Governance

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?

The study analyzed governance of several major corporations against OECD governance principles (www.oecd.org/daf/corporateaffairs/principles/text). The study found overarching issues centered on improved risk management, remuneration, transparency, stakeholder engagement and board responsibility. The report pointed out challenges and weaknesses with corporate governance programs, including a more in depth discussion on risk and risk management and controls - subjects I feel are relevant to many types of organizations within the cotton industry. Some of those challenges are highlighted below.

Report highlights:

Board practices: Ensuring independence and competence of board of director members can be challenging. It should be board policy to identify the best skill set of the board and its members. The roles and responsibilities of various board members should be clearly stated and understood and each member's remuneration should be linked to specific performance objectives.

Remuneration and incentive systems: The link between compensation and performance is often very weak. This is in part due to managers having too much influence over the terms of performance-based remuneration without adequate transparency and independent judgment by the board or others.

Shareholder rights: Stakeholders could do more to ensure corporate governance is optimized in the company they have invested. Shareholder resolutions tend to be reactive rather than proactive, the latter of which could encourage a more collaborative response. The rate of shareholder voting is very low in most corporations. There may be ways a corporation can inspire more voting or provide other options on how shareholders can engage with the corporation on governance and other important matters.

Risk management: The study cites failure of risk management systems was one of the greatest shocks from the financial crisis. In many cases boards were ignorant of the risks their company faced. It notes that effective implementation of risk management requires an enterprise-wide (and, I suspect, possibly industry-wide) approach. Risks should not be assessed on the basis of individual raw materials or business units and a risk management system should consist of the following five components:

1.     A control environment: this is needed as a foundation for effective internal controls

2.     Risk identification: one must have a system to identify risks

3.     Control activities: controls can be preventive or detective

4.     Information and communication: these elements connect all internal controls together

5.     Monitoring: ensure that risk management tools and controls are understood and used properly by all necessary levels of the company

Routine risk assessments should be conducted and disclosed in a transparent and understandable fashion. Identified risks should be assessed in terms of the enterprise's appetite for risk as well as its risk management systems - no enterprise should be taking on risks beyond their means or that they don't have a manner in which to respond.

Other aspects of a risk management program should include:

• Aligning business strategies with risks to ensure proper  risk management in the business context.
• Clearly articulated definitions of risks.
• Responses to risks should incorporate input from key departments and stakeholders (e.g. regulators, guardians, customers).

Risk management, in particular, will be increasingly important to all members of the cotton industry as climate change, trade sanctions and other factors threaten the consistent supply of cotton needed to meet increasing demands. All industry members -from brands to spinners - should be aware of their risks and then develop systems to manage them.

Question

Is there value in having industry associations help individual actors understand the need to identify and manage their risks in an effort to reduce overall risk to the industry?

This is my last in a series of posts presenting highlights from the International Union for Conservation of Nature's (IUCN's) Water and Nature Initiative (WANI) toolkit. The various documents in the WANI toolkit are aimed at helping communities improve water governance programs.

This entry discusses Change: Adaptation of water resources management to climate change that helps water professionals identify actions that can be taken to adapt to changes in the world's water regimes resulting from the effects of climate change.

Climate change will have destabilizing effects on hydrological cycles, resulting in greater variability in precipitation, stream flows, and intensity and frequency of extreme hydrological events. Current approaches to risk management such as operational rules will not appropriately address climate change impacts; therefore efforts these impacts are increasingly focusing on adaptation - often with special focus on water management.  New approaches, which will vary with region,  need to consider system-wide and shifting impacts to guide practioners.

Change: Adaptation of water resources management to climate change guides practioners through integrated approaches to water resources management. It sets forth the following strategic priorities:

     1.     Reducing the vulnerabilities of people and societies to shifts in hydro-meteorological trends, increased variability and extreme weather events,

     2.     Protecting and restoring ecosystems that provide critical land ad water resources and services, and

     3.     Closing the gap between water supply and demand.

Under each of these priorities WANI recommends supporting policies, planning and monitoring and relies on various institutions and stakeholders from a range of disciplines. Some examples of policies and planning models include: improving land-use and water resource planning, considering zoning and infrastructure, developing or improving flood preparedness programmes, improving groundwater protection and restoration plans, and developing insurance products to protect vulnerable community members from climate-related disasters and risks.

Metrics and possible interventions are also presented. These include implementing recycling and conservation, restoring forests to reduce soil erosion, and managing environmental flow releases to maintain or restore floodplains.

WANI also promotes capacity building and knowledge sharing among stakeholders. This can be done through public campaigns to raise awareness of the various uses of a given water resource, sharing information within and between governments, business sectors and civil society, and developing disaster preparedness plans.

Change: Adaptation of water resources management to climate change also presents the importance of building capacity and adaptive management (i.e. systematic process for building of the knowledge gained from practice to continually improve management policies and practices). Strengthening both a community's capacity to monitor, adjust and implement the various elements of a climate change adaptation plan and its adaptive management capabilities will improve its ability to protect itself from extreme weather events as well as adjust to ever changing climate change impacts. This will, in turn, enable them to avoid or manage potential conflicts should water resources be overburdened in the future.

Lastly, this resource highlights the need for national platforms that provide an open, transparent forum where stakeholders can work together to plan for, implement and monitor climate adaptation plans.

This is another post in a series of blogs presenting highlights from the International Union for Conservation of Nature's (IUCN's) Water and Nature Initiative (WANI) toolkit. 

This blog discusses Pay: Establishing payments for watershed services that provides guidance on how to improve water security by establishing rewards or payments for ecosystem services provided by a given water resource. Providing appropriate payment to land and water managers to maintain or restore watershed services is an innovative way to improve water security.

Water-related services can include producing agricultural products, supporting ecosystem functioning, regulating water flows, and providing cultural and recreational attributes. Pay presents how such services can be valued and measured and provides an overview of the various components of an effective payment scheme for watershed services.

Total Economic Value (TEV) is a common framework for valuing ecosystems. It uses two categories - use and non-use values. Use values can be:

Direct use value - mainly derived from goods that originate directly from the watershed

Indirect-use value - mainly derived from services that the surrounding ecosystem provides

Non-use values are derived from benefits from preserving the watershed and ecosystem in its natural state. These can be either keeping something in existence (existence value) or preserving the ecosystem or watershed for future generations (bequest value).

Valuations are an important basis for negotiations but in the end the values will be determined by negotiations between parties.

Designing a payment scheme should be centered on creating market-based incentives to change management choices that optimize the benefits of the watershed.

Like other documents in the WANI toolkit, Pay focuses on shared benefits and values of ecologic resources From a ecosystem perspective. It outlines how to identify and value watershed services, design a payment scheme, identify and engage stakeholders and negotiate agreements, establish rules and governance frameworks and monitor progress and share learning across different stakeholders.

Pay also describes the following payment schemes:

Private - direct payments to service providers, purchase of land or sharing of costs among private entities

Cap-and trade - trading of water permits among users with an overall cap of water withdrawal and pollution

Certification or eco-labeling - environmental and social attributes are included in the costs of a traded product

The needs and capacities of the various stakeholders must be recognized as well as clear linkages between upstream land and water use, and downstream benefits.

Pay outlines elements of an agreement - services provided, compensation, monitoring and compliance, and governance and management. It also presents the need for clear and enforceable rules and transaction mechanisms and that these must operate within a wider framework of laws, policies and customary arrangements.

Finally, Pay explains the importance of incorporating social learning to continually monitor progress and prioritize efforts. The social learning process should be accessible to all well-informed stakeholders and include a feedback loop that can lead to continuous improvement to the overall payment scheme.

To review the WANI toolkit and related documents please visit: http://www.iucn.org/about/work/programmes/water/resources/toolkits/