Fair trade and beyond: voluntary standards and sustainable supply chains
Over the last decade, a plethora of voluntary initiatives and standards have emerged as a response to increasing awareness of the social and environmental implications of modern production and trading systems. Within these initiatives sustainability issues have been particularly relevant to manufacturers and retailers who trade on their brand image as providers of safe environmental and ethically produced goods. Initiatives like Fairtrade GLOBAL GAP and Rainforest Alliance are examples of a broad range of voluntary standards covering a wide scope of requirements that include quality and hygiene working conditions terms of trade and soil management practices. These standards open new opportunities for retailers brand owners and producers but also pose new risks to food and beverage supply chains. This chapter provides an introduction and classification of the range of voluntary standards in the industry today the opportunities and challenges that emerging trends in this area represent for supply chain managers and an overview of alternative strategic options for corporations to become engaged in this field
The history of social and environmental concerns about business is probably as old as trade itself. In Ancient Mesopotamia, around 1700 BC, King Hammurabi introduced a code in which builders, innkeepers or farmers were put to death if their negligence caused the deaths of others or major inconvenience to local citizens (Centre for Business Relationships, Accountability, Sustainability and Society, 2007). Even in the absence of royal or government regulation, companies have, for a long time, voluntarily engaged in activities that go well beyond strictly business. Over a century ago, Quakers such as Barclays and Cadbury, as well as socialists like Engels and Morris, experimented with socially responsible and values-based forms of business (Henriques, 2003).
Historically, consumer activism has also played a role in pressuring companies to take action independent of existing regulations. One of the first large-scale consumer boycotts took place in England in the 1790 s over slave-harvested sugar, succeeding in forcing the importer to switch to freelabour sources (Micklethwait and Wooldridge, 2003).
Sustainability concerns, including food safety, environment and social issues, have been around for a long time, but the debate has intensified with recent food safety scares and an increased interest by consumers and civil society in the sustainability of production and consumption patterns. A number of food safety scares like salmonella and E.coli outbreaks, avian flu and toxic milk in China (Traub, 2008; Jaffee and Henson, 2004) shook consumer confidence in the industry and raised questions on the public mechanisms of food safety control (Henson, 2006).
An increasing awareness about the rate of depletion of natural resources and wide disparities in well being around the world also led to a new interest across all sectors of society towards sustainability issues, that is ‘the ability to meet current needs without compromising the ability of future generations to meet their needs’ (World Commission on Environment and Development, 1987).
Consumer interest, powered by media attention and non-governmental organisation activism, created a powerful mixture that pressured corporations to rethink some of their sourcing practices and these pressures became a major force behind the launch of many sustainability initiatives by large corporations (Christmann and Taylor, 2002; Feltmate, 1997). NGOs have emerged as new powerful forces in shaping consumer attitudes over the last 20 years. Using media and the more egalitarian and pervasive channel for distribution of information created by the Internet, NGOs have become powerful actors in threatening corporate reputations and market positions (Argenti, 2004).
As one example of NGO action, Oxfam’s campaign in the coffee industry illustrates the potential force that NGOs can have to influence corporate action. In 2002, amidst a severe crisis that was affecting the coffee industry, Oxfam drew attention to the plight of millions of coffee farmers and pressured large coffee roasters to react to the situation or risk damaging their brands. A report published by the NGO entitled Mugged: Poverty in your coffee cup analysed the origins and effects of the coffee crisis and urged American consumers to join Oxfam in bringing relief to farmers and in calling for the major players in the coffee industry to support a Coffee Rescue Plan (Oxfam America, 2002).
Over the following five years, most coffee roasting corporations and large retailers got involved, at least to some extent, in sustainable coffee schemes such as Fairtrade, Rainforest Alliance or Utz Kapeh (now called Utz certified), thus making the coffee industry one of the first areas in which social and environmental voluntary standards flourished and became a key element for producing, trading and marketing coffee (Agritrade, 2008).
In the food safety area, government regulation has also increasingly played an important role in promoting new supply chain coordination mechanisms. Regulations like the UK’s Food Safety Act of 1990 marked a shift of responsibility from the seller of food products to the buyer who, in the case of a charge, now needed to prove that he had taken ‘all reasonable precautions and exercised all due diligence to avoid the commission of the offence by himself or by a person under his control’ (Hobbs and Kerr, 1992). These regulations led large food retailers and importers increasingly to scrutinise their supply chains, specifying their own set of private safety and quality standards and enforcing these through systems of second-party certification (Henson, 2006).
At the European level, CEC regulation No 178/2002 established a European Food Safety Authority (CEC, 2002) and shifted the focus from product inspection to ensuring food safety across the food value chain as a whole. It established food safety based on the principle of containing risk and increasing traceability, relying on HACCP (hazard analysis and critical control point) methodology as a central component of food safety mechanisms. It also placed primary legal responsibility for ensuring food safety on the private sector stating that: ‘A food business operator is best placed to devise a safe system for supplying food and ensuring that the food it supplies is safe; thus it should have primary legal responsibility for ensuring food safety’ (CEC, 2002).
But sustainability initiatives have also gone beyond being just risk management mechanisms. They have become an important variable on which suppliers compete to differentiate food products to end consumers. In high-income economies, consumers increasingly demand full information on a product so that they can make individual choices in relation to taste preferences as well as in relation to personal beliefs (e.g. food safety, labour rights) (Gibbon and Ponte, 2005). In this context, sustainability includes notions such as ‘environment conservation’, ‘environment friendly’, ‘corporate social responsibility’, ‘economic viability for farmers’, ‘fairtrade’ and ‘ethical trade’, among others. The common denominator of these products is that they include a statement that the product offered contains attributes referring to the environmental or social conditions surrounding the production of these food products.
Overall, consumer interest, NGO activism and regulatory changes have led to significant changes in supply chain management by leaders in the food and beverage industry. As a risk management strategy to avoid legal exposure or brand damage, or as an opportunity to differentiate brands and products in an increasingly ethical and environmentally aware marketplace, corporations are in the process of reviewing their supply chains and defining new ways of doing business. An important way of doing this has been through the development of voluntary standards and increased engagement of stakeholders along the entire value chain.
Standards are agreed upon criteria whereby performance of a product or service, its technical and physical characteristics and/or the process and conditions under which it has been produced or delivered can be assessed (Navdi and Wältring, 2004). Standards communicate information about the characteristics of a product or the process by which this product was produced (Ponte, 2004) and they can be based on quality, search, experience or credence attributes (Gibbon and Ponte, 2005; Ponte, 2004). Quality standards communicate information about a product’s degree of excellence, as embodied in specific attributes. Search attributes are those that can be verified at the time of the transaction (e.g. colour, size). Experience attributes can only be assessed after the transaction has taken place (e.g. flavour). Finally, credence attributes cannot be objectively verified and are based on trust (e.g. if a product is organic). Labels, codes and certifications can be a visible means of signalling that a certain product or process has met the requirements of a given standard, but not all standards have an associated label.
While mandatory standards are set by governments and take the form of regulation, voluntary standards are non-mandatory. They are established as a formal coordinated process in which key participants in a market or sector seek consensus (Ponte and Gibbon, 2005) and which can be monitored internally by individual enterprises or through third parties.
Voluntary standards vary along multiple dimensions, with a number of classifications having been proposed in the literature. The most frequently used typologies distinguish standards according to four variables: (1) the organisation(s) leading and influencing the setting up of the standard, (2) the motivation in the organisation(s) to set a new voluntary standard, (3) the scope of the initiative and (4) the enforcement mechanisms.
Probably the most common dimension used to distinguish between voluntary standards is based on the parties involved in determining the requirements (Acutt, 2002; Mazurkiewicz, 2005). This distinguishes three types of approach: unilateral initiatives, multi-stakeholder agreements and third-party initiatives.
Unilateral initiatives can be led by a single company or by companies jointly establishing a group or industry code of conduct. Company-specific programmes include initiatives such as UK retailer Tesco’s Nature Choice, Marks & Spencer’s field-to-fork initiative and Nestlé Nespresso’s AAA Sustainable Quality Programme. In this case, the programme is directly linked with the operations of the company and, although it can be determined in consultation with multiple stakeholders, the company ultimately defines the programme’s elements and standard requirements.
Companies can also work in cooperation with others in precompetitive, voluntary standards initiatives or in multistakeholder agreements. The latter are developed between different sectors and generally include representation from retailers, manufacturers, NGOs, academia and, increasingly so, representatives of the public sector. An example of this type of agreement is the Common Code for the Coffee Community (4C), established in 2006 as part of a collaboration between retailers, industry, coffee producers, civil society, government and development organisations. While many of the initiatives at the time were geared to small-scale niche products, 4C’s objective is to foster sustainability in the ‘mainstream’ green coffee chain and to increase the quantity of coffee meeting basic social, economic and environmental sustainability criteria (Common Code for the Coffee Community Association, 2008).
Third party initiatives are established by other stakeholders, particularly NGOs, as part of an advocacy and campaigning initiative to have an impact on corporations and producers. Corporations can adopt these standards on a voluntary basis and thus be associated with the claims made by the voluntary standard which are often communicated to the consumer through a label. An example of this is the emergence of the Fairtrade initiative, aimed at offering better trading conditions to small-scale producers and which has been adopted by large corporations such as Tesco’s own-label Fairtrade line on a range of groceries or Nestlé’s Partners Blend Fairtrade certified coffee brand.
A second dimension of differentiation between standards is the rationale for the creation or adoption of a particular voluntary standard. Jaffee et al. (2005) distinguish between a standard and initiative geared to managing risk and one where a competitive differentiation is sought.
The mitigation of reputational and/or commercial risks associated with the safety of food products has been a driver behind the establishment of some of the most popular voluntary standards such as the British Retail Consortium (BRC) and the Euro-Retailer Produce Group Good Agricultural Practice (EUREPGAP) Standards. Ethical or environmental Concerns have also increasingly become an area of risk mitigation. As mentioned in the introduction, the risk of reputational loss owing to mismanagement of sustainability concerns, or becoming the target of activists and media campaigns, has also been recognised as a driver behind the adoption of certain ethical sourcing standards.
On the other hand, some companies have adopted food safety or sustainability voluntary standards as a means to differentiate their products and compete in quality-defined markets (Henson, 2006). Quality in this case can be expressed not only in physical attributes but also in production and process methods (Ponte, 2004; Reardon and Farina, 2002). These standards are mainly targeted at consumers and so are generally associated with a brand or label that distinguishes the products. Examples of differentiation of process or product quality include UK retailer Tesco’s Nature Choice, Marks & Spencer’s field-to-fork initiative and Nestlé Nespresso’s AAA Sustainable Quality initiative, where the retailers communicate directly to the consumer the claim that their products and processes are better than other products and processes (Humphrey, 2008).
A third difference between standards is the scope of the initiative. Although many standards tend to incorporate multiple dimensions as they evolve and expand, most voluntary initiatives were launched with an emphasis either on food safety or on environmental, social or economic sustainability. For example, the EUREPGAP standard, created partly as a response to food safety legislation, was dominated by such concerns, with social or indirect environmental elements being secondary in the standard. Organic standards, on the other hand, have a focus on environmental criteria, while the Fairtrade movement focused on modifying trade relations along the conventional commodity chain.
Standards also differ in the products covered. Safety-based standards tended to focus on the products exposed to a higher risk, such as fruits, vegetables and meat products. Social or economic sustainability driven standards, on the other hand, started on products considered the most subject to poor social or economic conditions such as coffee, bananas and cocoa.
Enforcement of a voluntary standard refers to the process whereby the actors in the chain (producers-traders-consumers) coordinate with each other to ensure the objectives of the standard are being met. Navdi and Wältring (2004 cited by Ellis and Keane, 2008) differentiate between company voluntary standards that are self-monitored (1st party) and a monitoring process where a sector-based standard is monitored by associated sector members (2nd party). In the case of third-party monitoring, an independent organisation verifies that the process and/or product satisfies all the standard’s criteria. A certification body can also give a written guarantee (and the right to use a label if available) that a product, process or service conforms to the specifications of the standard. In this case, an accreditation organisation is an authoritative body for a specific standard that grants formal recognition to a certifying body or person to certify to the standard (Trade Standards Practitioners Network, 2008).
Although the costs of implementation can be significantly higher in the third-party certification process, this enforcement mechanism has become widely used among voluntary standards trying to establish their legitimacy among consumers. Unilateral standards tend to attract a higher level of scepticism, especially if they ‘lack independent third-party verification, show a lower level of transparency and lower participation of affected stakeholders’ (Ponte, 2004). As a result, most standards have, over time, become more transparent and many have incorporated third-party verification or certification to increase their credibility in the marketplace.
Using the dimensions outlined in the previous section, Table 23.1 provides examples of the major types of voluntary standards that exist today in the food and beverage industry, followed by short descriptions of some of the major standards.
Source: Trade Standards Practitioners Network and standard setting organisation websites.
Fairtrade is probably the most recognised label among consumers and it is sometimes used as a generic term encompassing all sustainable trade initiatives. Fairtrade’s focus has been on smallholder producers and is driven by a threefold stated strategic intent: to work with marginalised producers and workers in order to help them move from a position of vulnerability to one of security and economic self-sufficiency; to empower producers and workers as stakeholders in their own organisations; and actively to play a wider role in the global arena to achieve greater equity in international trade (FairTrade Labelling Organisation, 2008).
Fairtrade has its origins in the 1950s and 1960s in alternative trade organisations (ATO) like Traidcraft in the UK and SOS Wereldhandel in The Netherlands. These were later followed by labelling initiatives, such as Max Havelaar in The Netherlands and the Fairtrade Foundation in the UK, both of which were later involved in the establishment of the Fairtrade Labelling Organisation (FLO) in 1997 to coordinate the expanding number of labelling organisations. The Fairtrade label now applies to products promoted by 20 labelling initiatives, grouped under the FLO and sharing a Fairtrade Certification process.
Although it is among the best-known voluntary standards, Fairtrade products represent today €2.38 billion (FairTrade Labelling Organization, 2008), accounting for a very small percentage of market share in the product categories where it participates. Albeit from a low base, Fairtrade labelled products, have been growing at an average rate of 40% per year over the last five years (Fig. 23.1).
Fig. 23.1 Estimated retail value of Fairtrade certified products (from Fairtrade Labelling Organisation, 2008).
• Agreed minimum prices, usually set ahead of market minimums: producer organisations guarantee a minimum price that covers the cost of production and provision for family members and farm improvements
One distinguishing feature of this programme, compared to other sustainability standards, is the establishment of agreed minimum prices. These are usually above or independent of world market prices and allow for a living wage for producers as well as the provision of a social premium. Although this represents an additional cost for the buyer, the cost has typically been passed on to the consumer in the form of higher prices for most labelled goods.
On the producer side, in order to be certified, small-scale producers have to be democratically organised (often in a cooperative), ensure there are no abuses and must be allowed to unionise. The producers must also invest the Fairtrade price premium in projects that aid their social, economic and environmental development. The standard further differentiates between small producers grouped in cooperatives, which is the case of coffee (one of the highest traded products under this scheme), and larger operations with hired labour, as in the case of large tea or banana plantations.
Fairtrade today covers nine food and beverage product groups. The origins of alternative trade schemes can be found in handcrafts and textiles, but since 1991 food has taken over as the most important category in terms of sales volumes and growth (Nicholls and Opal, 2005), with bananas and coffee as the two leading products. In core Fairtrade markets such as UK, the Fairtrade label represented 18% and 7%, respectively of the total imports of these two products in 2006 (Ellis and Keane, 2008). Still, despite these specific markets and a high growth rate, total global volumes traded are marginal with respect to the total volume traded for these commodities, the highest category being bananas with only 1.36% of the total global market (Table 23.2).
aVolume of Fairtrade certified products is relative to global trade.
Source: Fairtrade Labelling Organisation (2008) and International Trade Center Trademap
Geographically, the main markets for Fairtrade products today are the USA and the United Kingdom, which together account for 60% of total sales (Fig. 23.2). Even within Europe there is high divergence in Fairtrade spending. Switzerland shows the highest consumption of Fairtrade products, spending an average of €20.80 per capita in 2007, while German consumers spent on average less than €3 per capita per year on Fairtrade products (Fig. 23.3) during the same year.
Fig. 23.2 Fairtrade certified products estimated retail value (millions of euros). Scandinavia: Denmark, Finland, Sweden and Norway. Other: Australia, New Zealand and Japan (from Fairtrade Labelling Organisation, 2008).
Fig. 23.3 Average annual consumption of Fairtrade products (euros per capita) 2007 (from Max Havelaar, 2007).
One of the important advantages of the Fairtrade label is the very high consumer recognition it enjoys in several markets. A recent market survey in the UK showed that 70% of the population recognise the Fairtrade trademark and that 64% of the UK population linked the label to a better deal for producers in the developing world (Fairtrade Foundation, 2008). This high level of consumer recognition is an attractive feature of the Fairtrade label as it makes it easier for branded products or retailers to communicate clearly – and less expensively – with end consumers on sustainability issues.
From the producer’s perspective, there is a clear benefit in profiting from minimum prices, credit and longer-term relationships. But less tangible benefits have also been identified such as capacity building and improved management practices in cooperatives (Sidwell, 2008).
Fairtrade also has its critics. A report published by the Adam Smith Institute (Sidwell, 2008) argues that an economy works best when prices are the direct reflection of supply and demand, not when they are politically motivated and artificially determined. As an arbitrary subsidy on a particular crop, Fairtrade pricing both distorts the comparative advantage of that economy and hurts farmers elsewhere. The report also estimates that only about 10% of the premium paid by consumers actually makes it to the producer, leading to the conclusion that there are other, more efficient ways of helping to reduce poverty.
Like Fairtrade, the Ethical Trading Initiative (ETI) is an ‘ethical sourcing’ initiative. But rather than focusing on the trading conditions of small producers, the ETI emphasises the conditions of workers in the producer countries. Thus, the main objective of the alliance is to ‘promote and improve the implementation of corporate codes of practice which cover supply chain working conditions’ (Ethical Trading Initiative, 2008).
The initiative is centred on the purchasing practices of companies importing products into the UK market and has a membership of 54 companies, including leading retailers such as Tesco, Sainsbury and Marks and Spencer as well as branded manufacturers like Chiquita Brands International and Associated British Foods. When companies join the initiative they commit to implement a base code and the accompanying principles of implementation in all or part of their supply chain. This code contains nine clauses reflecting the most relevant international standards with respect to labour practices, based on International Labour Organisation conventions.
The code requirements include the right to choose employment freely, freedom of association and collective bargaining, restrictions on child labour as well as ensuring fair wages and working conditions. The implementation principles set out general rules that govern execution of the base code. These are based on a commitment expressed by the company and communicated to the suppliers, followed by implementation of the code on the basis of continuous improvement. Companies accept the principle that the implementation of codes will be assessed through ‘monitoring and independent verification; and that performance with regard to monitoring, practice and implementation of codes will be reported annually’ (Ethical Trading Initiative, 2008).
Supporters of the initiative point to the increased efforts to address international labour standards on a larger scale through the market power of large retailers. A study commissioned by the Ethical Trade Initiative reported widespread adoption of the initiative, with ETI member companies registering more than 20,000 supplier sites in over 100 countries (Barrientos and Smith, 2006). Producers can also initiate the process, taking responsibility for meeting the standards and assuming auditing costs. After assessing their compliance with the requirements, suppliers can submit this information to the Suppliers Ethical Data Exchange (SEDEX), which serves as a repository of information available to buyers (www.sedex.org.uk).
Among the criticisms, Ellis and Keane (2008) observe that though compliance costs can be potentially high, given that membership is about progress towards the goal of compliance and not about fulfilling the full base code, actual costs of compliance can be much lower and are sometimes passed on to producers. It has also been criticised for reaching mostly regular and permanent workers and being less effective in reaching more insecure and marginal workers (Barrientos and Dolan, 2006).
Born with the early regional groups of organic farmers developing organic standards in the 1940s, the organic movement has evolved to include hundreds of private standards worldwide alongside technical regulations of more than 60 governments (IFOAM, 2009). Organic standards aim at ‘the worldwide adoption of ecologically, socially and economically sound systems that are based on the principles of Organic Agriculture’ (IFOAM, 2009).
Organic products represent a large percentage of the products that are certified under voluntary standards. The world market of organic food and beverage products was estimated at US$52 billion (€40.5 billion) in 2008 (Fig. 23.4). Sales have grown almost 80% since 2004 and are expected to reach US$85 billion (€66 billion) by 2013 (Datamonitor, 2008).
Fig. 23.4 Estimated retail value of organic certified products in billion US dollars (from Datamonitor, 2008).
Fruits and vegetables represent the largest category in organic products, accounting for 36% of the total market. Prepared food and dairy products are the next two categories with an additional 20% and 17%, respectively (Fig. 23.5).
Fig. 23.5 Global organic food market segmentation percentage share, by value, 2008 (from Datamonitor, 2008).
As the number of organic codes and voluntary standards proliferated in the 1970s and 1980s, two main voluntary ‘standards of standards’ emerged. The International Federation of Organic Agriculture Movements was created in 1972 and published a first set of basic standards in 1980 to facilitate the development of organic standards and third-party certification worldwide and to provide an international guarantee of these standards and organic certification. On the inter-governmental side, a Committee on Food Labelling of the FAO/WHO Codex Alimentarius Commission adopted in 1999 the ‘Guidelines for the Production, Processing, Labelling and Marketing of Organically Produced Food’.
The IFOAM Basic Standards and the Accreditation Criteria are two of the main components of the Organic Guarantee System (OGS). Based on the decision of the IFOAM General Assembly in September 2005, IFOAM has been revising the OGS with the aim of creating more access to the system by increasing its flexibility.
Organic markets are more regulated than other sustainable sourcing activities. EU countries have endorsed a common organic standard, initially described in 1991 by Regulation EEC 2092/91 and revised between 2005 and 2008. Canada, the United States, Japan and over 60 other countries have also implemented regulations on organic farming. Organic agriculture is an area where voluntary and mandatory standards are interrelated. In an effort to harmonise private and government standards, an International Task Force established jointly by FAO, IFOAM and UNCTAD was launched in 2003.
Advocates of organic agriculture highlight its positive effect on soil structures, water conservation, mitigation of climate change and sustained biodiversity (IFOAM, 2009). Challengers of the organic certification cite lower yields and difficulties in expanding supply at the scale required for mainstream consumption. There is also still an open debate concerning harmonisation of certification requirements, which have continued growing in number and complexity. While considerable consistencies exist across different specific standards, differences still remain on issues like conversion period, permitted substances for fertilisation, disease control and food processing (UNCTAD, 2007), with producers and buyers often following multiple certification programmes and bearing the costs and complexity associated with managing multiple certifications.
The standard traces its roots to the response of European retailers to changes in regulation such as the UK Food Safety Act of 1990, which marked a shift of responsibility from the seller of food products to the buyer. The standard focused initially on fruits and vegetables and aimed at ‘making a first step towards European-wide harmonisation of minimum standards for integrated production’ (van der Grijp et al., 2004).
GLOBALGAP is a business-to-business standard that is not made evident to consumers via a logo or any other identification. It is based on third-party certification and its main focus is to ‘achieve its goals of safe food under reasonable labour conditions and without damage to the environment by identifying risk factors and establishing practices to counter these risks’ (Humphrey, 2008).
The standard consists of a set of rules organised in three areas: (1) ‘major musts’ that must be met in their entirety, (2) ‘minor musts’ for which 95% of all control points is compulsory and (3) ‘recommendations’ for which no minimum compliance level is set (GLOBALGAP, 2007). Traceability is an essential part of the standard. As shown in Fig. 23.6, information is collected and audited along the process flow using a common farm base and multiple scope and sub-scope requirements. Producers can be certified on an individual or group basis, or by having the industry’s own quality and safety management system deemed equivalent to that of GLOBALGAP. Certification requirements include limits on pesticide residue as well as a ban on non-essential animals being around packing-houses. It also integrates social considerations such as workers’ health and safety requirements.
Fig. 23.6 Stages of production covered by GLOBALGAP (from GLOBALGAP, 2008).
Although the standard is still heavily focused on supplying the European Union market, it has become an important element of the food safety practices of most major European retailers and a ‘de facto’ requirement for exporters trying to sell fruits and vegetables to this market as well as, and increasingly so, other products covered by the GLOBALGAP standard. Over time, membership of the EUREP and later of the GLOBALGAP grew to include over 40 retailers (mostly European with the exception of one Japanese retailer) and an increasing range of food products including tea, salmon and wheat, involving over 92,000 producers from 88 countries certified as EUREPGAP or GLOBALGAP producers and 134 certifying organisations.
Already the most widely implemented farm certification scheme for fruits and vegetables, the standard has also expanded its reach driven by the expansion of European retailers to North America and the work of the Global Food Safety Initiative (GFSI) to benchmark the five leading food safety standards: United States’ Safe Quality Food (SQF) Institute standard, UK’s British Retail Consortium (BRC), International Food Standard (IFS), US Safe Quality Food (SQF) standard and the Dutch HACCP initiative.
An important strength of GLOBALGAP rests on its widespread acceptance among retailers, especially in Europe. The process towards the harmonisation of food safety standards has also been an important development, avoiding multiple competing audits of standards required by buyers. Criticism of the standard is centred on the high compliance costs and the difficulties faced by many producers, particularly smallholders, to comply (Henson, 2006; Ellis and Keane, 2008; UNCTAD, 2008).
Voluntary standards are gaining importance in the food and beverage industry. New standards are constantly being introduced, multiple stake-holders are progressively getting involved in the development and implementation of these standards and their relationship with regulatory standards is being closely observed. As voluntary standards increase their role in the industry, five important trends can be identified: (1) expansion of scope (emphasis, geography, product) among leading voluntary initiatives, (2) increasing awareness and need to clarify compliance costs associated with voluntary initiatives and standards, (3) emergence of a new set of indicators and measurement methodologies to assess the impact of sustainability initiatives, (4) closer supply chain relationships resulting from participation and compliance with voluntary standards, (5) expanding role of multiple stakeholders in the supply chains. These trends are reviewed below.
Most voluntary standards were introduced as a response to a specific issue, one area of the supply chain, and covered a limited range of products. EUREPGAP, for example, initially covered only fruits and vegetables exported to Europe. Its expansion in membership and the change in name to GLOBALGAP signalled its intended evolution in geographic scope. A fruit and vegetables protocol, the initial focus of the standard, later became just one module of an expanded initiative that included new modules for livestock production and aquaculture (GLOBALGAP, 2007). In addition to increasing product and geographic scope, there has been a trend to expand the emphasis of the standards to integrate safety and quality with social and environmental sustainability concerns under the same umbrella initiative. Social and environmental sustainability standards such as Fairtrade, Rainforest Alliance and Utz Certified also expanded the range of products and geographies covered by their schemes.
As a consequence of the expanding scope for many initiatives, both buyers and producers are faced with multiple overlapping but non-aligned standards, resulting in increased management costs and complexity. Safety standards might be the leaders in progressing towards increased harmonisation. GLOBALGAP, for example, sets out a ‘benchmarking process’ that qualifies and harmonises different standards around the globe (GLOBALGAP, 2008). By the end of 2008 this process had resulted in 13 standards from 11 different countries being approved, and a further 10 being considered. Further, as mentioned in Section 23.4.4, the Global Safety Initiative was set up to define a benchmark across the five leading food safety standards: United States’ Safe Quality Food (SQF) Institute standard, UK’s BRC, International Food Standard (IFS), US Safe Quality Food (SQF) standard and the Dutch HACCP initiative (not included in the above 13 standards).
A process of harmonisation and mutual recognition has only recently started in response to growing dominance of certain safety standards like GLOBALGAP (Henson, 2006). However, the progress is still limited in many voluntary standard areas such as ethical or environmental sustainability, and the harmonisation process has made very little progress, limited to certain farms opting for multiple simultaneous certifications (for example organic and Fairtrade) (Ponte, 2004).
Voluntary initiatives are not cheap to implement. Complying with the requirements specified in the standard, setting up management systems, infrastructure and certification mechanisms all add up to making adoption of voluntary initiatives an expensive undertaking. Two questions frequently asked in the debate on sustainability and compliance are: (1) how much does it cost? and (2) who pays for what?
With exceptions, sustainability is a new field for all players involved. Estimating the cost to set up, promote and enforce a new voluntary standard is a difficult undertaking and significant uncertainty still exists about how to assess the levels of investment required to ‘green’ a supply chain or to run a ‘sustainable’ operation. Most companies enter this field without an accurate idea of what kind of investments will be required, frequently miscalculating the costs involved, including the management time that sustainability initiatives can take up. As one trader involved in a sustainable coffee sourcing programme said: ‘We didn’t know what it would take. . . maybe that was better’ (Alvarez and Wilding, 2008).
It is also unclear what an appropriate division of costs among the different players is. In most schemes, producers are required to cover the costs of certification and/or transformation (in the case of organic agriculture) in the expectation that there will be a market (and an associated premium or long-term relationship) with a buyer. Indeed, the cost of compliance has been identified as one of the major limitations resulting in reduced participation among producers in developing countries, particularly smallholders (Jaffee et al., 2005; Humphrey, 2008). Ellis and Keane (2008) propose creating a ‘good for development label’ that would indicate to consumers a retailer’s or brand’s efforts towards providing technical or financial assistance to small producers, contributing to local infrastructure development, bearing costs of compliance themselves, and so on.
Balancing this view, promoters of incorporating sustainability considerations in corporate strategy point out to the even larger costs of ignoring the issue. Adapting the sentence by Derek Bok, former president of Harvard University, ‘If you think education is expensive, try ignorance . . .’, a participant in a recent food industry conference offered ‘If you think food safety and sustainability initiatives are expensive, try the alternative . . .’. Even though correctly assessing the costs of increased involvement in sustainability initiatives can be difficult, the costs of not participating can be even more burdensome.
The debate on costs is, of course, only one side of the argument and can only be appropriately assessed by incorporating the benefit side of the equation. Again, it can be argued that it is not only about the benefits that are generated, but where the benefits are accrued and what the resulting impact is.
As sustainability initiatives start to be espoused by large corporations, a natural consequence has been the need to define a set of measurements and to assess the impact of the initiative from a corporate as well as from a broader perspective. The so-called triple bottom line (Elkington, 1999) requires an enterprise’s accounting system to incorporate not only the traditional financial measurements but also social and environmental outcomes. Measurement of ‘direct’ (within the direct control of the enterprise) water and energy savings is probably the area where most progress has been made so far.
New methodologies have also been introduced aiming at one or more of the areas of impact. Examples are social accounting methodology, sustainability balanced scored, social return on investment (SROI), the Committee on Sustainability Assessment (COSA) Project, and several carbon footprint measurement methodologies like the one endorsed by the UK Carbon Trust (Carbon Trust, 2008).
In terms of communication and reporting, the most comprehensive framework at the present time is probably The Global Reporting Initiative (GRI), a large multi-stakeholder network of thousands of experts. The framework proposed by the organisation sets out the principles and indicators that organisations can use to measure and report their economic, environmental and social performance. These Sustainability Reporting Guidelines are known as the GRI or G3 (third version) and are free public goods. Other framework components include sector supplements (unique indicators for industry sectors), protocols (detailed reporting guidance) and national annexes (unique country-level information) (Global Reporting Initiative, 2008).
Although frameworks like the one proposed by the GRI are increasingly being adopted, agreeing on indicators, methodologies and boundaries for accounting for environmental and social impact throughout the entire supply chain, the indirect impacts on producer communities and among consumers is still an important outstanding challenge and will continue to be an important issue for voluntary sustainability initiatives.
Participating in and complying with sustainability voluntary standards requires deeper knowledge about what happens beyond the traditional boundaries of the organisation. Safety requirements such as traceability, environmental or impact assessment imply establishing a higher level of cooperation and exchange of information beyond the immediate trade partners and across the entire supply chain. Although not originally pursued in most cases, the high level of coordination required has also disposed buyers and sellers to establish closer relationships. It has also meant an additional role for intermediaries. In pure commodity markets, arms-length relationships have traditionally been the norm, with trading companies expected to act as intermediaries between producers and buyers. In a recent research on the coffee industry, large trading companies were found to play an important role in sustainability initiatives, going far beyond pure financial and product intermediation and into coordination of a wide range of activities including training, micro-lending and environmental projects (Alvarez and Wilding, 2008). This research also identified the need to acquire a new set of capabilities and resources as an important enabler for supporting the new requirements in the now expanded buyer–seller relationships.
In addition to closer buyer–seller relationships, working together with multiple stakeholders is becoming common practice for most voluntary standards in the food and beverage industry. Many voluntary standards, particularly those focused on food safety, originated as a list of rules and requirements determined by the expectations of retailers or manufacturers. Jaffee et al. (2005) argues that exercising an effective voice in the definition of standards is usually quite difficult for smaller countries and individual suppliers, although opportunities often arise for dialogue about how the standards are to be applied.
Even standards ‘with the best intentions’ have been often criticised for lacking input from the producers (specially smallholders) in relation to the appropriateness and the costs/benefits of the standards (Ponte, 2004) or for lacking a participatory approach to auditing impact (Auret and Barrientos, 2006). As standards become a larger portion of total trade, the organisations behind each standard are becoming more participatory and are making efforts to incorporate the views of multiple stakeholders through more or less structured mechanisms. Initial dialogues between corporations and NGOs are giving way to increasing involvement of producers, development institutions and governments.
Besides participating in the crafting of the standards, the role of NGOs and development organisations has been crucial in activities that go beyond traditional production and trading. The implementation of sustainability initiatives that involve activities such as technical training, transfer of management skills, access to finance and infrastructure investments requires the involvement of and coordination with other ‘non-traditional’ players such as NGOs, development organisations and education institutions. This multi-stakeholder participatory management is relatively new for many corporations which need to work at a strategy level, but also for supply chain managers who need to make this cooperation work on the ground. Again, as in the case of shifting of the buyer–seller relationship, a new set of skills is now required from managers working on the ground and who now need increasingly to work with multiple stakeholders.
While there exists significant awareness of the increasing role played by voluntary safety and sustainability standards among companies, for most of them it is much less clear how to react to them, which standards to incorporate, their impact on supply chain operations and the role they can play in the overall corporate strategy. Defining a sustainability strategy requires analysing the risks and opportunities the company faces, not only across its operations but also across the extended supply chain limits and within the broader community. It also requires a comprehensive view of the corporation’s values and overriding corporate strategy. A sustainability strategy cannot operate in a vacuum, it needs to be aligned with the rest of the company and what it stands for. An analysis of risks, opportunities and the company’s overall strategy involves identifying the key issues that the corporation needs to assess in determining an appropriate sustainability strategy.
• Market driven: With double digit growth rates for many sustainability labelled products, the category can be an attractive niche for branded products and for retailers. Natural resource saving innovations can also find new markets that were not available only a few years ago.
• Brand image: Opportunities may exist associated with enhanced brand reputation through a differentiation of products with a sustainability claim. Retailers communicating a higher level of commitment to safety or to environmental or social sustainability have the opportunity to increase their brand reputation among sustainability-aware consumers and environmentally minded investors. But it can also be a double-edged sword and become a risk as companies making claims on the sustainability of their brands face increased scrutiny by consumers and NGOs.
• Employee engagement: According to a study conducted in 2007 by management consultancy McKinsey, 48% of surveyed CEOs believed that employees have the greatest impact on the way that a company manages societal expectations (McKinsey & Company, 2007). Employees can be an important driver for engaging in sustainability initiatives and can also be an important resource for execution of these initiatives.
In an article on business and society, Porter and Kramer observed ‘The fact is, the prevailing approaches to corporate social responsibility are so fragmented and so disconnected from business and strategy as to obscure many of the greatest opportunities for companies to benefit society’ (Porter and Kramer, 2006). The set of values espoused by the organisation, its mission, vision and objectives should serve as guidance as to the role that sustainability initiatives should play in the corporation and what should be the role of the various stakeholders in supporting the chosen strategy.
Although each company’s strategy is different and should devise a unique strategy, Fig. 23.7 illustrates three archetypal choices in response to alternative configurations of risks and opportunities.
In a situation with high safety or industry reputational risk but with reduced opportunities for differentiation, a common agreement on baseline standards can provide a higher level of protection with a lower implementation cost. It can also act to pre-empt or shape regulation. Examples of this type of initiative include the Roundtable for Sustainable Palm Oil (RSPO) and the Common Code for the Coffee Community (4C). There are, however, significant challenges in the coordination of such broad initiatives involving multiple stakeholders with different agendas. It can take a significant time to coordinate such a large group and some initiatives have been criticised as being a ‘race to the bottom’, agreeing only on the lowest common denominator and therefore compromising the relevance of the initiative.
In situations where there is a lower level of risk but where sustainability offers an opportunity for differentiation from competitors, corporations can choose to engage selectively in the areas that offer the highest opportunity to increase revenues or to generate efficiencies across the entire supply chain. Many corporations in the industry have recently incorporated lines of products or purchased brands that address the small but growing ‘sustainability’ market. Others have set up focused initiatives that result in water, energy or waste savings. Venturing into a focused initiative can also serve as a first experiment for the company, without involving the entire set of operations. The risk, on the other hand, is that once the company communicates on these selected initiatives, the rest of the operation can come under scrutiny and backfire on the corporate reputation.
In certain situations, sustainability issues simultaneously represent a significant risk and important opportunities for the company. For example, a situation with a risk of scarcity of raw materials but where closer and broader relationships with stakeholders can result in sustainable value creation can represent an important opportunity. Sustainability can thus become an integral part of how a business unit or an entire corporation does business, linking it to the company’s core values, its strategy and its business model, even if the level of risk is low. UK retailer Marks and Spencer has been recognised as successfully integrating its sustainability strategy into the overall corporate strategy, with sustainability-related activities that span across all major activities of the company and integrated with the traditional core operations (Marks and Spencer, 2009). In the extreme version of this type of strategy some companies’ identity is not only integrated but is driven by sustainability goals. For example, USA retailer Whole Foods Market’s value proposition is to sell organic, natural, healthy food products. Social issues are also fundamental to what makes Whole Foods unique and the commitment to sustainability extends beyond sourcing to the store construction material, wind energy credits to offset its electricity consumption, composting residues, and so on (Whole Foods Market, 2009).
Again, as in the previous option, engaging in sustainability activities and making them visible can raise the standards by which the company is judged and therefore companies that espouse responsibility as a core value may be more exposed to NGO campaigns ‘holding a company to a higher standard because they feel the company is using a socially responsible positioning to enhance its reputation rather than honestly trying to do the right thing’ (Argenti, 2004).
Voluntary standards, while not historically new, increasingly play an important role in shaping the supply chains for manufacturers and retailers across both product and geographic markets. These standards, whether based on consumer, producer, NGO or governmental interests, have become important elements for manufacturers differentiating products and managing potential supply risks, and consumers making purchase choices. Whether associated with consumer interests, NGO activism, manufacturer differentiation or regulatory protection, standards play a growing role in the supply chain strategies of a growing number of companies across product and geographic markets.
Voluntary standards can focus on a product’s technical performance or characteristics, convey information to consumers and place demands on suppliers. These standards traditionally vary dramatically across many dimensions, including the lead organisation controlling the standard, the motivation of the party employing the standard, the scope and focus of the standard and the enforcement mechanism.
Despite traditional differences, a number of common trends are having an impact on voluntary standards today. Most voluntary standards, while initially focused on specific products or markets, are expanding their scope in terms of the range of products or markets covered. This expansion in scope is resulting in increasingly overlapping but not necessarily aligned standards, increasing the cost and complexity of compliance. A second trend is growing costs associated with compliance, as well as debate over both understanding the true total cost of compliance and over who should bear these rising costs. A third trend is growing awareness of the need to measure the true impact of standards, whether it is on producers or suppliers or the environment itself. The complexity of measurement across the entire value chain, whether through a so-called triple bottom line or another approach, is still an area to be explored and developed. Further trends are associated with the impact of standards on relationships across buyers, sellers and other stakeholders and the need for dialogue and consultation across the entire range of supply chain activities.
In general, voluntary standards are playing a more central role in overall corporate strategies. The impact on corporate strategies is associated with risk (safety, reputation and continuity) identification and management, and opportunities for strategic differentiation. Important strategic opportunities for firms today vary based on balancing the opportunities for differentiation against management of risks. Strategic options can include focusing on cooperation to establish common benchmarks, expanded engagement to increase differentiation, or full scale integration into the core strategy of a firm. In any case, corporations are increasingly expected to participate in areas not traditionally associated with business and to go beyond the boundaries of their operations to a much broader playing field. The opportunity to achieve important benefits for the corporation and for the broader society exist. But there are also significant costs involved in adopting sustainable sourcing strategies. A higher cost, however, might well be the cost of ignoring the issue.
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