Governance

 The State of Sustainability Initiatives (SSI) project is facilitated by the United Nations Conference on Trade and Development (UNCTAD) and the International Institute for Sustainable Development (IISD) under the auspices of the Sustainable Commodity Initiative. The project aims to improve supply chain decision makers’ understanding of voluntary standards initiatives and to aid their strategy and program development.

The report presents findings in three parts: 1) evaluation of vital statistics,2) review of market shares and trends, and 3) an analysis of relationships between voluntary standards initiatives and key development themes (e.g. biodiversity, poverty reduction).

The study analyzed ten initiatives, each of which has existed for more than three years, using approximately 100 indicators related to costs, market trends, governance, conformity assessment, content and criteria. All voluntary standards initiatives share the same basic goal of promoting sustainable supply chains. Voluntary standards initiatives are increasingly taking a more integrated approach by incorporating multiple issues and even across multiple sectors. I will focus on the first section: evaluation of vital statistics.

Costs

Accounting for all costs associated with certification schemes is challenging due to the complexity and variability from region to region and initiative to initiative. Indirect costs include training, infrastructural investment and potential yield reductions, which are historically difficult to measure. The administrative budgets for the voluntary standards initiatives studied range from 1.5 to 19 million euros and most are dependent on grants for more than 50 percent of their funding. There are also costs associated with certification, registration and related activities that are typically born by the industry.

Conformity assessment

The VSI assessment, development and implementation process can have a big impact on the cost- effectiveness and integrity of the system. The process should be participatory and should allow for local conditions, resources and capabilities. Nearly all of the initiatives have local indicators and 70 percent are, or in the process of becoming, compliant with the applicable International Standards Organziation standard (ISO 65).

Almost all of the initiatives require annual auditing, but they differ by the degree of flexibility in how the audit is conducted. Most initiatives have a chain of custody standard, with many including the segregation of compliant product to allow for traceability. The forestry sector is more reliant on mass-balance systems.

Governance

Strong governance and participation by all interested stakeholders is a pillar of credible and transparent voluntary standards initiatives. Only half of the initiatives have a process for independent dispute settlement, despite its importance, with 40 percent providing a process in English only. Only 60 percent of initiatives allow external stakeholders to vote on criteria, which is cause for additional concern. With this said, voluntary standards initiatives are allowing a wider range of “non-industry” stakeholders to participate in the decision-making process. Standards board members are dominated by stakeholders from developed countries, with NGOs holding the majority of seats and industry members holding fewer board level positions.

Content and criteria                 

Increasingly, many initiatives’ criteria address multiple issues, with environmental criteria the most prevalent and robust across the initiatives studied. You will find consistency across initiatives on synthetic inputs, integrated pest management and restricted chemical lists.

Social criteria center largely on International Labour Organization (ILO) conventions, with virtually all initiatives requiring compliance with core ILO conventions. Most initiatives have robust criteria for health, safety and employment conditions.

Economic criteria are the weakest category across all initiatives. When they do exist, they center on product quality and minimum wage requirements.

I would like to add a comment on transparency. Transparency is essential to ensure that stakeholders can make – and be accountable for – impactful and sustainable decisions. Transparency must include information on the impact of voluntary standards initiatives themselves. They hope it will open a dialogue and spur the development of improvements in the information collection and dissemination processes. Voluntary standards initiatives present an opportunity for consumers, companies and governments to receive better information on which to make decisions about strategies, investments and operational enhancements.

For the most part, the voluntary standards initiatives have been developed under governance processes and are transparent on requirement. The real test will be if the voluntary standards initiatives can be brought into action to have a measurable and positive impact.

Questions for consideration

Can we apply learnings from the voluntary standards development process – as brought to light in this report – to cotton industry efforts?

  Impacts of Voluntary Standards on Value Chains

In past newsletters, I have discussed the proliferation of voluntary standards and shared insights from my experience with various standards and supporting supply chain systems (e.g. BCI, biofuels chain of custody). So it was with interest that I recently read The Impacts of Private Standards on Global Value Chains, Literature Review Series on the Impacts of Private Standards - Part I. (International Trade Centre, 2011); a paper that provides insight – and evidence – on the impacts that voluntary standards are having on global value chains.

From a systematic review of 63 studies –32 empirical and 31 conceptual, theoretical or methodological– the paper attempts to answer several key questions on the impacts of private standards on the value chain. Some interesting findings are summarized below.

Measurable change: Change in conventional chains appears to be limited. With this said, positive impacts have been found where dominant chain actors operate in alignment with the values promoted by standards. 

Governance: Mainstreaming strategies might change governance patterns in global value chains. In some instances, entities that are not historically part of the value chain, e.g. certification bodies,  

Opportunities: Vertical integration can occur and it often enables producers to carry out value adding activities and increase revenues; however, they also put additional demands on producers and exporters.

Small producer participation: The majority of studies indicate that standards create increased barriers to small producer participation. This is more likely when significant investments are required. For example, the study found that smallholder participation in United Kingdom-bound fresh fruits and vegetables value chains declined from 50%–55% in 1999 to under 20% in 2001, which the authors attributed to the investments needed to meet supermarkets’ demands –a cost most small-scale actors cannot accommodate.

Distribution of revenues along the value chain: Revenues derived from standards compliance increased along value chain actors with a disproportionately higher benefit to the retailer.

The review also found that compliance with voluntary standards in value chains depends on the following characteristics of the supply chain (examples are of greatest compliance):

Length of the chain: short chains with few actors.

Degree of integration: highly integrated chains.

Type of product: those with existing requirements regarding traceability, quality and safety (e.g. food).

Market conditions: high level of market concentration among actors purchasing supplies, such as retailers, manufacturers, brands.

Kind of relations among actors: long-term relations and high degree of trust.

Identification: commodities identifiable in end products (e.g. cocoa, coffee, sugar).

If we briefly consider these findings they become clear. Complex (longer) value chains are often challenging due to the sheer number of producers. A greater number of producers results in widespread production sites which makes auditing – a critical component of compliance– difficult. With increased producers the relationships among players are often short-term, significantly reducing the level of influence end buyers can have over other value chain participants.

When developing or implementing voluntary standards, it is important to understand the potential impacts they may have on the various actors in our value chains. Once we understand the impacts, we should take actions to ensure that the standards do not inadvertently hinder some actors’ (often those in most need of help) abilities to participate in these value chains.

 Question for consideration

 Are voluntary standards creating opportunities for the cotton industry or simply causing a distraction to business?

Conducting conflict mineral audits confirmed my past findings on the issue of traceability throughout a commodity supply chain. That is, end buyers' and non-governmental organizations' (NGOs) knowledge of how the cotton supply chain operates and what type of information (e.g. name of suppliers) is highly guarded by supply chain actors is scant.  Unfortunately, it seems that most cotton end buyers only have relationships with, and knowledge of, the supply chain as far back as the mill.

Commodity supply chains are extremely complex; take cotton for example. It is mixed during processing at multiple stages by various actors who work within a network of relationships to exchange non-descript products on a spot market. Tracing a fiber back through this maze would be challenging even with the best data and data tracking system available. To compound the problem the industry operates with an intentional level of opaqueness as details of business transactions (e.g. prices, supplier names) are considered proprietary.

Some suppliers take the protection of this information so seriously that even their employees don't have access to it. Setting up a system to trace cotton from producer to origin whereby suppliers report all required information to confirm cotton's origin will take time. It is also worth considering having the auditee report all necessary information to an independent third party auditor who then reports the conclusion (i.e. absence of banned cotton) but not report all detail of business transactions (e.g. supplier names).

The cotton industry faces an additional challenge over the conflict minerals program. In conflict minerals there are very few smelters, the processors who first mix and transform the ore that contains the minerals and thus remove a distinct, verifiable link with its origin. In the cotton supply chain spinners, of which there are hundreds of thousands, would be similar to the smelters of conflict minerals.

In order to trace something out of a supply chain, one must trace virtually all of the material to ensure the quantities of origin claims matches the volumes actually produced (e.g. conduct a mass balance). Therefore, the only credible way to trace a source of cotton out of a supply chain is by routinely auditing all cotton spinners of which there are thousands. This would best be done through one comprehensive program. This is not realistically manageable.

I feel the cotton industry should help NGOs and apparel companies understand the complexities of the cotton supply chain so more effective and mutually beneficial alternatives might be explored.

Questions

Is there a way to overcome the challenges of tracking cotton from product back to origin? If so, should the industry embrace this challenge and create a system that could begin to trace lint through the chain?