have the potential to transform agricultural productivity and better enable terrestrial carbon sequestration, creating the next green revolution.

The report outlines  McKinsey Global Institute’s top 15 opportunities to expand supply and improve productivity of energy, food, water and materials resources. For each of the opportunities, the authors estimate the percentage contribution of each opportunity. I would like to share a few of the opportunities that relate most to agriculture, land, and water, below:

• Increasing yields on large-scale farms
• Reducing food waste
• Increasing yields on smallholder farms
• Reducing land degradation
• Improving irrigation techniques

I’d like to take a closer look at each of these areas below.

Increasing yields on large-scale farms

Large-scale farms (greater than two hectares) account for approximately 70 percent of global cultivated land.  Increasing yields on large-scale farms could account for 65 percent of the potential yield increases on all cropland and deliver 7 percent of the productivity gains benefits. Some existing barriers that would need to be addressed include:

• Sharing of knowledge and technology is lacking (e.g. optimizing plant strains for local climatic conditions).
• Machinery is needed but it is capital-intensive. Many farmers (large or small) do not always find it easy to access affordable financing.
• Farmers need to be trained on improved farming practices (e.g. no- or low-till, optimal fertilizer application).

Reducing food waste

An estimated 20 to 30 percent of food is wasted along the value chain. Food waste in developed countries occurs in the processing, packaging and distribution stages of the value chain. Food waste in developing countries is twice as great as in developed countries and occurs after harvest due to poor storage and infrastructure.

Reducing food waste along the value chain could also deliver 7 percent of total productivity gain benefits. Secondary benefits include water and energy savings. However, this sort of reduction would require improvements in storage (especially cold storage) and infrastructure, which are capital-intensive.

Increasing yields on smallholder farms

Improving yields on smallholder farms (less than two hectares of land) accounts for 30 percent of the opportunity to increase the yields of cropland over the next 20 years. However, smallholder farms account for only 30 percent of total cropland, and the current level of smallholder yields is 50 percent of the level of large-scale farms. Doubling yields on smallholder farms will result in an overall yield that is still smaller than what would result from making even smaller yield increases on large-scale farms.

The challenge to improving yields on smallholder farms centers on getting numerous rural subsistence farmers to use improved inputs and adopt better practices. In many cases in developing countries, smallholders lack the information they need about the benefits, the access to market because of shortcomings in the available infrastructure, and the knowledge of better agricultural practices.

Reducing land degradation

Reducing land degradation would deliver 4 percent of the productivity gain benefit. However, rehabilitating degraded land is also a capital-intensive endeavor. The idea of a reduction in land degradation may hold more potential if high-value crops, including biofuels, were to be cultivated.  

Preventing the degradation of currently healthy soil would be less capital-intensive, but doing so would mean the adoption of no-till or low-till farming, which in turn would require capacity building in many instances.

Improving irrigation techniques

Replacing inefficient irrigation systems (e.g. flood irrigation) with micro-irrigation systems (e.g. sprinklers, drip irrigation) would increase crop yields and reduce water consumption. This improvement is the second largest opportunity to reduce water consumption after improving crop yields, and would deliver three percent of total resource benefits.

The use of sprinklers can reduce water consumption by 15 percent while improving yields by 5 to 20 percent. Drip irrigation would reduce water consumption by 20 to 60 percent and increase yields by 15 to 30 percent. However, these are also capital-intensive improvements, and the low cost of water is often a disincentive.

Questions

How can the cotton industry best pursue opportunities that strengthen our future, including the threat of food and fuel crops?

Continuing along the same lines of earlier blog about climate change risk management and adaptation tools, I would like to share highlights from the Organization for Economic Co-operation and Development (OECD)’s Private Sector Engagement in Adaptation to Climate Change: Approaches to Managing Climate Risks. The authors examine the private sector’s progress in adapting to climate change by considering information from sixteen case studies drawn from a range of industries across the private sector as well as information gleaned from the 2009 Carbon Disclosure Project (CDP) questionnaire. The paper explores what motivates a company to act on risk exposure as well as which factors can affect a company’s incentives, capacity, and perceived need to adapt to climate change. It also looks at the role of the government in enabling and encouraging the private sector to take action on climate change adaptation. I found the report’s findings insightful, especially the following highlights.

The risk exposure that companies face can be direct or indirect. Risk can come in many forms, including: physical (e.g. damage to infrastructure), supply chain and raw material (e.g. water scarcity lowers production), reputational (e.g. reduced product quality), financial (e.g. loss of value), product demand (e.g. shift in product selection), regulatory (e.g. water conservation requirements) and litigation (e.g. increase defaults). The type and severity of risk a company faces depends on its operations and sector (e.g. goods, services).

The authors of the paper describe a study that was based on a three-tier framework evaluating companies’ actions in terms of their risk awareness, risk assessment, and risk management. Each successive level builds on the results of the preceding one. The paper provides examples of steps taken by companies for each tier described in the report. It is worth noting that companies may choose not to openly discuss investments, strategies, and efforts to address adaptation as these efforts can be considered a business advantage that should not be publicized.

Risk awareness

Risk awareness is broken down further into categories:

• Recognition of climate change risks: most companies recognize climate change risks.
• Engagement in national dialogues or international negotiations: a quarter of companies have engaged in some international or national level dialogues on climate change.
• Internal training on raising awareness: some companies utilize their websites to demonstrate or raise awareness of climate change risks. Other vehicles (e.g. children’s books or competitions) can be effective.
• Campaigns to raise awareness: many campaigns target employees as a means of preparing for natural disasters and emergencies.

Risk assessment

Most companies assess risk using their own tools and frameworks, resulting in variations in risk assessment detail and approaches. Companies tend to focus on current and short-term risks that have direct impact on their business, such as damage to assets and infrastructure. Assessing long-term climate risks involves the use of scenarios and projections that require specialized skills not commonly found within a company.

Risk management

The authors of the paper note that most companies have only implemented risk management (adaptation) measures that are driven by other benefits to the company or its operations while also improving resiliency to climate change. Examples of these measures include addressing water scarcity, promoting sustainable agriculture or shifting products as a result of changes in consumer demands. A few companies, namely those that rely on long-term assets (e.g. water and energy providers, mining), have taken measures that are specific to climate change risks.  

When reviewing these results, I concluded that despite a high level of awareness among companies that climate change poses risks, not all of them believe they are vulnerable to such risks. The risks that are addressed more often are those related to extreme weather events rather than gradual climatic shifts. While two out of five companies surveyed have conducted risk assessments, only one third have invested in adaptation measures such as infrastructure. Still, some companies have begun the process of working to minimize risks by engaging in a certain level of activity, such as integrating climate risk into standard risk management or planning processes.

The study discussed in the report found that several factors, including capacity, incentives and perspectives, can motivate or discourage a company’s level of adaptation efforts. Let’s take a closer look at what those factors mean.

Capacity: This term refers to a company’s in-house capacity and expertise that better enables them to assess and develop responses to risks, as well as to their ability to finance adaptation measures.

Incentives: Uncertainty about how climate risks will impact a company’s operations or supply chains will reduce incentives to invest in adaptation measures. Additionally, buyers that can shift production to different regions with minimal business impact are less inclined to invest in adaptation measures. Policies and regulations may be necessary to stimulate investments, especially for long-term solutions that are justified in short-term business planning.

Perspectives: Companies that have suffered from extreme weather events or natural disasters may be more likely to invest in adaptation measures. Articulating the benefits of investments – not simply risk avoidance – may improve the likelihood of adoption.

The researchers framed possible adaptation strategies in six categories:

• Preventing losses: reduce exposure to climate impacts
• Tolerating losses: accept losses where it is not possible or cost effective to avoid them
• Spreading or sharing losses: distribute the burden of impacts through insurance
• Changing use or activity: shift resources or activities to those better suited to climate change
• Changing location: move to locations that are less vulnerable to climate change impacts
• Restoring assets: restore assets to the condition they were in prior to being damaged

The private sector can play a key role in ensuring companies have the information they need to assess and address climate risks as well as provide risk management guidance and tools. This paper is a good resource to any company interested in using tools to address climate risk or promoting a collaborative approach to developing climate adaption measures.

As I have stressed in the past, transparency and open and fair stakeholder engagement are core elements of good governance. This is especially true when developing and implementing public policies that can have widespread impacts. I recently read a short paper on ten principles for transparency and integrity in lobbying that I found quite informative. I would like to share a few highlights with you.

The paper presents its ten principles in the context of four elements that I believe are essential to an effective lobbying program.

Building a framework for openness and access

Governments and policy makers should provide fair and equitable access to all stakeholders in the development and implementation of policies. This should ensure access to public engagement.

Rules and guidelines on principles and processes based on the principles of good governance should be established and implemented. The rules and guidelines should define “lobbying” and “lobbyist” to avoid misinterpretation, misrepresentation and other potential loopholes.  They should be an integral part of the wider policy and regulatory frameworks. Financial and administrative burdens also should be considered to ensure a level playing field and fair access for all stakeholders.

Enhancing transparency

Information on lobbying activities should be accurate and be made available to all stakeholders in a timely manner.

Fostering a culture of integrity

Principles, rules, standards and procedures with which all public officials should comply should be established. Additional efforts should be made to create a culture of integrity – both from the public officials and the lobbyist perspectives.

Mechanisms for effective implementation, compliance and review

Compliance is critical and often the most challenging aspect of a good governance program. Governments should develop a clear and enforceable rules and a well-coordinated set of strategies and mechanisms to monitor and enforce these rules.

Policy makers should review their program from time to time to ensure the objectives are met. Enhancements to the system should be made to all coordinated elements as appropriate.

The inevitability of climate change has led to discussions, research, and planning increasingly focusing on adaptation to, not simply on mitigation of, climate change. More attention is also being given to climate change risk management. Both mitigation and adaptation are necessary. As we increasingly experience more extreme weather events (the year 2012 brought record levels of drought, wildfires and polar ice melting as well as Superstorm Sandy), the need to adapt to climate change is becoming necessary sooner than most people anticipated.

Understanding climate risks and developing adaptation strategies will be critical to a healthy and resilient cotton industry over time. The Organization for Economic Co-operation and Development (OECD) presents tools that can help organizations to better understand vulnerabilities to climate risks, to assess and select adaptation options, and to evaluate these options over time in their working paper, Harmonising Climate Risk Management: Adaptation Screening and Assessment Tools for Development Co-operation,.

The OECD tools were designed under the premise that a climate risk management adaption process involves the following stages: 1) awareness raising and engagement, 2) pre-screening and screening, 3) risk assessment, analysis, and options evaluation, 4) implementation, monitoring, and evaluation. While the tools and underlying principles were developed with cooperation agencies in mind, they are relevant to – and worth taking into account by – the private sector.

To optimize the efficiency and effectiveness of potential solutions, the cotton industry should consider these – and other appropriate – tools to begin addressing climate adaption in a coordinated, collaborative, and transparent manner. I hope the following highlights of the OECD tools are helpful.

The researchers evaluated the use and choice of tools by: describing and categorizing the range of tools and approaches available to integrate climate change in development co-operation; assessing the experiences of both tool users and developers to identify the desired value in applying such tools; and identifying the challenges and gaps that may inform future tool development.

The paper presents adaption tools in three categories based on the tools’ principal functions:

Type 1 – Process guidance tools guide users through identification, gathering, and analysis of relevant data and information to: identify climate risks to development activities, assess and analyze climate risk management strategies, and evaluate options to integrate climate risk management into development activities.

Type 2 – Data and information provision tools generate or present data and information on: primary climate variables and projections (e.g. temperature, rainfall trends), secondary climate impacts (e.g. flood maps, crop yields), and vulnerability and response options (e.g. poverty maps, example adaptation options). [Note: outputs of Type 2 tools are often used as inputs in Type 1 tools.]

Type 3 – Knowledge sharing tools offer platforms and networks that offer adaptation practitioners a virtual space for information and experiences related to climate risk and adaptation, allowing users to: store and share information and knowledge, and interact with other users to develop or advance ideas, approaches, tools, monitoring, etc.

The OECD paper focused on Type 1 tools, namely screening (scanning for relevance to climate change) and assessment (detailed examination) tools. Screening tools are increasingly used by donors to design adaptation options with sufficient information on future climate conditions (variations in climate, the geographic exposure, and the baseline adaptive capacity).

The paper suggests that screening tools currently in use tend to be similar in scope and focus across different organizations. While assessment tools may vary more, they remain consistent in the detailed examination of climate impacts and comparisons of levels of risk management. Consistency across donor approaches also includes the identification, prioritization, selection and implementation of risk management and/or adaptation options as well as encouragement of monitoring and evaluation. Not surprisingly, the tools’ effectiveness relies on the users’ ability to apply them properly. This ability requires training and support.

The paper promotes the harmonization of screening and assessment tools and approaches and makes the following recommendations for the development community:

• Provide training – initial and follow-up – and support.
• Improve alignment between the users of process guidance tools and the users of data and information provision tools to enable a better understanding of each other’s needs and capabilities.
• Strengthen guidance and support to help users move into action.
• Develop a common and clear terminology, a generic and adaptable risk management framework, organization and categorizing systems, and a clearinghouse for tools accessible to users.
• Work with development partners to ensure the integration of risk screening and assessment tools in government decision making.

We find ourselves at a moment in time when action, whether it is adaptation, mitigation or risk management, will have long-term consequences. The cotton industry should begin efforts to develop and implement climate adaptation solutions. This report could provide some information and guidance that could help the industry optimize the efficiency and effectiveness of potential solutions.

The International Trade Centre's Cotton Exporter’s Guide is a reference book that aims to provide anyone engaged in producing and exporting cotton – especially in developing countries – with a strong understanding of all aspects of the international cotton trade. I feel that the book gives a clear and concise overview of key topics and mechanisms found in global cotton trading.

The Cotton Exporter’s Guide is divided into six chapters, each presenting essential components of the cotton trade. The chapters and subchapters are laid out in a manner that allows users to easily access topics that are most relevant to their business.

Chapter 1: The World Cotton Market provides an overview of the world cotton market (production, consumption and trade), factors influencing supply and demand, market trends, cotton pricing and Cotlook Indexes, and major issues of the sector, including trade policy and the World Trade Organization.

Chapter 2: Cotton Value Addition assesses cotton demand, with sections on textile processing, physical characteristics of cotton, cotton quality and its determinants, neps and short fibers, the issue of contamination, classing and grading, and instrument testing.

Chapter 3: Cotton Marketing focuses on cotton marketing and promotion, with sections on e-commerce (Internet auction and electronic paperwork), the New York Board of Trade and the other futures markets, hedging and marketing, the minimum guaranteed price system, the role of merchants in cotton exports, and cotton promotion.

Chapter 4: Cotton Trading looks at cotton trading, with sections on packaging, controlling, back office and documentation, freight and shipping, financing, warehouse receipts, insurance, risk management, contracts, and arbitration.

Chapter 5: Market Segments reviews the market segments, with sections on the different types of cotton, conventional and biotech cottons and extra long staple cottons, and highlights the organic cotton market.

Chapter 6: Market Profiles presents market profiles of the main importing countries in Asia (Bangladesh, China, India, Indonesia, Pakistan, South Africa, Thailand, Turkey and Viet Nam) with recommendations on how to approach their booming cotton-consuming textile industries.

The Guide provides a lot of helpful information that can’t be captured in this blog. I hope to provide more insight into the topics that I feel are most relevant to governance in future blogs.

Questions to consider

Are these tools useful to the intended users in daily practice?

Is the information current enough?

Are there additional ways to enhance the usefulness of tools such as this?

The past two years of price volatility experienced by the cotton industry have resulted in short-term negative impacts, including an unprecedented number of contract defaults as well as in long-lasting damage in the form of an unstable supply chain fraught with distrust.

The industry has long recognized the presence of defaults, and the International Cotton Association (ICA) has implemented credible mechanisms to uphold contract sanctity for many transactions between merchants and spinners. However, several other segments of the supply chain that play a role in driving defaults – both directly and indirectly— are not subject to such mechanisms. The limited reach of these efforts leaves a lot of room for the governments of cotton producing or processing countries to play a role in enforcing contracts and reducing the number of defaults.

Leaders within the U.S. cotton industry feel that their government should put pressure on foreign governments to do what they can to prevent the damage done to the industry by contract defaults. For example, according to a recent Reuters’ article, the U.S. cotton industry cited contracts worth $1 billion that are either in default or at risk of default by textile mills in countries such as Bangladesh, Indonesia, Thailand and Vietnam.

The industry representatives asked the U.S. government to consider a foreign government’s record of enforcing commercial commitments and upholding trade laws when establishing that government’s eligibility for a U.S. trade preference program. While the question of how governments address state-owned mills or processors may warrant special attention, these mills or processors should not be exempt from legal contracts.

The request appears to be straightforward – naturally, the government should play a role in upholding national and international laws. This request may not, however, be as straightforward as one would think. A government may be urged by some constituents to take actions that may oppose the request of another. For example, one segment of the cotton supply chain (e.g. producers and merchants) may ask the government to limit foreign access to preferential trade status based on their government’s ability and will to enforce contract terms, while another part of the supply chain (in this case, retailers and manufacturers) may urge that same government to ease the requirements that countries must meet to gain preferential trade status.

As the industry discusses possible solutions to uphold contract sanctity, the decision makers should take the perspective of each actor along the supply chain into consideration. Recently, progress has been made in connecting and sharing perspectives among different supply chain actors. Less than five years ago, most retailers generally did not know the names of any merchants; nor did they have any idea from where their cotton came. Initiatives such as the Better Cotton Initiative, Cotton made in Africa, and others have connected merchants and retailers (and other actors along the supply chain), but even in the best cases, conversations are largely limited to short-term transactions and sourcing relationships. We must all gain a better understanding of the interconnectedness of each player’s actions and interdependence of all of our economic wellbeings if we are going to succeed in creating a healthy cotton industry.

While connecting different members of the cotton value chain is important, governments must enforce trade rules and work together to level the playing field for all actors.

Questions for consideration

How can governments work together to create a healthier industry over the long run?

Are there unintended impacts of governments’ actions that could threaten the principles of free trade?

Just before Superstorm Sandy wreaked havoc in the northeastern U.S., I read what has turned out to be a very timely and relevant report. The report, Stormy Future for U.S. Property/Casualty Insurers: The Growing Costs and Risks of Extreme Weather Events, was written by Ceres, which is a coalition of investors, businesses and others that promotes a sustainable economy. The report looks at the troubling trends facing the insurance industry as a result of some climate change impacts, including damaging storms such as Sandy. The report includes recommendations for insurers, investors, and regulators to better manage these risks.

The cotton industry could benefit from gaining a better understanding of future risks and trends as well as working with insurance companies to mitigate risks and manage costs associated with insurance and payouts. I share the following information from the report with this in mind.

According to Ceres, in 2011 alone, extreme weather events cost U.S. property/casualty insurers more than $32 billion in losses. Damages just from Superstorm Sandy are estimated to be in the range of $30 to $50 billion. Since 1990, total government exposure to losses in hurricane-exposed states has risen more than fifteen-fold, totaling $885 billion in 2011. These high costs, along with the current lower investment returns due to a sluggish economy, increase the risk of an insurer’s ability to manage – or possibly survive – future weather-related loss events.

Extreme weather events are becoming more severe and frequent, resulting in claims that have been increasing over the past 30 years. This increase will likely continue, leading to insurance companies facing more frequent and costly payouts. The report raised some points, among many more staggering statistics, that illustrate this troubling trend, including:

• The highest losses from excessive precipitation on record occurred between 2008 and 2011.
• Average annual winter storm losses have nearly doubled since the 1980s.
• Between the years 2005 and 2007, and in 2010, wildfires burned the most acreage  since the 1980s.
• Losses from lowest precipitation during 2012 will be the highest since 1988.
• The records for hottest temperatures are now hotter, and extremely hot summers are forty times more frequent. More than 25,000 new record highs in the U.S. have been set in 2012 alone.

The recommendations for actions that Ceres puts forth for consideration by key stakeholder groups are even more important. These include:

Insurance companies

• Evaluate and price the increased risk exposure of insured property in the context of climate change and new or emerging extreme weather patterns.

-      Support or undertake research on national and regional forecasting of future weather and catastrophe patterns.

-      Develop and use catastrophe models that anticipate the probable effects of climate change on extreme weather events.

-      Update insurance pricing and risk underwriting to reflect changes in extreme weather impacts on property damage loss trends.

• Inform land use planning, infrastructure design, and building codes of climate risks to ensure continued insurability in critically exposed markets and markets expected to face future insurability challenges.
• Promote reduction of carbon emissions.

Insurance sector investors and rating agencies

• Encourage insurance companies to improve the disclosure of climate change risks and opportunities as well as response strategies.
• Conduct an analysis of insurance company exposure and management responses.
• Build climate change management practices into regular dialogues

Insurance regulators

• Strengthen mandatory climate risk disclosure.
• Build climate risk considerations into the financial oversight process.
• Create more shared resources to help insurers and consumers to better understand the nature of climate change risks.

While these recommendations are certainly not exhaustive, they provide a good starting point for some of the key stakeholders. The cotton industry (along with other industries) can build resilience to extreme weather events by planning ahead. We should also prepare for increasing engagement (and possibly demands) by insurance companies and regulators. Gaining consensus from within the cotton industry on the biggest priorities and opportunities would be a good starting point.

 Questions for consideration

What are some of the industry's top priorities? Opportunities?

How should we engage the insurance companies?

Cotton is an important crop and product. Nearly every person around the world uses it on a daily basis. The cotton industry employs more people than any other industry and is a significant contributor to the gross domestic product of many developing countries. Despite its global significance, cotton production can still optimize the benefits of cotton production while minimizing the potential negative impacts.

The Better Cotton Initiative (BCI) aims to transform cotton production worldwide by developing Better Cotton as a sustainable mainstream commodity with the following aims:

• Reduce the environmental impact of cotton production
• Improve livelihoods and economic development in cotton producing areas
• Improve commitment to and flow of Better Cotton throughout the supply chain
• Ensure credibility and sustainability of the Better Cotton Initiative

The BCI itself has transformed since I had the pleasure of acting as its first Chairperson five years ago, when a dozen passionate council and staff members came together to design the initial principles and framework for implementation.

When we envisioned the evolution and global expansion of the BCI we saw three stages:

A start-up phase with limited members and a goal to build credibility and collect data to make a compelling business case for engaging more farmers, involving more governments, and gaining support from other value chain actors.

An expansion phase with additional regions and value chain actors. During this stage we would be collecting data (e.g., key performance indicators) and following other business benefits to tell an increasingly convincing story for more farmer participation and industry support.

A normalization phase that would include further expansion to new regions. Better Cotton would flow into already existing systems without much direct engagement from actors. Farmers’ participation, industry and government support expands with program expansion.

I see evidence of great change when Reading the many accomplishments and metrics in the BCI’s 2011-12 Annual report. The BCI is moving into a new phase. I would like to share a few of these milestones with you here.

This past year the BCI worked with 125,000 farmers (approximately 90,000 of whom produced Better Cotton) on 450,000 hectares through a network of farmer learning (training) groups and implementing partners[1] to produce approximately 490,000 metric tons of Better Cotton lint in Brazil, India, Mali and Pakistan.

In addition, 25,000 workers, including over 20,000 women, received training tailored to what was most important to them. For example, while farmers typically were trained on all Better Cotton principles, most women and workers were trained only on decent work and fiber quality principles – the principles that directly correspond to their needs.

Membership more than doubled to 119 organizations by the end of 2011, with the largest growth in the supplier and manufacturer categories. The cotton consumption of BCI brand and retail members now represents over 5 percent of the world’s total consumption.

The following table provides a snapshot of the BCI’s key performance metrics for each BCI indicator from 2011 to 2012.

*Brazil’s data are estimates due to the fact that its harvest has not been completed.

The BCI’s recent accomplishments are impressive for this initial stage of development. With this said, the BCI recognizes that there is much more to do as they enter a new stage of development. Better Cotton is perched on the edge of expanding to become a mainstream commodity. To this end the BCI recently developed a strategy for the years 2013 to 2015 that is aimed at scaling up Better Cotton and working towards financial self-sufficiency.

Some changes to the BCI system include their membership options and structure. I have highlighted these below with the hope that some of you will consider exploring supporting the BCI in a way that makes most sense for your organization.

Suppliers and manufacturers will be able to choose between basic and registered membership.

• Basic membership is for entry-level companies that want to support BCI in a more hands-off way while they learn about what it means to market, buy and sell Better Cotton.
• Registered membership is for those suppliers and manufacturers who are active in the Better Cotton supply chain.

Brands and retailers can choose between standard membership and pioneer membership.

• Standard members contribute to supply creation by investing in farmer support, communicating about Better Cotton and accessing all BCI benefits, such as the traceability system, field data and results.
• Pioneer Members are the driving force behind the success of BCI. They invest significant financial support both in BCI capacity and for farmer support, work closely with members and their staff to ensure that Better Cotton is entering their supply chain. They are also members of the Better Cotton Fast track program.

Brands are also able to start with a learning membership as they get ready to start supporting and procuring Better Cotton the following year.

SustainAbility’s recent paper – Signed, Sealed…Delivered? – provides thoughtful insight and constructive recommendations on ways to make large scale shifts to new models of production, which will result in more sustainable and socially beneficial conditions.

My work is centered on linking market demands with improved raw material production through complex commodity supply chains and business realities. I believe that we must account for the true cost of a sustainability or ethical system and maximize the value to all supply chain actors. To do this we must understand where we reap the biggest benefits. Some key areas that should be evaluated include: running farmer support programs, implementing product traceability systems, and conducting audits to ensure integrity of the system. I would like to share the perspective I have gained from my work.

Building capacity among farmers

I am currently supporting Olam International’s efforts to pilot the Better Cotton Initiative (BCI) in Mozambique. Olam sources over 20 products, including cotton, and is the largest private microfinance provider to smallholder farmers. Olam is the second largest cotton merchant and largest private cotton ginner in the world. They have vast experience implementing farmer capacity programs in developing countries.

Through the BCI effort, our partners are able to see the true costs of running large-scale farmer capacity building programs that include training on better production practices, providing agronomic advice, supplying quality inputs, and facilitating equitable financing. Olam has proven that the benefits of these investments – higher yields of a better product and a secure base of dedicated farmers – lead to a better business for Olam. It is important to note that Olam sells this cotton at market rates.

Investing in these areas yields the added value of a stronger partnership between the farmer and the ginner that often leads to additional benefits (e.g. improved risk management). 

Tracing material in a supply chain

Costs and fees associated with tracing a product through a supply chain may vary between supply chains. But most include: developing and operating a tracking system, registering certified material, undergoing a facility and accounting audit, and paying special storage and transportation fees. At times, supply chain actors must absorb the majority of these costs while the brands reap the majority of the benefits. Regardless of final cost, these activities are geared towards marketing to consumers and don’t directly lead to the improvements we are seeking at the farm level. At times, the cost of tracing a product can actually limit the resources available for famer-level programs, and thus the degree to which an initiative can scale up.

Auditing at an industry level

Moving away from agriculture for the moment, it's helpful to look at global brands in the electronics industry, which have been effective in implementing industry-level programs. One such example includes the Conflict Free Smelter (CFS) program to support the industry’s ban of conflict minerals (minerals that fund the perpetrators of human rights violations in regions such as the Democratic Republic of the Congo) from their supply chains. The CFS program centers on conducting traceability audits of smelters processing ore from multiple sources to confirm that only conflict-free minerals are being used in our electronic equipment.

I lead a global team that conducts these audits and I have seen that rolling out a program across an entire industry can have real and direct business impacts. For example, some smelters won’t be able to sell their inventory until they pass the audit. Passing an audit may take some time as doing so requires a new way of doing business, including collecting documents not usually shared between sellers and buyers. However, businesses can benefit from improved inventory management and partnership with their buyers and global brands. Regardless, the cost of not undergoing the audits is much greater – the absence of your customers.

Moving forward

If we are to have a stable cotton industry and meet the demands for a growing population, we must ensure we are investing in ways that will lead to the biggest overall improvements. I believe investing in improved material production holds the strongest benefits for businesses and farmers alike. Two areas that hold the most promise include:

Helping farmers improve productivity by providing quality seeds, training on maintaining soil health, limiting use of inputs, offering financial assistance for investments in labor-reducing equipment (e.g. oxen) or irrigation.

Investing in agricultural research and development (R&D), particularly in underserviced regions with great potential to improve. It is widely accepted that the world as a whole has underinvested in agricultural R&D despite clear evidence that there is a very high rate of return to agricultural R&D.  And the investments we do make are not evenly distributed. The share of the bottom 80 countries slipped from 0.29 percent of the global total in 1995 to 0.26 percent in 2000.

I look forward to partnering with many of you to mainstream more sustainable production models through impactful efforts.

Questions for consideration

What efforts have been successful in providing economic returns as well as positive environmental or social impacts? Why did these work and other efforts aren’t as effective?