Governance

Voluntary standards aim to promote and reward behaviors that have positive social, environmental and economic impacts. These standards can be created to address limited compliance where government enforcement is inadequate or bolster the minimum standards established in more robust regulations and, in some cases, they eventually become incorporated into law, sanctions or subsidy eligibility requirements established by governmental bodies (e.g. EU's REACH).

As brands increasingly attempt to advance their corporate social responsibility programs, sustainability leaders are using voluntary standards as a stipulation for doing business with them. These market-based drivers can have a powerful impact on the global cotton industry.

I believe in what the standards aim to achieve and feel this change will benefit the cotton industry but the scale to which they can be applied is still in question. I have worked with voluntary standards in a multitude of capacities:  leading sustainability functions for Gap Inc., chairing the Better Cotton Initiative (BCI), designing and evaluating supply chain systems, consulting on the practical application of voluntary standards, and linking government efforts with standard expansion. Based on input from cotton industry members, I am not convinced that certification and full traceability throughout the supply chain is the only - or the best - approach. Existing traceability systems in particular are cumbersome, costly and can disturb or distract from normal business operations.

With this said, the voluntary standards have created a new expectation of businesses and industries -understand your impact and act responsibly. I value this and other contributions of voluntary standards (e.g. transparency and credibility) and feel production and processing practices must be improved for the sustained health of the industry. I simply want to help the industry move further faster than what I think can be done under voluntary standards with full traceability. In a period when cotton prices are at an all time high, the industry cannot afford to invest in any measures that don't result in direct improvements to their business and bottom line. Direct investments that improve profitability or the production of cotton - e.g. farming practices or processing efficiencies -would be of greater benefit to the industry and ensure funds are directly linked with measurable change (rather than indirect expenses related to certification and traceability efforts). Once the connection between these efforts and business benefits is made, the industry will likely take it upon itself to expand efforts that align with the voluntary standards and in a manner that is efficient, impactful and aligns with their current business and supply chain models.

One model that provides an option valuing verification of practices and improved impacts over strict certification and allows for less than full traceability is BCI.  BCI appeals to brands because it allows them to trace Better Cotton into their supply chains. Spinners appreciate BCI's promotion of contamination reductions. Ginners benefit from higher yields. These benefits must be realized - and if they are, the industry will lead the charge.

Questions

Are voluntary standards necessary or benefiical to the industry?

Are there different approaches that would work best in the cotton supply chain?

Total support to the agricultural sector (including producer support) was USD 375 billion in 2007-09 (0.9% of OECD GDP). This is down 2.3% from 1986-88. In all but one OECD countries, the agricultural support had declined when compared to the overall economy.  High world commodity prices and lower food stocks contributed to food security becoming central to agricultural policy debate.

Many countries implemented previously agreed reforms, others took ad hoc measures in prompt response to price volatility. Some trends in policy reforms include: delinking of support from commodity production, and increasingly linking support to better practices. Some countries adjusted the form of subsidies paid to producers because rising prices negated the need for them.

Food security was the focus of discussions when Ministers for Agriculture from the OECD countries met in early 2010.  The Ministers agreed to build on and complement policy principles agreed in 1998 and recognized:

• An integrated approach to food security is needed
• ‘Green growth' offers opportunities
• Climate change presents challenges and opportunities.

The Ministers also agreed that governments should meet many basic responsibilities that include ensuring that:

1.     appropriate institutional, regulatory and policy frameworks are in place to enable markets to function properly

2.     appropriate policies are developed to manage risk

3.     policies are coherent with general macroeconomic, trade and other policies

4.     policies support responsible management of natural resources

5.     the total costs and benefits to society are considered

6.     there is a supportive investment climate

7.     innovation is encouraged, including transfer of technologies that enhance  productivity and product quality

Some recommendations for governments to consider when shifting support from production levels to adoption of better practices include:

• State clear objectives, use evidence-based evaluations of progress, and improve transparency,
• Target support to lower income farmers and include risk management tools to protect them from price variability and crop damage.
• Encourage payment schemes that cost polluters and benefit ecosystem services providers.
• Promote climate change adaptation and natural resource conservation.
• Invest in needed infrastructure.
• Promote innovation that builds efficiency across the sector.

A stronger and more transparent global market that can reduce price variability and lead to more consistent policies that take a long-term approach which could further stabilize and strengthen the overall industry.

Tighter regulations can also result from an industry's inaction such as not acknowledging corruption or human rights violations associated with raw material production. For example, The Dodd-Frank Wall Street Reform and Consumer Protection Act signed by President Obama on July 21, 2010 mandates new auditing and disclosure requirements for companies that use certain minerals in their products originating in areas known to be mined under conditions of armed conflict and human rights abuses. On December 15, 2010, the U.S. Securities and Exchange Commission proposed rules to implement the provisions of this Act. Its focus is to ban the use of metals from the Democratic Republic of the Congo due to human rights violations that are occurring in that country.

Although the regulations don't ban the use of conflict minerals, many industries, such as the electronics and airline industries, are responding to the regulations by developing programs to rid their supply chains of conflict minerals. These programs that rely heavily on audits to confirm the origin of a given metal, are resource intensive, expensive and create new reputational and legal risks to the companies should the audits not satisfy all interested stakeholders. It could also lead to a more restrictive number of qualified suppliers (those who don't purchase any conflict minerals) and more limited source of materials that could, in turn, lead to higher prices if demand outstrips qualifying supply.

The cotton industry can learn from these events and proactively mitigate the risk of reputational damage or increased and burdensome regulations. The industry faces several challenges: 1) cotton is often perceived as being pesticide and water intensive, 2) the Uzbek government's use or acceptance of child labor during cotton harvest is gaining more public attention and action by the U.S. government, and 3) WTO rulings shifting the landscape of cotton production. The cotton industry could avoid negative reputational impacts or the risk of future regulations by addressing the areas of concern (e.g. pesticide use, child labor) as well as communicating all of the positive aspects of cotton (e.g. natural fiber, creates income to rural, poor farmers). This may become more beneficial and important as cotton prices soar and faces competition from synthetic fibers.

Question

Is there a role the cotton industry could take to minimize the risks to the industry's public perception associated with the most egregious environmentally and socially conditions?

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/

I read an interesting paper produced by OECD recently, Policy Responses in Emerging Economies to International Agricultural Commodity Price Surges (2010), which examined short-term policy responses to the 2006-08 rise in commodity prices and analyzed their effectiveness in meeting policy objectives. This is particularly relevant today as cotton prices soar to all times high. Changes in trade flows, price transmission, inflation, consumption and production were also examined.

Overall, the study found that focused safety nets were best at sheltering poor households without disrupting the market, including creating negative price signals to farmers. An added benefit was that the conditions of the safety net could be adjusted as prices rose and fell, allowing greater flexibility over other interventions.

The researchers categorized government short-term policy responses into four types:

     1.     Market interventions to limit the rise in food prices

     2.     Market interventions to control inflation

     3.     Assistance to consumers through safety nets

     4.     Support to producers

The study found that most countries tried to limit the rise in food prices by directly affecting the price or increasing the supply of commodities by removing tariffs, increasing export taxes or reducing export price incentives. These usually reinforced existing policy themes and aligned with longer-term policy frameworks and objectives such as food security.

Export restrictions (e.g. bans, taxes, reduction in rebates) were found to significantly reduce exports of the covered commodities; however, these and other direct government interventions were not always effective in suppressing domestic price pressure. Additionally possible negative impacts included depression in prices discourage farmers from replanting the targeted crops.

OECD promotes shifting from outdated subsidies towards more progressive programs aimed at achieving its economic growth and poverty reduction targets. Traditional subsidies can distort consumption behavior and negatively influence policy decisions by keeping the cost of resources artificially low. Many developing countries will need to invest in their infrastructures to achieve the economic growth they aim to achieve.

Shifts towards programs that lift restrictions on foreign investments, improve access to land, improve enforcement of competition rules and cutting red tape. Progressive programs such as public-private partnerships will also be needed to make any significant headway on infrastructural improvements.  It is, however, worth noting that opportunities to secure funding through these public-private partnerships will likely be increased if more progressive investments that promote better agricultural practices, protection of ecosystems and provide basic worker protection as many funders are incorporating these criteria into program requirements.

Question

Are there measures that the cotton industry should be taking to strengthen governance in times of such price volatility?

The rapid advance in cotton prices, both physical and futures, that the industry is experiencing may put contract sanctity at risk. It is therefore vitally important that the industry work together to limit the impact on global cotton trade.

Contract sanctity in the global cotton trade is supported by the International Cotton Association (ICA) that works to ensure and promote equitable cotton trading practices through bylaws and rules, and provides an impartial and effective dispute resolution service through arbitration. Contract sanctity, however, is not always upheld. The concept of contract sanctity centers on the general idea that once parties duly enter into a contract, they must honor their contractual obligations.

Commitments can also be broken at the national level as we have seen in the autumn of 2010, India failed to export more than one million bales of cotton to Pakistan under an existing agreement. The ban on cotton yarn exports were to help the domestic industry have access to cotton yarns at reasonable prices. Though this contract violation is subject to ICA dispute resolution through arbitration, the cotton export situation in flux in India –cotton growers hope to profit from the surge in cotton prices– it is not clear if arbitration for contract defaults will be a practical solution.

Despite the importance of contract sanctity to the health of the global cotton industry, the challenge remains on implementation and enforcement. ICA will not be able to manage all events.

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/