An interesting thing has happened over the last five years. There has been a seachange in the approach by big corporate brands such as Unilever, Kraft, Mars, Walmart and others to managing their supply chains. Not so long ago, buyers cared only that products show up in their factories at the price and specifications desired. There was little concern for the environmental and social conditions in production areas.
What a difference five years can make. Unilever has made a commitment to 100 percent sustainable sourcing as part of its innovative Sustainable Living Plan; Walmart is rewarding suppliers based on a concrete set of sustainability criteria, and these are just a few of the new level of sustainability commitments we're seeing.
Hundreds of companies are working with civil society (and occasionally, governments) to help millions of producers to invest in sustainable practices-helping them to become more viable small businesses and, not incidentally, more stable long-term suppliers. However, the scale of the environmental and social problems, as well as the complexity and scale of supply chains makes it difficult to scale these sustainability solutions up quickly. One of the persistent constraints in the agricultural sector is a lack of financing for supply chains- in many cases limited by a set of real and perceived risks. Crop failure, poorly managed farms and market volatility are among the many risks that create barriers to financing. As the Rainforest Alliance and its partners in the supply chain work with more and more farmers, we see that the adoption of sustainability practices (such as Rainforest Alliance certification) can indeed reduce these well-known risks.
Buyers and banks are recognizing these benefits. Good environmental practices such as tree planting, soil and water management can reduce crop failure. Improved management systems can reduce costs and increase yields, thus increasing net farmer income. Buyers purchasing from sustainable producers are more likely to enter into long-term contracts. And these are just a few of the benefits we've observed. Buyers and banks are starting to recognize these benefits, but there is a lot more work to be done to mainstream reliance adoption of sustainability as a risk mitigator in these value chains.
In April 2011, the Rainforest Alliance and Citi Foundation hosted a Sustainable Value Chain Finance Workshop, which established a dialogue across the full range of agricultural sector participants, including buyers, exporters, retailers, producers, insurers, private and public financial institutions, development agencies and civil society. At the workshop, participants concluded that certain enabling conditions still need to be created in order for sustainable value chain finance to scale. In particular, underlying risks (i.e., commercial, financial and political) need to be better understood across all players in the chain, and mitigation of those risks by sustainability practices needs to be better assessed, tracked and reported. Sustainable farming and business practices, adoption of risk sharing schemes along the value chain, improved monitoring and information systems, and enhanced approaches to insuring crop production were identified as key enabling conditions to unleashing financial resources.
The full report from the spring meeting can be found here.
Citi Foundation and Rainforest Alliance plan a second workshop for Jan. 30, 2012, to build on these findings. Participants will focus on sustainability as a risk management tool with a focus on select sectors including cocoa and coffee. The group will establish priorities for new sustainability financing in these sectors and highlight several innovative pilots and financing opportunities. Participants will also review a proposed framework of key metrics for these value chains which have been selected to highlight areas where sustainability measures produce tangible financial risk mitigation.
Watch this space for the next report!