Governance

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.

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.

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?

The World Bank just released The World Bank’s Social Protection and Labor Strategy 2012-2022. . This strategy centers on filling four gaps in social protection and labor (SPL) efforts today: integration across programs and functions, access to SPL instruments, access to jobs and opportunities, and global knowledge of effective SPL approaches.

Resilience, equity and opportunity, themes taken from the title page of the report, are integral to the World Bank’s ten-year strategy. The World Bank believes that effective SPL systems build resilience by protecting individuals and families from sudden shocks that can overwhelm them otherwise. Equity – including access to public or private services such as finance, education, health care, jobs and markets – will help to ensure that people’s basic needs are met. Policies and interventions should provide opportunity to the most vulnerable members of the community.

The empowerment of women, the sharing of knowledge (including learning from others’ efforts), access to market information, and advancement of research and development, are also important elements of the World Bank’s strategy.

The World Bank promotes solutions that address multiple risks and reaches the poorest people of the poorest countries. This strategy aims to help governments move from fragmented approaches to a more synchronized and integrated system for SPL programs. Successful programs should also include mechanisms to reach informal work sectors (e.g. agriculture) that are often excluded from government safety nets. The bank’s program intends to help countries move toward a systematic approach that has five “SMART” characteristics:

Synchronized across programs

Monitored, evaluated, and adapted

Affordable, fiscally, and cost-effectively

Responsive to crises and shock

Transparent and accountable

The World Bank promotes programs that are integrated with complementary programs in other sectors or that have a different area of focus (e.g. health, education). Despite all of the focus on providing protection programs, the World Bank also recognizes that there is a need for balance between protection and competitiveness. The World Bank recognizes that jobs and opportunities – as well as access to markets and employment opportunities – are central to any sustainable poverty reduction strategy.

The World Bank also points out that knowledge sharing is integral to any SPL program. The World Bank is working with developing countries to capture evidence-based data that can inform future decisions and can be shared across regions in the proper context. The bank’s strategy responds to three knowledge gaps:

• Understanding what currently exists and identifying gaps by region or subject,
• Evaluating results to arrive at a clear and appropriate understanding of the effectiveness of SPL efforts, and
• Sharing knowledge and best practices across regions to help those countries that are suffering from limited knowledge and skills.

The World Bank aims to address these gaps by:

• Strengthening its capacity for monitoring the performance of SPL program implementers,
• Maximizing the availability and use of existing knowledge,
• Generating comparable and accessible data on SPL programs,
• Making information on SPL more widely available, and
• Scaling up support for impact evaluations.

I applaud the World Bank’s strategy and approach. Governments must engage in efforts to promote sustainable development, and taking this SMART approach will likely lead to a more sustainable and effective change.

Questions for consideration

Can the cotton industry adapt the World Bank model and promote a SMART approach throughout the industry?

Can the cotton industry help the World Bank’s effort to engage governments in the sustainable development movement?

When financial experts speak of commodity markets they often discuss futures markets. But for a layperson like me, I didn’t really understand how “futures” work or how they influence commodity markets. I would like to share a bit of the basics that I have learned with you. 

Cotton’s Revolution held a Strategic Thinking Session on April 25^th to discuss cotton’s recent price volatility and how the industry can strengthen existing mechanisms and promote policies to address harmful price volatility. I was not in attendance but found the CCI’s summary of observations and Mr. Arvind Singhal’s presentation on Managing Impact of Cotton Supply Chain Volatility very interesting and important to share with others in the wider cotton community – and beyond.

The cotton industry is vast and involves a wide variety of actors – from small-scale farmers and weavers to spinners to global brands. It is influenced by entity outside of the supply chain such as hedge funds and speculators and faces competition from other fibers and crops. Some key observations from the Bangkok Session include the imbalance of power and lack of risk management mechanisms along the entire supply chain as highlighted in the following points raised by the thinking session’s participants:

• There is a need to develop mechanisms to enforce contract sanctity and to continue to foster communication along the entire supply chain.
• Speculators, hedge funds and pension plans can create artificial and higher levels of volatility, creating a higher level of risk for more vulnerable members of the supply chain.
• The lack of export from China and India, two of the largest producing countries, places the US, the largest exporter, in a strong negotiating position.
• A handful of large retailers have a disproportionate negotiating power. At the same time mechanisms do not currently exist to manage risk associated with their actions that hurt the entire supply chain such as defaulting on contracts and incentivizing bad buying behavior. Additional challenges that the retailers pose include their lack of knowledge about fiber characteristics and continuous change in sourcing personnel.
• E-commerce will open up communication connections between different supply chain actors. This could allow new segments of the supply chain to communicate to consumers without having to go through retailers.
• The consumer is an important stakeholder and the industry has not yet created a “sexy” or positive message about cotton.

In addition to these thoughtful discussion points, I also found Mr. Singhal’s presentation very interesting with some more detailed insight into contributors to cotton price volatility and examples of steps food companies are taking to manage risks in their supply chains. Some of the factors behind cotton price volatility that Mr. Singhal presented include shifts in production due to climate change, government interventions (e.g. India bans), currency movements and entry of large commodity speculators. He also shows how cotton has lost market share to other fibers as a result of higher prices. He also points out that retailers have changed sourcing patterns by increasing the number of seasons, reducing lead times (which helps control raw material costs) and many have outsourced to a sourcing management firm (e.g. Li & Fung).

Mr. Singhal provides us with four case studies on food companies’ strategies to manage the volatility of raw materials:

• Nestle has a four-point strategy to: 1) enhance connections with farmers and suppliers, 2) improve understanding of price movement trends and sensitizing customers accordingly, 3) innovate to replace expensive ingredients, and 4) reduce waste and improve efficiencies.
• McDonald’s approach involves establishing long-term contracts with suppliers and vendors, buying in bulk to take advantage of the economies of scale, using “no frills” logistics, and improving ability to forecast input costs.
• Barilla, a leading pasta company, takes a central role in deciding raw material procurement – even for its suppliers, stays abreast of raw materials demand-supply equation on price trends, and provides sourcing intelligence to suppliers to help them source better.
• Starbucks has a diversified procurement model and sources from multiple regions. It is important to note that Starbucks had to increase prices of its products when the purchased for an entire year in 2011 when prices were high.

These case studies indicate that large global brands are engaging more deeply in their supply chain, possibly creating new business relationships. If done correctly, these models could help manage risk along the supply chain. However, it could pose more risk to vulnerable members of the supply chain if the brands use an approach that increases their negotiating power.  Regardless, more direct engagement with retailers and brands appears to be inevitable.

 Mr. Singhal closes his presentation with some suggestions:

• Volatility will likely remain and brands and retailers can dampen its effects on the other members of the supply chain.
• Producers and traders should work more directly with retailers.
• Affected actors or cotton institutions should strategically address harmful, short-term government interventions.

This session was clearly a timely and covered issues that must be addressed to ensure a healthy and more stable cotton industry. We now must come together to develop effective and sustainable solutions to address the issues of most concern.

Questions to consider

What is the most pressing issue that the industry should address?

How can we engage the least involved members of our wider community - consumers, retailers, hedge funds and speculators?

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 have reached all time highs over the past year. 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?

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 have reached all time highs over the past year. 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?

Export Promotion and the WTO, A Brief Guide (ITC 2009) presents the rules in the World Trade Organization (WTO) Agreement on Subsidies and Countervailing Measures (ASCM) – covering manufactured goods – and the WTO’s Agreement on Agriculture (AoA). Both agreements provide specific rules for developing countries. The authors examined export promotion schemes that are available to developing countries and comply with international rules on subsidies.

The guide provides a “nuts and bolts” overview of what governments and exporters should consider when developing export promotion schemes under ASCM and AoA. It describes subsidies and duty drawback tools that are available to developing and least developed countries (LDCs) to help identify potential sources of financial support.

Agreement on Subsidies and Countervailing Measures

The rules of ASCM apply only to subsidies that are ‘specific’ or explicitly limited to:

• One enterprise
• Certain enterprises
• One industry
• Certain domestic industries
• Certain enterprises located within a designated region(s)

The ASCM guide defines the following key terms that help the reader understand core concepts of the guide.

Subsidy: A government is providing either a financial contribution or income support to the benefit on a specific recipient. A financial contribution can include when a government provides:

• A loan guarantee to a private company
• An exemption from taxes, provides tax credits or otherwise forego revenue
• Goods or services other than general infrastructure, or purchased goods

Actionable subsidies: Permitted subsidies under ASCM can still be challenged through WTO dispute settlement proceedings if they have “adverse effects” on the interests of other WTO members.

Non-actionable subsidies: Subsidies that cannot be subject to action are those intended for environmental protection or make up for regional inequalities within a state or to promote research and development.

ASCM prohibited subsidies: Subsidies that are prohibited under ASCM include those that are contingent upon export performance (export subsidies).  The guide provides case studies to present how to determine whether a subsidy program or a loan is prohibited.

Exemptions from on export subsidies: LDCs with gross national product per capita less than US$1,000 annually are exempted from AoA and are listed in the guide.

Agreement on Agriculture

The AoA has a long-term objective of establishing a fair market-oriented agricultural trading system through a progressive reduction of agricultural support and protection. It covers market access (i.e. tariff reductions), restrictions on the use of domestic subsidies and restriction on the use of export subsidies on primary products. A list of cover agricultural products is provided in Annex I of the Agreement.

Export subsidies most prevalent in the agricultural sector and covered under AoA include:

Direct export subsidies contingent on export performance: sales of non-commercial stocks of agricultural products for export at prices lower than comparable domestic market prices, producer-financed subsidies (e.g. government levies that are used as an export subsidy), cost reduction measures (e.g. marketing), internal transport subsidies, and subsidies on incorporated products.

In a fashion similar to the ASCM guide defines key terms that help the reader understand the allowances and exemptions and prohibited conditions under AoA as highlighted here:

Export credits: result when a buyer or supplier of exported goods or services is allowed to deter payment for a certain period of time. These involve a certain level of official support.

Export credit guarantees: instruments that cover the risks of export credits, such as default by a borrower. These can be both political (created by government practices, war or natural disasters) and commercial (complexities associated with foreign buyers).

Permitted export subsidies: export credits that are consistent with the OECD Arrangement on Guidelines for Officially supported Export Credits.

Prohibited export subsidies: grants by governments below certain interest rates, or payments by governments of at least part of the costs incurred by exporters, or financial institutions to secure a material advantage.

Free trade zone: an area within a country regarded as being outside its customs territory and exempt to customs duties and taxes.

With all of the challenges the cotton industry faced last year – volatile market, contract defaults, droughts and floods – Bloomberg’s accusations of child labor in Fair Trade cotton at the peak of holiday shopping was just another blow.

The December 15th, 2011 Bloomberg article, “Victoria’s Secret Revealed in Child Picking Burkina Faso Cotton,” unfairly paints a negative image of fair trade and the cotton industry. The story centers on a girl, Clarisse, who was taken in by her relatives at the age of 9 and reportedly works on a farm that produces fair trade cotton for Victoria’s Secret.  

The reporter oversimplified complex issues that are not unique to or a result of the activities in the cotton industry. The reasons behind Clarisse losing her parents were not thoroughly explained. While the depiction of the sparse belongings, hard work and limited food are, very unfortunately, is realistic in much of Africa. The reporter also failed to recognize the value that the cotton industry provides to rural farmers in such desperate conditions.

Targeting one of the few apparel brands that have made the effort to support to improve conditions on the farm in West Africa can deter other brands from making this important investment in the future. But the real damage is the lasting negative impact of cotton in the eyes of consumers.

And, if that weren’t enough, there is much speculation regarding age of the “girl” that was the central figure in the Bloomberg article. The reported stated she was 13 years old. In a January 3, 2012 public response to the allegations made in the Bloomberg article, Fair Trade International states “she cannot accurately be described as a child as defined by the UN Convention on the Rights of the Child (i.e., under 18 years old).” Fair Trade International also found that the she works on a family-owned vegetable farm and is not involved in cotton.  They also state that there are no fair trade farms in the area. Bloomberg alleges that Clarisse is using her dead sister’s birth certificate.

I can’t help but wonder why would Bloomberg write such as discriminating article on cotton. It appears that Bloomberg did not conduct a sufficient level of due diligence regarding the “facts” they presented in the article. This raises the question of journalistic integrity.  Naturally, there are laws that apply to Bloomberg and its reporters and editors so I won’t belabor that point. But what can we do as an industry to avoid this from happening in the future.

We can keep each other informed of investigations, exposés or other inquiries to ensure they have access to truthful and accurate information. We should also support each other clarify or defend accusations that do get in the public arena.

Questions to consider:

Are negative mdeia accounts - and at time with false statements - something on which the cotton industry should take action? Or just something we need to shoulder?