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Green lines. Companies, Governance, and the Biosphere

Neatly stacked logs in a forest

A recent paper on Transnational Corporations, Biosphere Stewardship, and Sustainable Futures, highlights both the critical role of, and rationale for Transnational Corporations (TNCs) to engage in corporate biosphere stewardship (covering climate, nature and other sustainability topics). Though whilst the authors observe that “TNCs provide benefits”, they also state that they “have earned a poor reputation, often for legitimate reasons.”

In over 30 years since the first Rio sustainability summit, the role of TNCs in driving biosphere stewardship has grown in importance. Initially this was through voluntary global systems such as the Forest Stewardship Council (FSC) and the Marine Stewardship Council (MSC). More recent has been the emergence of the Science Based Targets Initiative, the Task Force on Climate-related Financial Disclosure and the Task Force on Nature-related Financial Disclosure.

Whilst the FSC and MSC created democratic governance processes with representation from those impacted by the activities of companies, the latter voluntary global schemes have been built with self-appointed and/or corporate dominated governance structures.

Now doubts are creeping in about not only the governance (and subsequent rigour) of voluntary global schemes. And also the interlinked questions around the governance of TNCs in general, and their relationship to nations and national governments.

Governments are not Stakeholders

Governments have prepared national biodiversity action plans, and nationally determined (climate) contributions, based upon their national democratic mandates and national priorities. These have been rolled up to create global approaches to climate and nature rooted within international (UN) processes.

However, these national and global governmental priorities increasingly sit in a disconnected space from the global commitments of TNCs. A recent review of 24 major global companies by the Pentland Centre at the University of Lancaster did not find any evidence that companies are taking into account national biodiversity priorities in framing their biodiversity targets, and determining their actions. It is not clear therefore whether their actions are supporting government priorities or undermining them. Similarly, it is not clear if the approach of TNCs to climate is rooted in national mitigation and adaptation priorities.

Which raises a question of the relationship of TNCs towards Governments. Most TNCs have sophisticated stakeholder engagement approaches. But it is also wise to reflect that a government is not a stakeholder. It is the government.

Trans-national Governance of TNCs

Global governance of TNCs has had limited success. National oversight of their activities and actions is a fraught affair, evidenced by attempts to set a common, fair (even just) framework for taxation. There are long standing efforts to address this voluntarily via GRI, and more recently in Australia through legislation. Despite this, the pushback is significant, and even the OECD is facilitating the maintenance of secrecy. The result is that TNCs are able to ‘optimise’ their global tax affairs. This undermines national government efforts to tackle inequality.

A similar issue occurs with global climate targets where interventions and investments in carbon reductions and carbon removals takes place in the countries and places where the costs for a TNC are lowest. This is irrespective of a company’s own national level emissions, It means that there is no guarantee that they are aligned with the emission efforts and climate strategies of all the countries that they operate in. TNCs may even therefore be undermining individual (and collective) government priorities and attempts to drive forward the Paris Agreement.

Aligning TNCs with Governments

All of which suggests the need for a more active discussion on governance of TNCs. And how we can ensure that they align better with governments. The temptation is to build a new set of guidelines, perhaps based upon an expansion of the OECD Guidelines. There are however simpler ways in which this could happen:

The first is to adjust the way TNCs report. Companies setting global ambitions and targets on biodiversity and climate should report on their impacts and actions at the level of the nation states they operate in. This would provide important context to be able to judge their actions vs impacts and against the national context. And ensure that their actions align with and contribute to national biodiversity action plans and the priorities of national climate mitigation and adaptation plans. Scrutiny of this disclosure by investors and civil society would provide the necessary ratchet mechanism to drive improvement and alignment with national priorities.

Alternatively a more action orientated mechanism would be to adopt a ‘Ruggie Framework’ approach for the biosphere. In high level terms, this could mirror the three pillars of the existing Ruggie Framework replacing ‘human rights’ with ‘biosphere’, as follows,

• The state duty to protect against biosphere abuses by third parties, including business.
• The corporate responsibility to respect the biosphere.
• Greater access by victims to effective remedy, both judicial and non-judicial.

This is not to diminish the Ruggie Framework attention to human rights. Rather it is a recognition that the rigour it has brought to human rights can equally apply to the environmental sphere. It is also a recognition of the way that TNCs have adopted the Ruggie Framework to address human rights abuses – setting a global ambition, but rooting action at the national, local and individual levels.

Could a Ruggie Framework for the Biosphere Work?

It is not difficult to imagine how it would work in practice. There is plenty of guidance here, here and here. It could easily form the basis for actions and reporting.

A Ruggie Framework approach would bring a more action orientated dynamic. Companies would be forced to link actions to the analysis of the status of the biosphere and impact of their operations. It would align companies and governments, by clearly defining their respective roles. It would also tie companies more explicitly to the national jurisdictions in which they operate, forcing a nationally focussed approach that will balance the global consistency that companies can bring.

The need for consultation of stakeholders would force a discussion and alignment at a national/local level and introduce the national/local level context to actions. It would force: an honest appraisal of abuses of the biosphere; what ‘respect’ means; and shift the discourse on ‘reducing impact’ to ‘remedy’. This latter point may not be a big step: companies are already moving in this direction, with ambitions to be ‘forest positive’ or ‘nature positive’ which explicitly seeks to remedy past biosphere abuses.

Of course this does raise the question of who is representing ‘nature’. Some countries have already provided legal status to rivers and nature, whilst at least one company has given nature a board seat. There is a growing body of legal expertise able to represent nature.

TNCs have by and large adopted the Ruggie Framework on human rights, giving it the status of ‘soft law’. It is positioned in companies closer to the legal & compliance function than the corporate affairs function (which often oversees sustainability). This has an added benefit in moving companies away from the current approach of incremental improvements and a focus on burnishing reputation, to drawing new ‘green lines’ in the protection of the biosphere.

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It’s Just; not Fair. Companies, Reparations, Loss & Damage

Mirror House by Doug Aitken

Is the corporate world about to have its reparations moment? The conventional view would be a resounding ‘what are you talking about?’. Aside from a few isolated and voluntary cases, most commentary suggests that there is little legal basis to make companies pay for historic actions.

At least that was the view a few years ago. The debate then was largely about forced labour and slavery – relatively easy to understand and argue. Yet a few developments recently suggest that the discourse is now gaining increasing attention. A growing number of families, universities and governments are taking tentative steps to come to terms with their past, and providing remedy, however imperfectly. The discourse is now also moving more into the corporate space.

Climate Loss and Damage

The agreement at the COP27 to develop a loss and damage fund is perhaps the thin end of a wedge. ‘Loss and Damage’ is, in essence, a transfer of funds from countries that have historically emitted GHG, to those countries that are most impacted by climate change. It is however not discussed in these terms in order to avoid notions of liability associated with reparations. Despite the linguistic gymnastics the results are the same – new money will be transferred from richer countries (built on the back of GHG emissions) to poorer ones (suffering the consequences of GHG emissions). As yet there are no details of the funding sources for this, but various mechanisms to bring in funds from the private sector are in play.

Just Climate Transition

One important aspect of the Loss and Damage discourse is the closely related concept of Just Transition. This was included in the 2015 Paris Agreement, though it was only in the COP26 in Glasgow that it finally gained momentum.Companies are starting to pay attention and develop corporate just transition strategies. The Fast-Moving Consumer Goods sector, through AIM-Progress, is even considering taking a sector wide approach. So are other sectors such as marine, energy and banking.

Taken together, this suggests that reparations/loss and damage and the principle of Just Transition will increasingly be important for companies. There is already a wealth of guidance available for companies, and forthcoming meetings will help shed light on what this means in practice. Two emerging aspects will determine the direction of travel: the interpretation of ‘just’, and the role to which just transition is linked to human rights due diligence processes.

It’s Just; not Fair

The challenge of mainstreaming Just Transition has been discussed in a recent thoughtful speech by John Morrison. He notes that the most fundamental key component of just transition is ‘that the transition is also transformative in terms of economic justice and does not blindly replicate the power relationships of extractive economies’.

Climate Justice has highlighted the broader sweep of the concept beyond climate:

“Just Transition is a vision-led, unifying and place-based set of principles, processes, and practices that build economic and political power to shift from an extractive economy to a regenerative economy. This means approaching production and consumption cycles holistically and waste-free. The transition itself must be just and equitable; redressing past harms and creating new relationships of power for the future through reparations. If the process of transition is not just, the outcome will never be. Just Transition describes both where we are going and how we get there.”

This is difficult territory for companies. So it is no surprise that some companies are attempting to redefine ‘just transition’ as ‘fair transition’.

There is however a danger here – ‘just’ and ‘fair’ are quite different. Fairness is more objective, and allows companies to be more in the driving seat of defining the what and the how. The process gets lost, and the corresponding action plan gets more narrowly defined, potentially in a way beneficial for the companies.

Past, Present, Future

The AIM-Progress exercise, seeks to understand how human rights due diligence (HRDD) can guide how to address Just Transition.

It can. Though not without a tweak to how HRDD is applied. Typically, HRDD exercises view the situation today and look at the current impacts of current operations upon rights holders. There has been less focus upon the context of historical practices that how they contribute to the situation today. Discussions on climate loss and damage, clearly bring in the historical responsibilities. Indeed the Ruggie Framework itself, whilst not being explicit about the timeframe of actual impacts, does imply a backward-looking scope. Which is where another development in 2022 was so important.

Tackling Deforestation

In late 2022 the Forest Stewardship Council (FSC) changed an infamously arcane rule. This prevented some companies from becoming certified to their standard if there was forest conversion in their estate after 1994. Originally this ‘cut off date’ was completely logical, but two decades later had become a serious barrier to progress. Companies that previously deforested in the past, but then stopped deforesting, were unable to become certified and receive recognition for doing the right thing.

The new FSC approach allows those companies to become certified if they “restore deforested and degraded lands in their concessions as well as to offer social restoration to communities affected by the deforestation”.

The FSC has a unique democratic construct that gives a balanced approach to northern and southern hemisphere stakeholders. The FSC comprises NGOs, and a wide range of stakeholders including companies. What the rule change has achieved is a framework and marker for reparations – both of nature and to society in a way that is acceptable for companies.

What Next?

Where families, Universities and Governments are taking tentative steps to come to terms with their past, and provide remedy, the Corporate world is just starting to wake up to its past. This leaves us with several questions and ways forward :

  1. We need to start looking backwards. Current expectations increasingly extend to past practices, that become adjudicated in law. And whilst there is the principle of non-retroactivity in law, some issues seem different. What happens when past profits were made on the basis of something that today is viewed as unacceptable/ illegal? Where are the models that can guide us? The IFC and OECD may provide some guidance.
  2. How will this be reflected in corporate accounts? As a liability on the balance sheet? As a profit and loss item? What does it mean for assurance of corporate reporting? We may not have long to find out. Guidance from professional service firms, taking into account Just Transition are starting to reflect the need to address historic social inequities. Accounting for the financial consequences can’t be far behind.
  3. How this plays out provides a transition risk for investors. The scope of the discourse on loss and damage is more than climate; and reparations is more than slavery & forced labour. It already extends to nature. It’s a short step towards inequality/living income, and crops such as cocoa, coffee and a whole load more where farmers are living in poverty.
  4. Is there a role for cut-off dates? The FSC 1994 cut-off date ultimately became a barrier to progress. Yet for well over a decade it was an instrumental part of the creation and early success of FSC. It sent a strong message that continued conversion was unacceptable. Pressure built up in the system and helped create a critical mass of adherents to FSC. Those who didn’t act immediately, eventually did. And came knocking on the door wanting to be let in as responsible actors.

Could a similar date help with other issues such as climate, biodiversity (beyond the FSC), inequality/living income? Could the decisions made in 2022 have effectively set that date?

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Climate Change: Charades, Taboos and Resets

Another Place. Antony Gormley

I had a liberating experience discussing climate change earlier this year. I am a trustee and volunteer at a charity that for years has been focussed on tackling the climate emergency. It is co-leading the campaign against the construction of a new coal mine in the north of England.

We had a session with our members and supporters to discuss what our next priorities should be to address the climate emergency. They said our priorities  should be on adaptation: making the town and its citizens resilient to climate change. The members also said we should be more honest in communicating what’s actually happening. And we should keep fighting against fossil fuel projects.

So this is the view from the ground. From a town that was the first in the UK to set up a citizens climate jury. It’s a view that is both liberating and realistic. It contrasts with the global discourse which is increasingly becoming an elaborate charade.

I don’t mean that with any disrespect to the many people, and many former colleagues who are tirelessly and optimistically working at the international level. This is not a criticism of what has been done. It’s just that a change in direction, emphasis and narrative on climate change are all sorely needed. The current strategies are not working fast enough. They may even be becoming counter-productive. So what’s to be done? Here are a few ideas for business.

Act on Forecasts not Dreams

It is time for the NGOs, think tanks, consultancies and business platforms to articulate a more honest narrative on climate. In the lead-up to COP26 in Glasgow, the talk was about ‘keeping 1.5° alive’. One year on, respected organisations are still putting out reports appealing for more urgency. And providing ever more unrealistic ‘this is what is needed’ insights, analyses and strategies. No-one I have spoken to this year believes in this anymore.

The taboo needs to be broken. Its time to focus more on the most likely climate outcome: 2.6°-3.2° of heating. Which is not to suggest taking our eye off the ball of preventing every fraction of a degree of future global heating.

Presumably somewhere in air-conditioned rooms, groups of people are now working on a new consensus, ambition and rallying cry. Its already too late to adopt a 2° threshold: that feels like going back to the future. The Race to Resilience is welcome, but feels like a coalition of coalitions. People on the ground want honesty, not cheerleading. Lets find a way to focus on outcomes, impacts, and actions that are commensurate with the scale of the challenge. Such as fossil fuel non-proliferation. 

Focus on Fossil Fuels and NDCs

“Net-zero” needs to be put back into its box. As I have written before, “The original intent of ‘Net Zero’ – to create corporate action to push for government action has been captured by corporate marketing departments. This is diverting attention from what is really needed.”

Which is that businesses should set targets for when they will be free of fossil fuels from their Scopes 1, 2 and 3. We need them to provide quarterly reporting on progress.

The other reason for dialling back on ‘not-zero’ is that it has had an unintended consequence. Governments don’t feel the need to play their part when the impression is that business will do the hard lifting. The spotlight needs to be put back on Governments to do what they have to.

Companies should reinforce not deflect from Government efforts. Corporate reporting on climate activities needs to explicitly demonstrate, country by country, how companies are contributing to individual government NDCs.

Degrowth

Reducing demand urgently needs to be put centre stage. Despite being highlighted by the IPCC, demand reduction does not feature in any of the recent reports and corporate narratives I have seen. Clearly its uncomfortable: it questions the basis of the mainstream economic model. Yet it is also a good time to do this as we struggle through late-stage capitalism. Its not more growth we need; its less, better directed growth.

So its timely that the idea of degrowth is making a return, this time with more academic rigour, and more diverse voices getting behind it. Degrowth is not about less of the same. It is about growing the things that are needed for societal wellbeing, equity and nature; accompanied by a shrinkage of the unnecessary activities in rich nations that are not delivering societal wellbeing.

There is much still to work out, not least the details of what and how. However, we only need to observe the per-capita consumption and emissions of the top 1% of society to get some clues where to start: private jets, SUVs, built-in obsolescence, and the creation of desire for the next new thing.

A Just Transition

At COP26 there was a new found enthusiasm by companies for ‘just transition’. They are now busy interpreting what it means for their own internal audiences and external positioning. Often simplified to mean ‘leave no-one behind’, it actually goes beyond a few add-ons to the content of climate roadmaps.

Embracing ‘just transition’ will be less about adjusting current business practices, and more about intentionally changing them. If companies are serious about a just transition this will involve placing a scrutiny on the economic model we are following. An economic model which is reliant upon extractive approaches to both the environment and labour. Degrowth provides a way to approach this by creating a planned, democratic and therefore, just and equitable approach to tackling climate change.

Avoiding Climate Tunnel Vision

Its surprising how climate change is now the primary lens through which many companies view the broad range of sustainability challenges they face. Its hard to understand if this laser focus on climate is just a question of the attention pendulum swinging too far one way, or is based upon a more sinister ‘intending the unintended consequences’.

Either way it is leading to (some) companies ignoring or conveniently shifting their gaze from potentially more significant issues such as biodiversity, living income and inequality.

I have written before about the ability of us all to address only a few big issues at once, as well as the interconnectedness and complexity of sustainability issues. Approaches to sustainability (and climate) need more nuance, balance and logic.

 

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Climate Smart Forestry: Smart for Some

I have been a Chartered Forester for over 30 years. Forestry was my profession until I moved into sustainability roles over 15 years ago. I was more than curious therefore to attend, for the first time in over 20 years, the Institute of Chartered Foresters annual conference, which took place in Glasgow recently. The theme was climate smart forestry. With 2.5-3 degrees of global heating the most likely climate outcome, and the long time horizons of forestry management, forest managers need to figure out how to address the physical and transition risks of climate change ahead of most. I was interested therefore to get some insights as to how the sector is currently thinking about how to build a climate smart, resilient future.

There were lots of excellent presentations and insights from the latest research, and it was also a real luxury to have the time to sit and reflect upon the challenges that a changing climate is throwing at us. I could not help thinking though that the discussions felt at time like my studies 40 years ago, just with a different framing (as one speaker said – its all about diversity, diversity, diversity). Plenty of practitioners are giving plenty of thought and experimenting on their own – with inspiring results. Polls taken at the start and the end showed that perceptions about climate change adaptation had changed over the course of the event, and there was a desire for more immediate action. Credit to the organizers therefore for curating the content that achieved this. 

And yet at the end a few people at least left somewhat doubting as to whether things would change, whether it was possible, necessary, or even possible. Reflecting on this afterwards I realized that these observations illustrate the challenges we face in dealing with climate change given the economic system we are starting from.

We need to talk about the Economic System

To explain. Forestry in the UK in some ways replicates the wider economy. There are four categories of ownership: the government (with 27%), charities such as the Woodland Trust, privately owned estates (which are akin to family businesses), and private investors.

Forestry England (who manage Government owned forests in England) presented thoughtful examples of their work that balances the need for productive timber production, public recreation and biodiversity enhancement, all future-proofed for a changing climate. The charity sector similarly explained its approach to deliver a range of objectives and responsibilities. The private sector, in the shape of family owned estates, also demonstrated their actions to develop the diversity that will provide the necessary adaptability and resilience for the future.

This forward looking view was contrasted by the private investment sector. Private investment in forests has moved on from the stereotypical wealthy celebrity planting trees as a tax break in the 1980s and 1990s. Asset managers now cater for individuals like you and I who can buy shares in investment trusts that invest in forests. As you would expect, the asset managers have all the right words and phrases to demonstrate their ESG credentials for a City audience. Yet the mood in the room clearly indicated that the sustainability performance on the ground was somewhat different. Investors are looking for “a return”, which are much higher than when I started out as a forester. This translates into an interest in one species which grows well – Sitka Spruce. The view from the City is that risk and resilience can best be delivered not by diversifying the forests in the UK, but by diversifying their portfolio into other forests, species and countries across the world.

The focus on simplicity of business model was continued by the biggest sawmilling company in the UK. It was keen to highlight its need to compete in global markets with imports from competitors who were bigger in size, lower cost, and with a higher efficiency. It needed the consistency of the same species, in a narrow range of diameters. There was an implicit warning that growing other species just added complexity for their operations which would reduce their margins, and the prices they could pay for logs.

Now to be clear, this range of approaches and views is not new. It’s not so far off what I recognise from when I last worked in the forest industry 20+ years ago. But when seen in the context of climate change it raises some questions about the structure of our economic system. Duncan Austin has coined the term ‘externality denying capitalism’ as being our biggest barrier to delivering sustainability. UK forestry with its mix of government ownership, charities, family businesses and investment funds brings this into sharp relief.

For those concerned about the future, it’s already being built by the Government managed forests, charities, and those parts of the private sector which bring the unique perspective and role of family business. When you have been around for 400+ years, then delivering a decent return whilst maintaining assets for the next generation is more important than ‘relative performance against the market’.

Building Resilience: Accepting Complexity

Which leads me to offer a few observations, not just for the UK forest sector:

  1. The whole value chain needs to collaborate to tackle the physical and transition risks posed by climate change. Obvious to say but evidence suggests that it isn’t happening. Foresters are grappling with physical risks and the need to plant and manage for the future not today. The processing industry will need to learn to accept the complexity this causes and the transition risk associated with it.
  2. iI’s time to have a debate on the types of ownership of production. And the balance of ownership thats appropriate in society to deliver the stability and resilience we need in the future. The action in some quarters of the private sector contrasts with the ‘externality denying capitalism’ elsewhere. Forest investment products that offer shareholders a CPI+5% long term annual return are unlikely to leave any room for diversifying and building resilience for the longer term. If these incumbents are fixed in their views, its time to build a different future. There is plenty of money currently sitting in ISA accounts paying very little. But there are people who would welcome a better return than offered by cash ISAs and wish to contribute to a better society and community. It’s time for some blended finance and impact investors to enter the fray to offer investment products comprised of forests that include productive assets, biodiversity and public access benefits; all built with climate resilience in mind.
  3. Policy makers need to reflect on the public support for private forestry. The view from the stage was that tax incentives are still needed due to the long term nature of forestry. Perhaps. But public money should be aligned with societal priorities, and the need to build a climate smart forest estate. At least one part of the private sector is demonstrating how to do this. The investment sector needs to be made to follow. Continuing tax support needs to be tied to climate smart outcomes.
  4. Government all too often gets a bad rap. But there are successes. For Forestry England, Forests and Land Scotland, and Natural Resources Wales; great job! Keep going.
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Cocoa and Poverty: Time for a New Framing

Chocolate inspires Art

In the last two to three years multinational companies have been launching detailed costed roadmaps tackling some of the biggest challenges facing society – climate, plastics, regenerative agriculture… The investments are significant, typically running to several Billion Euros/US$/CHF over a four-to-five-year period. However, we have yet to see the game changing roadmaps and public commitments to tackle inequality and human rights. This is especially important in the sourcing of agricultural raw materials from small-holder farmers.

There are some indications that attention to inequality is shortly due for a major upgrade. The World Business Council for Sustainable Development is gingerly working out business solutions to cut through an economic system that has institutionalised inequality. Corporate reporting standards setters are focussing on societal inequalities and others are co-creating a Task Force on Inequality Related Financial Disclosure. Within the cocoa sector, Nestlé recently announced its new human rights framework and roadmap. It promised action plans on its salient issues, including living income.

How things play out in cocoa will be an interesting test case of how seriously a new focus on inequality will be. The last few years has seen the focus in the cocoa industry on child labour and then recently deforestation. Yet underlying these issues, and driving them is the real issue: poverty. The sooner we have an open debate on the pathway of consequences the better: address poverty and progress will be much easier on child labour and deforestation.

Inequality in Cocoa Value Chains

Farmer incomes depend upon cocoa prices which in the last ten years have varied widely but shown no real trend. Livelihoods are desperate for the majority of smallholder cocoa farmers. Yet further along the value chain, executive pay is set at levels that provide a more than adequate guarantee for a comfortable life. For investors, dividends paid by major companies have risen over the same period. Not only are the rewards not delivered equally, neither is the risk.

Traders, manufacturers and retailers that profit from cocoa mostly have boiler plate statements on inequality that hint at a desire to fix the situation. Big companies have their own branded programme to support cocoa farmers, many of which run over a 10 year period. Cocoa Life, Cocoa Plan and Cocoa for Generations all demonstrate a lot of individual and collaborative actions, typically including money spent upon addressing child labour, building traceability and accountability (through eg certification programmes), increasing cocoa productivity, supporting communities, addressing deforestation, and paying voluntary premiums.

The annual amounts invested typically account for about 0.5% of turnover, ie not much. To put them in further perspective, the pay of the CEO and management teams of the major cocoa manufacturing companies is the same (or higher) than the total investments made to support cocoa farmers. Yet whilst there is an ongoing question on the adequacy of the of the funding compared to the scale and urgency of the task, the focus of that funding is also now in the spotlight.

For the last decade these initiatives have focussed on solving inequality through actions on productivity, costs, quality, sustainability premiums and one-off projects in communities. Some academic work by Wageningen University (WUR) and Mondelēz has helpfully synthesised the latest research findings. Yet as Nico Roozen has comprehensively laid bare, industry and academia seem stuck with an out-of-date framing.

It seems that these old-style sustainability interventions have been superb at guaranteeing future supplies for factories whilst keeping prices low. The unintended consequence has been the perpetuation of the main challenge that farmers face: poverty.

The problems of the current corporate approach seem to boil down to four things:

  1. A faith in productivity increases
  2. A failure to take into account system constraints and context
  3. A focus on deflecting discussions on prices
  4. A fixation with an inappropriate income threshold

The research by WUR/Mondelēz importantly concludes that structural changes in the industry are indeed needed. But it does not interrogate enough the other areas. So what would a new framing look like? How should a new generation of corporate approaches to cocoa and inequality be built?

Farmers, not Cocoa Farmers

Living income has been promoted for some time as the best chance to address poverty. And whilst companies proclaim support for the concept, living income has always been seen as a Trojan Horse for a discussion on price. Companies use a counter argument that the only levers that they have available to raise incomes are productivity, costs, quality and voluntary premiums. They have largely decided to put their faith in productivity.

The opportunity to increase productivity of west African cocoa farmers by a factor of two or four sounds fantastic for the casual reader, and the farmer. Yet concentrating upon productivity locks farmers into a negative supply-demand feedback loop. Unless there is a corresponding doubling or quadrupling of demand it generates an oversupply of cocoa and keeps a lid on prices.

The WUR research has provided the evidence for what has long been understood – that growing cocoa alone, however successfully, is not a route out of poverty for many farmers. For those farmers with small land areas, lack of ability to make the necessary investments, or lack of interest to develop their farm into an ‘agribusiness’, alternative development routes and crops should be the focus.

In parallel, macro-economic approaches to manage global cocoa supply and demand will also be necessary, as will Governmental approaches and interventions on land ownership and rural development.

The new framing therefore needs to put farmers, their community and national food and nutrition security first. Rather than seeing farmers who grow cocoa as ‘cocoa farmers’, they should be seen as farmers.

This needs to be seen in the context of a huge necessity and opportunity. Most countries in Africa import basic foodstuffs and wish to increase their availability of nutritious food. Development banks have significant funding programmes designed to build food and nutrition security. Targeted programmes such as the GAFSP, run by the World Bank, distribute funds to improve the resilience of smallholder farmers and improve local food availability, as well as investing in the value chains, storage facilities and routes to market to serve urban markets. Typical programmes run for five years or more and require investments of several hundred US$ per household.

To be clear, this is not just a task for the cocoa sector to lead. It needs leadership by national governments through their agriculture, economy and health departments, and carried out in partnership with communities. But it needs to be supported by the cocoa sector. Cocoa companies can play their part through a segmentation of farmers, targeting their support programmes and redesigning their commercial relationships based upon that segmentation.

Futures Contracts: Or Contracts that have a Future?

Whilst companies like to focus upon productivity, civil society and governments focus upon price. The question is what price? Cocoa prices today are determined by ‘the market’ – as reflected in futures contracts. Futures contracts reduce business risk by providing certainty of prices for manufacturers and retailers. But this transfers that risk and volatility onto the farmer and hinders the same companies own farmer support programmes. As the WUR paper indicates, futures contracts and commodity markets do not care about human rights or environmental degradation. They break the connection between the practices on the ground and the consumer, destroying any attempt by the market to adequately fund measures to address externalities such as child labour or deforestation.

So, if prices have little relation to the costs of production, the costs of doing the right thing, or the costs of delivering a decent livelihood for farmers, what’s to be done? It’s hard to escape the logic of Fairtrade’s model – a guaranteed floor price and a premium which at least puts some boundaries upon a pure market-based approach. Companies have by and large rejected these limited strictures, preferring their own voluntary approach, through which they are typical paying premia of 2-3% of the cocoa price. That is: not much.

The major manufacturing companies are all committed to source 100% of their cocoa directly from their own programmes by 2025. However, none have so far discussed how they expect to determine the mechanism by which they will set prices. In due course, regulations may force due diligence and the costs of externalities into futures contracts. Alternatively, technology may allow social and environmental externalities to be embedded into a differentiated commodity grade.

But in the absence of these developments, for companies to be credible in addressing inequality and issues such as child labour, they will need to explicitly address pricing. This may involve reducing their dependency upon commodity futures contracts for both purchases and for setting the baseline price; speeding up buying more directly from farmers producer organisations; and finding a mechanism to address actual farmer costs and externalities. Potentially, companies could adopt the same approach they use for critical raw material ingredients – a cost-plus contract-growing approach that ensures a fair return for the farmer where externalities are adequately accounted for.

Thresholds of Decency

It speaks volumes that cocoa companies and academics are still using the extreme poverty line as the baseline to talk about inequality. It gets worse – even living income is defined as what a family needs to get by on. The ambition needs to be beyond ‘getting by’. Just as executives in companies and asset managers have come to expect a decent salary and bonus, so should cocoa farmers.

The World Bank is now trying to distance itself from the extreme poverty line (US$1.90/day), using two new poverty baselines of $3.20 and $5.50 per day. The ambition of the cocoa sector should go beyond thresholds of ‘poverty’ and aspire to creating ‘decent’ lives, which suggests a daily figure closer to US$10. Clearly, paying (typically) premia equivalent to $0.20 per day is not in any way a serious attempt to address farmer incomes. Neither are ‘proud’ claims of supporting the LID of US$400/T – equivalent to about US$1/day for most farmers. Rather than premia being seen as a ‘top up’ they need to be seen more like a universal basic income. Payments for cocoa production are then ‘on top’. Not unlike the (virtually guaranteed) bonuses on top of the guaranteed salaries enjoyed by those employed by companies.

A word on carbon markets. These are seen by some as an opportunity for cocoa farmers. They are, but not at the expense of making the economics of cocoa cultivation stand on its own two feet. Carbon payments (for soil carbon or trees standing) need to be seen as a one-off bonus for farmers. A windfall, over and above what cocoa cultivation can pay them. They deserve an upside for once.

Such changes indicate a cocoa sector that needs to recognise the need to work on a ‘just transition’. This is unlikely to be a win-win. Reducing risks for farmers will not be without its costs for companies. But this is coming anyway: the transition risks associated with addressing or not addressing livelihoods are building. The continued industry focus on productivity and narrative on prices is increasingly looking like diversionary tactics to avoid taking those hard decisions.

The Next Wave of Corporate Commitments

So back to corporate programmes on human rights, inequality and cocoa. If the ambition of a new round of human rights action plans mirrors that on climate and regenerative agriculture, then a significant corner could be turned.

The typical 0.5% of turnover per annum spent on cocoa programmes will need to increase to somewhere in the order of 5%. Possibly more. The cocoa programmes of the future will fund a universal basic income for cocoa farmers, contribute to farm & food diversification, as well as renewed efforts on tackling child labour, deforestation etc.

How to pay for that? Well that’s for the company management to think through. Margins on cocoa manufacturing are in the range of 10-17% and clearly offer some room for a downward reset. As does pricing. The price range of the same or equivalent products in my local shops is 10-20%. So much for ‘price points’. Right now (January 2022), with inflationary pressures in the economy and food value chains, it’s an ideal moment to increase consumer prices to adequately fund new programmes.

This will of course present challenges for companies: corporate cocoa agronomists will need new skills to help farming communities and producer organisations grow new crops and access new markets; finance teams will need to ensure that the annual accounts can reflect the restructuring and investment that’s needed; marketing departments will need to consider how to move chocolate more up-market; and investor relations teams will need to provide investor guidance on these value enhancement/risk mitigation measures.

Above all, companies will need to evolve their reporting away from input activities (eg number of farmers trained, number of trees planted) and rather discuss and report upon outcomes and impacts. Particularly, the numbers of farming households in cocoa areas that have a decent standard of living, how they have remedied poverty and inequality in communities they are sourcing from, and the contribution they have made to solving the system level challenges holding back cocoa growing communities.

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Net Zero becomes Not Zero

‘The world’s first net zero coal mine’ is the new corporate branding trick of West Cumbria Mining (WCM) for its proposed mine near Whitehaven. Launched on the first day of the public inquiry into the mine earlier this week, it attempts to align the investment with Government policy. But in attempting to reposition itself WCM has hastened the end of net zero as a credible concept?

Where we have come from

‘Net-zero’ gained traction in 2019 following an IPCC report warning of the grave danger of global warming above 1.5°. To ensure that we stay below 1.5° rapid reductions in fossil fuel use are needed, though some limited fossil fuel use will be necessary by 2050. So it has been accepted that any remaining fossil fuel use can be compensated by carbon removals such as tree planting or carbon capture and storage. Hence ‘net-zero’.

Since 2019, over 700 companies have signed up to ‘net-zero’ pledges. More than 130 countries have or are planning to have a net-zero policies and legislation in place, including the UK.

Behind these pledges are a set of rules administered by the Science Based Targets Initiative. A solid net-zero commitment would halve emissions across Scopes 1, 2 and 3 by 2030 and then to close to zero by 2050, offsetting the remainder. A credible commitment would have a public plan of tangible actions for the next 24-36 months.

Where we are

But this is where it gets murky. Looking at the different net-zero targets of companies, there are a range of assumptions, baselines and scopes that make it hard to compare the promises of different companies even within the same sector. Mixing GHG removals with reductions is further compounding the confusion. What once looked simple is actually full of loopholes. Someone closely involved in the process once confided with me that there is more speculation than science when it comes to some of the calculations.

The original intent of ‘Net Zero’ – to create corporate action to push for government action has been captured by corporate marketing departments. This is diverting attention from what is really needed.

Rather than ‘net zero’ pledges, companies should set a timetable and dates for being free of fossil fuels. The International Energy Agency (formed to guide industrialised countries energy policy) has illustrated this urgency by stating that the world needs to ensure there is ‘no investment in new fossil fuel supply projects’.

Where we are going

A few companies understand this, and are changing their communications – Unilever is committing to electric trucks, Maersk is investing in ships that will run on methanol, and steel companies are working hard to replace coal with hydrogen. Quietly, a change is underway.

So beware those that cling to the net-zero narrative.

Which brings us back to West Cumbria Mining. A company owned by a private equity firm with a complex shareholder structure that ends in the Cayman Islands. It’s a safe thing for them to rebrand themselves as net zero. It aligns them with UK Government Policy and positions them within the mainstream of the corporate world.

Yet a serious company would make a net zero pledge having done some due diligence to know that they can get there. There is no evidence that WCM have the first idea, or the intention. Their marketing partner is a global coal trader owned and financed by coal companies.

West Cumbria Mining has achieved one thing though. It has drawn attention to an unintended consequence of the success of Net Zero: its become the latest overused meaningless corporate buzz-phrase. We need to face the fact that Net Zero has been captured by companies which really believe in Not Zero.

 

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Rethinking the Conventional Sustainability Wisdom

José Lopez, who died recently, had a fantastic capacity for turning conventional wisdom on its head. He had the knack for inverting phrases in a way that shone a blinding light on the reality, provided a simplicity of vision, and pointed us all in the right direction. Once asked what was the factory of the future, as quick as a flash his response was “the factory that has a future”. 

At first glance a flippant answer, yet on reflection its actually deeply insightful, if a little philosophical. Apply that to many current questions, such as: “what’s the future of capitalism?”, and you immediately have the answer. And the way ahead.

There are a few phrases that I believe need to be put under the spotlight. Here are a few that have shaped conventional wisdom, but are holding back progress on sustainability.

Think Local, Act Global

A phrase that needs a reboot is ‘think global act local’. The sustainability movement has dug itself into a hole following this globalization mantra.

Coming up with a global solution and then implementing it locally in one or two places has led to some nice sustainability stories for annual reports and conference speeches. Yet the continued calls for “solutions at scale” suggests that something is wrong with our thinking. 

We need to think local, design programmes that are appropriate for communities, and that make an impact on the ground. Then we need to replicate this repeatedly to roll it out globally. We need to think local, act global.

That’s the conclusion of recent research from a recent Foresight4Food paper on smallholder farmers.

And also the conclusion reached by the FSG team who stated that “Local solutions are the essential to tackling global problems” in a paper about how global leaders should think about solving our biggest problems.

Build Back Better

Thats right. I’m not sure we want to go back to anything, or backwards for that matter. The existing societal and economic foundations are exceedingly suspect, and our management theories are outdated. Quite frankly a U-turn is more appropriate in many areas.

Michael Liebreich ran a poll recently where only 3% voted for ‘build back’. 71% voted for ‘build forward’. Interestingly 26% preferred ‘embrace degrowth’. Degrowth is certainly what we need in some parts of society, though there is also no doubt that we need to deliver equality and equity in many other parts. We need growth; but differentially.

So can we please retire ‘build back better’ immediately, and replace it with something more appropriate and visionary? My own preference would be to include ‘transition’, ‘forward’ and ‘faster’ in the formulation.

A Fork in the Lake?

Somehow in the sustainability world we always seem to be at ‘tipping points’, have ‘windows of opportunity’ or be at ‘forks in the road’. This stretches the credulity of the accompanying messages, because we rarely are.

The latter is meant to be for those deciding moments in life. Yet it has become a metaphor for taking any kind of decision. Which of course devalues it’s meaning and weakens it’s impact. 

Yogi Berra skewered the phrase best, saying “When you come to a fork in the road, take it”.

So I have. I decided last year to take early independence, and my last day of salaried life is at the end of this month. This blog will continue. As will my contribution to sustainability and society – just in a different way, and on a different road, and a different lake.

I will be swapping Lac Léman for the Lake District where I will be thinking and acting locally, to help individuals and local communities. I will also focus on a few things globally that I believe can help society to transition to a better place. This will not involve building back better.

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Art, Science and Context Based Targets

I saw this slogan on a wall at EPFL in Lausanne recent, and it got me thinking. “We have a science based target” is the only phrase that needed to be uttered in climate circles for the last few years. Everyone nods in agreement. You are one of us. So its no surprise that the “Science Based…” bandwagon is moving onto biodiversity, water, land and more.

I have written before about complex issues and the notion of quantum sustainability. Yet before we jump headlong into science based targets (SBTs) we need to realise the unintended consequences of trying to navigate this complexity and uncertainty with a simple tool. It may well divert attention from the real issues that we need to be working on to tackle the climate emergency.

Science or Art?

The concern about SBTs is the artistry that goes into the whole process. There is a flexibility to choose the baseline year, the climate scenario and which parts of the business to include. This leads to a lack of comparability across companies. Then there is the question of Scope 3 emissions.

A few years ago, a colleague pointed out that science based targets for scope 3 emissions are “pure speculation”. The point being that you can’t have science based targets where there is no science. It’s a good line, and essentially true. Calculating scope 3 emissions is a fraught process that relies upon a range of methodological estimates, assumptions and dodgy data.

1.5 Degrees to the Rescue?

Thank heavens therefore for the IPCC 1.5 degrees report. This states that to limit global heating to 1.5 degrees we need to halve GHG emissions in the next decade. This has just simplified the whole SBT process and saved companies a whole lot of consultancy fees.

However, a new angle in the climate discourse has come onto the scene. The TCFD (Task Force on Climate Related Financial Disclosures) introduces a new type of science and artistry into the climate debate. Companies reporting to TCFD have to show their resilience under different scenarios.

This is where things get really interesting for some industry sectors. In thinking through the scenarios it turns out that transition risks become arguably as significant as the physical risks that we are used to talking about. And more immediate, as business decisions and responses are needed now. Which got me reading up about game theory.

SBTs bump up against Game Theory

Game theory can help us work out likely strategies and actions to address climate change (and even other sustainability challenges such as plastics). However, applying game theory to climate change produces some sobering results. As an article in Wired magazine highlighted, climate change is likely to get a lot worse before it gets better.

SBTs might even make the situation more painful for those companies that have signed up to them, in good faith. There are currently close to 600 companies signed up to the SBT initiative. That leaves tens of thousands who have not. Despite those 600 managing their operations to achieve a 2 degrees of heating, we are still heading for 4-5 degrees. Which means that the next round of SBTs have to get stricter. Game theory suggests that this cycle will repeat itself. Potentially repeatedly.

Yet with the easy stuff now done, signatories to SBTs will soon be required to implement disruptive business models and make significant investments that will pay off if the climate stabilises. But if the majority maintain their business as usual approach the climate will still head for 4-5 degrees of heating.  Those investments will then be completely lost, and those companies will need to invest all over again to adapt to an outcome they tried to avoid. Investors will not be so forgiving regarding these transition risks. Which suggests its time to focus more upon context.

Context Based Targets

Context Based Targets reflect systems thinking, taking into account not just thresholds, but allocations, and adjustments for changes in the world. A few years ago Mark McElroy wrote a good description of the difference between science and context based targets. I would go further and suggest that the context needs to include the actions of competitors, government and society (especially investors and consumers).

Which starts to explain the commitment recently made by the UK Government. It committed to “net zero emissions” by 2050, but said that it would revisit this commitment (and its consequent actions) every 5 years. Given the current unknowns regarding the actions of other Governments, under a game theory this looks entirely logical*.

The New Climate Leadership

The difference between “business as usual” and “1.5 degrees” scenarios is now dramatic. Once companies understand the actions needed to halve all value chain emissions, transition risks will become the primary consideration for many. This means getting a handle on the actions of others, and the consequences of “free riders”. Getting too far ahead of mainstream society will need to be weighed up against the bragging rights of being “a climate leader”.

This is not a fatalistic justification for inaction. It is clear though that legislation will be the only way forward, and so corporate leadership will be demonstrated as much through advocacy as from actions. And context based targets, with their rationale clearly communicated will say more than SBTs can.

As for the end game, Extinction Rebellion look to have nailed it.   

*I do accept that the commitment is pretty hollow when put against the actions of the UK Government that recently approved a new coal mine and continues to push for a new runway at London’s main airport. But that just emphasises the context that companies need to factor in.

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Quantum Sustainability

A different perspective on the rigging of the Cutty Sark

The sustainability world used to be so simple. There were a few topics, such as climate, water, forests, oceans, and some commodities. They all operated in their own silos. If you wanted insights and guidance then WWF (in Europe) and Conservation International (in North America) could help. It was then just a case of getting the commitment of management to act, and the rest was easy. You could almost call that the classical theory of how to approach sustainability.

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