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Responsible Sourcing: Business challenges in addressing deforestation risk

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Global demand for agricultural commodities is the primary driver of deforestation, as timber is extracted and land is cleared to produce beef, soy, palm oil and other commodities. Agriculture is estimated to drive around 80% of deforestation worldwide. These ‘forest risk commodities’ are the building blocks of millions of products traded globally and feature in the supply chains of almost all major companies.  Pressure is mounting on food and drinks businesses who are being asked to make a major contribution to halting deforestation which may be a result of practices within their supply chains. 

This article looks at some of the drivers behind a growing focus on the responsible sourcing of agricultural commodities and presents general steps companies can take to influence, measure and monitor environmental and social performance in their supply chains.

Responsible Sourcing: Business challenges in addressing deforestation risk

“Deforestation accounts for approximately 10-15% of the world’s greenhouse gas emissions, equivalent to the entire transport sector.”

Deforestation Risk:  What is the problem?

Global demand for agricultural commodities is the primary driver of deforestation, as timber is extracted and land is cleared to produce beef, soy, palm oil and other commodities. These commodities are sometimes called “forest risk” commodities.  Agriculture is estimated to drive around 80% of deforestation worldwide.

International pressure is mounting to stop deforestation.   Initiatives such as the New York Declaration on Forests, the Paris Agreement on climate change, the Sustainable Development Goals (SDGs) and the Carbon Disclosure project’s (CPD) forests programme have all set out action plans to avoid the worst effects of associated climate change, loss of biodiversity and illegal practices.  These international agreements, together with evolving national and international climate change policies are ramping up the pressure on businesses to make their own commitments toward zero net deforestation – and an increasing number of businesses have already signed up with 70% of companies reporting to the CDP forest programme making some form of commitment to address forest loss.  

Zero deforestation is the gold standard but the strict requirement preventing the cutting of trees in one place which are replaced with planting and regeneration in another is too restrictive for many businesses so zero net deforestation which does allow some cutting and re-planting (afforestation) is seen to be a more realistic goal.

Negative environmental and social effects of deforestation

Impact on biodiversity : The most dramatic and obvious impact is a loss of habitat for millions of species. Deforestation can lead to species losses and has a negative impact on ecosystem functions.

Major contributor to GHG emissions: Addressing deforestation could reduce GHG emissions by up to one third of the carbon mitigation needed annually to keep temperature rises in check.

Loss of natural capital: Natural Capital can be defined as the world’s stocks of natural assets and forests are a key source of natural capital. However, the loss of forests due to agricultural production and primary processing sectors estimated to be costing the global economy US$1.8 trillion annually.

Air quality:  Fire is commonly used in SE Asia to clear land for plantations producing palm oil and other crops creating widespread regional problems with air pollution. 

Impact on the water cycle: Trees are important to the water cycle. They absorb rain, produce water vapour and mitigate against water pollution.

Illegal practices: Deforestation is often associated with unacceptable social issues such as land grabbing, poor labour practices e.g. child labour or unsafe working conditions and other human rights abuses.  

What are the key risks and opportunities for businesses?

Food and drinks businesses are coming under increasing pressure from government, NGO’s and consumer groups to source their raw materials sustainably.  Many companies are publically engaging in responsible sourcing practices by voluntarily committing to take into account social and environmental considerations when managing their relationships with suppliers.

Sourcing from countries where deforestation is known to be a problem can lead to reputational, operational and regulatory risks.  The following table illustrates the views of more than 170 food businesses who took part in a the Carbon Disclosure Programme’s (CDP) Global Forests Report highlighting the types of risks they face when sourcing specified forest risk commodities.  Forest risk products include all commodities that have been produced on recently deforested land. 

Figure 1 Percent of companies recognising substantive business risks in their supply chains

Figure 1 Percent of companies recognising substantive business risks in their supply chains

Source: CDP’s Global Forest Report 2015

More than 75% of the companies included in the CDP’s analysis recognised at least one deforestation linked supply chain risk, these include:

Reputational risks can arise if a company is associated with unsustainable land management practices and rising GHG emissions.  More than half of all companies in the CDP’s study reported facing reputational risks in sourcing forest risk commodities. Businesses face losing access to capital as investors and banks seek to avoid deforestation risk in their own portfolios. NGO’s have raised the profile of this issue by publishing benchmarking reports to monitor and report on the progress made by food and drinks businesses in reducing the potential for their sourcing activities leading to deforestation.  Two such scorecard reports developed by the WWF are the Palm Oil Scorecard and Soy Scorecard, the latest iterations of both were released this year.  Once associated with unsustainable practices businesses may face naming and shaming and potential consumer boycotts of their products. 

Operational risks may occur in the form of interruptions to reliability of supply of key commodities, either as a result of climate change, or from measures designed to tackle deforestation.  For example, changes to buyers’ contractual obligations may require products to be certified by the appropriate scheme to prove that products have not contributed to deforestation.  Businesses risk losing contracts if they have not established their own supply chains for certified products. 

Regulatory risk may come about due to a change in laws and regulations that will impact on a business, sector or market. Intergovernmental initiatives to halt deforestation together with evolving national and international climate change policies are likely to require greater commitments from businesses to move towards zero net deforestation in their sourcing policies.  As governments try to meet their climate change targets, legislation is likely to tighten in an effort to reduce their contributors to GHG emissions.  This could even lead to restrictions on the trade of non-certified products. 

The flip side of risk is opportunity, and like risks, opportunities must also be diligently managed. The proactive management of deforestation risk can:

  • Help support the development of strategic sourcing policies and prioritise resources
  • Strengthen supplier relationships, improve performance and reduce disruptions in supply
  • Build competitive advantage by opening up a growing market for deforestation-free products
  • Build trust from consumers and builds brand value - associating your products with environmentally and socially responsible practices
  • Demonstrate commitment and can drive continuous improvement in sustainable sourcing
  • Identify areas that are in most need of improvement, inform strategic decision making and help to prioritise action.  
  • Position a company ahead of any national or international law or regulation that my impact their business.

What can F&D businesses do to manage deforestation risk?

Identify areas of deforestation risk in your supply chains: One of the greatest challenges faced by food sector businesses is their reliance on hundreds of suppliers spread across a wide geographical area supplying thousands of different goods and services.  Food businesses need to focus on high risk areas with regard to geography and crop.  A strategic risk assessment can help to understand where deforestation risk crops such as soya, palm oil, beef, leather, and timber are present in their supply chains and from where they are being sourced.   

Determine your policy position to achieve targets: The strategic risk assessment will inform development of coherent sourcing policies with associated targets and timescales to move in the direction of zero deforestation.  Company policies should be clearly articulated in a supplier code of conduct which all suppliers are able to sign up to.  Policies should be reviewed annually to take into account changes in legislation and industry standards, NGO and consumer concerns.

Work collaboratively to break the link between deforestation & commodities: There are numerous industry organisations established to help food sector businesses to source commodities sustainably.  Round table organisations have been set up to ensure sustainable production and trade for palm oil, soya and beef.  These membership organisations have put certification systems in place to help businesses to source certified supplies. The round tables have set standards that require producers to protect valuable forests and to follow a comprehensive set of wider social and environmental safeguards.  Proactive food businesses such as Associated British Foods, 2 Sisters Food Group, and Compass Group among many others have endorsed these round tables through membership.  Association with round tables offers businesses the opportunity to participate in collaborative working groups such as the Palm Oil Innovations Group (POIG).  Getting involved in collaborative initiatives such as these can help guide company sourcing policy, develop relationships with like-minded businesses to address sourcing difficulties in a pre-competitive environment, and can foster a positive company image.

Industry organisations established to help food sector businesses to source commodities sustainably logos

Build relationships with and support suppliers: Any changes to company policies for sourcing forest risk commodities must be communicated clearly to suppliers and should not be implemented without a consultation period as changes may present challenges for them.  These challenges can be more easily overcome by working closely with them.  Recognising that your suppliers may be sourcing from second and third tier suppliers is important so relationship building along the whole supply chain will help ensure “buy in” at all levels.  Establishing two way lines of communication will help with early identification of potential supply disruptions and will ensure that buying practices are realistic and targets are sensible. Good supplier relationships can provide a platform for discussing factors other than price and may include an element of training to help suppliers develop their own responsible sourcing practices.  Businesses that have established good relationships with their suppliers are better able to identify and target actions toward at-risk suppliers which can help focus resources where they are most needed.  

Monitor and report on supplier performance Once company supply chain data on forest risk commodities is available e.g. volume, value, origin of product, this can be compiled into a product footprint to measure the volume of forest risk products used by the company, including embedded products e.g. soya component of animal feed used to produce meat products.  Having supplier data reported in this way helps monitor progress toward established company targets and may be used to demonstrate compliance to industry standards.  Once a businesses’ product footprints have been calculated, data may be disclosed as part of the company’s annual business reports and CSR statements or via NGO scorecards to improve transparency and to show commitment to the goal of reducing deforestation.  Even small changes reported may be viewed positively by consumers and by NGO’s. Disclosing this information can send a powerful message about the company’s commitment to reducing deforestation and mitigating the climate change impact of their operations.

The WWF, the Carbon Disclosure Project’s Forest Programme and others have developed systems for rating F&D businesses based on the amount of sustainable soy, palm oil, beef and timber they use in their supply chains. 

How can ADAS help?

ADAS works with food sector businesses to develop sustainable sourcing plans.  Our services include mapping use of forest risk commodities, carrying out strategic risk assessments, setting achievable goals and targets, improving supplier base liaison, and monitoring and evaluation of programmes.  For more information on sustainable sourcing please contact ADAS consultant: Leslie Berger on leslie.berger@adas.co.uk or 01954 268 229.

ADAS provides insight and solutions to businesses within the food and beverage industry. We support our clients to develop and implement sustainable sourcing, risk management and resource efficiency strategies, generating cost savings and building business resilience. Our long history of engaging with the agri-food industry ensures we understand the different commercial drivers across the food chain, from farm to consumer.

 

 

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