Supply Chain Sustainability: Shifting from “Can” to “Must” | 25, Issue 20
SARAH CHARLES, writer, Communications Officer at the International Trade Centre, and author of a recent dissertation on mandatory supply chain due diligence, outlines the history, opportunities, and challenges of regulatory sustainability approaches while offering a path forward for coffee businesses grappling with the shift from a voluntary to a regulatory approach.
A decade ago, if a company had a Sustainability Manager or Coordinator (or very rarely, a Director), they were likely to report to the head of the Marketing department and spend most of their time explaining to customers what made the company worthy of being admired and emulated by other businesses. These professionals were tasked with translating abstract corporate purpose statements into relevant, tangible actions by the company—actions that would ideally result in positive environmental, social, and financial impact (the three pillars of sustainability [1]). In this emerging field, there were as many ways of approaching sustainability strategy development, execution, measurement, and reporting as there were companies branding themselves “sustainable.” There was enormous creativity and innovation on display, but in the absence of standards and regulation, there was also a lot of confusion. In the coffee industry, some companies had aligned their brands with voluntary sustainability standards (VSS) like organic and Fair Trade, and as a result they were required to manage certain products and aspects of their manufacturing in accordance with these standards, but these were—as the name indicates—voluntary standards.
Fast forward to 2023, and the sustainability landscape looks very different. The emergence of environmental, social, and governance criteria for investment (ESG) has driven companies to set targets, measure impact, and report using global frameworks like the Carbon Disclosure Project (CDP) and Science Based Targets Initiative (SBTI). While interpreting abstract concepts is still part of their job—and any job that focuses on anticipating the future—nowadays sustainability managers are more likely to be collecting data than telling compelling stories to customers. The field has also expanded its reach: according to a study by Forbes, the number of Chief Sustainability Officers holding executive-level sustainability positions tripled from 9 percent to 28 percent between 2016 and 2021.[2] If you’re one of those people who feels like sustainability is everywhere, well, you’re not wrong.
But arguably the biggest difference between the present and the recent past is the emergence of legislation that has taken conversations—about human rights, deforestation, and transparency, to name a few topics—from the feel-good, aspirational realm of voluntary adoption to the uncompromising realm of mandatory compliance. Coffee professionals in Europe are likely already familiar with many of the regulations in Sarah Charles’ feature, but many industry actors in producing countries are equally aware of, and in many cases even more concerned about, how the industry will adapt to a new paradigm. Some concern is warranted, as these changes present a lot of unfamiliar challenges, but they also present some unprecedented opportunities.
I wonder if sustainability in 2033 will look anything like it did in the early years. Will sustainability professionals be part of legal teams? Will human rights due diligence be as foundational to the operation of a successful business as paying its employees a competitive salary is now? And if those things come to pass, how will the coffee industry look different as a result? As the author says, “While we may not have the power to stop a process that is already in motion, we do have the opportunity to influence it positively.” I, for one, am looking forward to being part of the evolution.
Kim Elena Ionescu
Chief Sustainability and Knowledge Development Officer, SCA
Globalization and international trade can be an engine of growth for developing countries— especially for those who have the commodities and resources that are essential to the world’s global supply chains and food systems—but what happens when the requirement to meet consumer demand and the opportunity to make economic progress lead to a decrease in the wellbeing of people and planet?
As we’ve seen over and over again, mass production and international supply chains all too often trigger violations of human rights and environmental degradation. The fast fashion industry is a salient example of this: child labor, sweat shops, pollution, waste, and emissions fuel an industry that works to satisfy an insatiable consumer demand for new clothes and accessories at low prices to keep up with ever-changing trends.[1] Developing countries that offer raw commodities and cheap labor are the hardest hit, both in terms of human rights violations and climate injustice.[2]
Recent governance response has been to impose mandatory due diligence as a standard of care, as opposed to voluntary sustainability standards that can too easily transform into a superficial “tick-box” approach to sustainability or a mere competitive asset, without the right intentions or strong incentives for accountability. The European Parliament has proposed a new set of human rights and environmental legislative frameworks to address an approach that has so far proved unsatisfactory, some of which have already been approved and have coffee sector stakeholders on the edge of their seats.
But, in most if not all cases, decisions around how to address sustainability are inherently fraught with trade-offs. Each time a new legislation or regulation is approved, many breathe a sigh of relief: “At last, we will see real change—a stab at a brighter future.” While optimism is a key motivational factor in our fight for social and environmental sustainability, it’s important to move forward with caution: imposing mandatory frameworks that will also affect global communities upstream of value chains carries a huge weight of responsibility that demands accountability on all fronts.
What do they entail? How will people be prepared? How will they be effectively implemented and monitored? Who stands to pay the price of compliance? Does the decision-making process have inclusive, global representation? These are just some of the questions and concerns being voiced that must be addressed.
The Due Diligence Landscape
Until recently, there were very few examples of corporate due diligence frameworks in place. A mandatory reporting regime, ratified in the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (Dodd-Frank Act), was the first attempt to legislate human rights disclosures. Since 2014, it requires US-listed companies to disclose whether they use “conflict minerals” and whether these minerals originate in the Democratic Republic of the Congo or an adjoining country, to break the link between conflict and trade in minerals.
Many of the regulatory frameworks being established today are built on the foundation of voluntary sustainability frameworks and reporting-focused laws like the Dodd-Frank Act or the UK Modern Slavery Act, adopted in 2015. In the framework of my research for my recent dissertation, The Foreseen Effects of the New Proposal for EU-wide “Mandatory Supply Chain Due Diligence” Legislation: A Case Study on the Ethiopian Coffee Supply Chain, I explored some of the studies and papers surrounding these frameworks, and the general topic of regulation for corporate accountability.
Research on the conflict mineral disclosure (CMD) mandated by the Dodd-Frank Act shows that it has only been partially effective in ensuring increased levels of social disclosure. Dalla Via and Perego’s study, Determinants of Conflict Minerals Disclosure Under the Dodd– Frank Act, shows that “larger firms with strong corporate governance systems are associated with higher levels of CMD and that enforcement leniency affects strategic (non-)compliance with a mandatory social disclosure regime.”[3] In the same way that voluntary sustainability standards often tend to exclude smaller-sized producers, the CMD law tends to negatively impact smaller firms who lack the financial resources and organizational capacity to comply with responsible sourcing requirements. This analysis suggests that mandatory due diligence does not work without tangible sanctions and fines for non-compliance, and that in the presence of non-compliance, illegal coping mechanisms can emerge as a result. It also highlights a utilitarian aspect of the framework, in that it focuses on the greatest good for the greatest number: the trade-off in this approach is a documented negative impact on smaller organizations.
In their paper “Human Rights Disclosure and Due Diligence Laws: The Role of Regulatory Oversight in Ensuring Corporate Accountability,”[4] Chambers and Vastardis additionally argue that human rights and due diligence laws are rendered ineffective without accompanying regulatory oversight and suggest that the state should function as a key actor to hold businesses accountable. This argument highlights that in voluntary frameworks, oversight and enforcement roles are often assigned to consumers, civil society, and investors, which can be insufficient or biased.
The Dutch Child Labour Due Diligence Act (2019), which makes it obligatory for companies to prevent child labor in their supply chains, is another example of mandatory supply chain due diligence in place. This has also been subject to points of criticism with respect to the Act’s monitoring and enforcement mechanisms, “as it remains unclear whether supervision is to be undertaken by one or a combination of existing supervisory bodies in the Netherlands or whether it would require the establishment of a new, dedicated supervisor.”[5] The new European Union (EU) supply chain due diligence faces the same risk of a lack of a monitoring system, meaning that oversight and enforcement of the legislation will be a significant challenge and will have high resource requirements. Having the state take on this role in each EU country, with the level of detail and monitoring required, is unlikely because it is impractical. This means that the task will probably be delegated to NGOs, investors, or other third parties—bringing us back to the original issue of bias or ineffectiveness.
Since these first trials, mandatory legislation has grown exponentially. France introduced its Duty of Care Law, and in 2022 Norway’s Transparency Act came into force. Germany enacted the German Supply Chain Due Diligence Act (LkSG) earlier this year and the Netherlands is working on its own human rights and environmental due diligence (HREDD) bill. This year (2023) the European Parliament adopted the Deforestation Directive (which will particularly affect coffee sector stakeholders) and the Corporate Sustainability Reporting Directive, and in June 2023 the EU Corporate Sustainability Due Diligence Directive (EU CS3D) was approved (the final version of the Directive is yet to be made available). The EU Forced Labour Regulation was also proposed and remains under review.
The new and upcoming due diligence frameworks are diverse and many—and while they have good synergies overall, they may appear repetitive at first glance. This can be confusing for even the most engaged audience. The regulation on deforestation-free products, for example, targets specific value chains like soy, beef, palm oil, wood, cocoa, coffee, rubber, and some of their derived products including leather, chocolate, tires, and furniture. The corporate sustainability due diligence directive, on the other hand, establishes a corporate due diligence duty for companies and their directors—it isn’t commodity specific. Some companies may assume that because one doesn’t apply to them, neither does the other. Another mistake would be to assume that because one directive has been dealt with, so have the others, which may bear some similarities in their requirements. Clearly communicating these different legislations, their respective requirements, and how they relate to each other will be crucial.
The switch to a duty of care with legal consequences is a reality that is now going global. The trend appears to be accelerating and will drastically impact value chains. Australia, Canada, and the US are taking decisive steps toward mandatory supply chain due diligence. The US has a public consultation underway concerning deforestation, closely mirroring the EU proposal. Japan has published HREDD guidelines to encourage companies to prepare for European standards.
The ball is undeniably rolling, leaving companies with a binary choice of cooperation or penalties—the very point of a mandatory approach. While this may seem like a final sentence, there is still some fluidity to be leveraged. Legislative frameworks are an iterative process that can leave room for constructive criticism, dialogue, action, and improvement. This will require collective, intentional effort from sustainability advocates across the industry.
Regulatory Impacts
As we look at all these new regulations coming out, it’s important to note that in the novelty lies both the hope for concrete change and a high degree of uncertainty surrounding their outcomes. Any foreseen impacts at this point remain speculative because the regulations haven’t happened yet. Speculations that are based on inclusive baseline assessments and surveys are, however, our best bet to mitigating unintended consequences and bridging identified gaps in the legislation.
Let’s look at the EU’s recently adopted CS3D as one example of the underlying gaps HREDD legislation could present. It is an EUwide mandatory supply chain due diligence directive that requires companies “to identify and, where necessary, prevent, end, or mitigate adverse impacts of their activities on human rights, such as child labor and exploitation of workers, and on the environment, for example pollution and biodiversity loss.”[6]
“Its findings reinforced this theory that it will be a challenge to enforce and uphold global environmental and human rights standards without unfair trade-offs.”
It aims to hold European companies with a turnover upwards of €40 million or €150 million accountable for their supply chains. It requires them to identify, address, and remedy the environmental, social, and governance (ESG) risks in their supply chains. More than a reporting directive, it is action-based and impact-focused.
This proposal has the potential to achieve system-level change in responsible business conduct, and to improve livelihoods, working conditions, and respect for human rights and the environment in producer countries. While a mandatory framework could level the playing field across private sector companies and boost sustainable practices, it also runs the risk of pushing the burden of proof onto producers, increasing pressure on communities often already vulnerable and low in resources. A legal due diligence obligation threatens to increase requirements and related costs, bureaucracy, and market entrance hurdles for all supply chain actors, effectively putting the livelihoods of some at risk—or even excluding many of them altogether.
Just how inclusive the policy-making process was of upstream supply chain stakeholders indirectly affected by the legislation remains hazy, which could weaken its effectiveness and global context relevance. A “one size fits all” approach to due diligence standards will have consequences. Mainstreaming the coffee sector according to global standards such as those upheld by the new directive will be challenging, given the wide-ranging contexts in the different countries of implementation.
In my thesis, I focused on Ethiopian coffee production as a case study on how new mandatory supply chain legislation might affect coffee sector stakeholders—and especially those upstream of the supply chain. The study engaged qualitative research methods, with primary data collected through 15 key informant interviews, including Ethiopian coffee producers and exporters, European coffee traders and buyer representatives, sustainability practitioners, and policy environment representatives. Its findings reinforced this theory that it will be a challenge to enforce and uphold global environmental and human rights standards without unfair trade-offs. Systems of production differ widely across regions and countries, with varying farm sizes, infrastructure and equipment, levels of economic development, and cultural values. Access to technology, finance, investment, and research and development is also inconsistent across coffee-growing countries. This means that the cost of production, and definitions of a living income and child labor, for example, have contexts that differ too widely to sustainably integrate global standards.
These issues raise the ethics of imposing international standards of what is right and wrong regardless of context, and the question of who decides.
New legislation also requires proof of compliance—which means enormous quantities of data. This raises the question of who will own these data, and who will have the right to sell them: a point highlighted by Hernan Manson, Head of Inclusive Agribusiness at the International Trade Centre, at the ICO Task Force lecture—How to Ensure Inclusive Due Diligence Legislation—that took place at World of Coffee Athens in June. This is another important economic and ethical consideration to face. The question will need to be addressed carefully, inclusively, and fairly if it is to reinforce the legislation’s sustainable objectives rather than “business as usual” dynamics.
The new legislation might also spur less finance and investment in coffee. Although it would be an unintended effect, investors may perceive the coffee sector as riskier than ever because of the combination of climate risk, inflation, and a shift to due diligence (some banks involved in coffee finance are already “taking a step back” because of the risk of noncompliance with the new EU legislation). The finance company, bank, or funder is responsible for a significant percentage of gross worldwide earnings and will be responsible for lots that don’t meet requirements, which is a major deterrent for investment. This means that interest rates could go up and affect pricing.
Finally, as we saw with Dodd-Frank, if new mandatory due diligence measures are enforced on value chain actors who do not embrace them, this could ironically boost global unsustainable practices by diverting business to more lenient countries or by opening up backchannel markets.
Making It Work
In their study, Chambers and Vastardis wrote that “despite their shortcomings (…), the (current) transparency and HRDD requirements do move the legal framework closer toward bringing human rights standards to bear on corporate activities,” and this is a position that many sustainability advocates align with today. The incentive to embrace corporate accountability has so far been linked to reputational risk and better market prices and appeal; global policy is recognizing the need for regulatory frameworks and the role of the state to enforce “a shift of focus from costs to values.”[7]
Voluntary sustainability standards have clear, demonstrated limitations. Complementing them with mandatory regulations will help increase corporate accountability—especially for the large multinationals that rule supply chains—and amplify due diligence impact at a global level. But while establishing legal measures can be helpful at first to get the ball rolling, these necessarily imply varying degrees of compliance and exceptions. This suggests the effectiveness of due diligence does not depend on the binary options of voluntary versus mandatory, but rather diverse degrees of accountability requirements.
How can we work with this new regulatory approach while—as those working within the system—simultaneously being aware of all the ways in which it may drive the very outcomes it seeks to subvert? Based on the study I conducted and lectures and discussions I have participated in on this topic, becoming more informed and prepared, and taking part in the conversation, are simple steps to enable a more seamless transition for actors across agricultural value chains.
Producers worldwide, and especially in developing countries, will need time to prepare: this was clearly stated by all stakeholders I interviewed. They will need support with financial resources, equipment, education, capacity building, human resources, and auditing infrastructure, and they will need at least a few years to adapt. Faced with these realities, it’s clear that a huge effort needs to be made to bring the perspectives of all those who will be affected to the table. While we may not have the power to stop a process that is already in motion, we do have the opportunity to influence it positively.
The high cost of compliance and how it will be absorbed—and by whom—remains at the top of coffee sector stakeholders’ concerns, in no small part because there is no reference in the legal text to compliance sharing of costs. At the ICO Task Force lecture at World of Coffee Athens, Dr. Leonard Mizzi—Head of Unit, Sustainable Agri-Food Systems and Fisheries at the Directorate-General for International Cooperation and Development of the European Commission—stated that scalable innovative finance will have to be triggered, based on bankable projects that can help derisk the sector. He also highlighted the need to bring in other sources of public and private finance to complement their own development funding, mainly through guarantees and blending.
Global sustainability standards are challenging to achieve, because they involve so many different geographical, cultural, sector, and market contexts. Newly adopted and proposed mandatory measures are based on extensive studies and consultations, but future iterations could be improved through broader consultation, consideration, and integration of recommendations from stakeholders from across each value chain.
In the coffee sector, multiple actors are rallying to get this work underway. The ICO, the Fairtrade system, the International Trade Centre, the European Coffee Federation, and many more are beginning conversations about these new frameworks within the coffee industry, including grower communities, and forming partnerships to create accompanying measures, initiatives, and pilot projects that will support stakeholders in this tough transition.
The European Commission’s Directorate General for International Partnerships published an in-depth guidance document on designing effective and inclusive accompanying support to due diligence legislation. The document recognizes that actors across value chains will require support and accompaniment to enable their meaningful participation in the system.[8] It lists several recommendations, including, for example, the need to share responsibilities across value chain actors and to support economic development in upstream operator countries, because many unsustainable practices have their root causes in poverty; the need for technological solutions, investment in infrastructure, awareness-raising, and bottom-up partnership approaches; and many more.[9]
Running pilot projects and support initiatives ahead of implementation kicking in will help raise awareness on upcoming measures, enable measures to be more effective, help increase sector ownership of measures in both EU countries and supplier countries, and make the legislative frameworks more relevant, effective, and sustainable in the long term.
Above all, making it will require keeping the conversation open, with as many people as possible.◇
SARAH ELEANOR CHARLES holds an MSc in Sustainable Development from SOAS University of London. In addition to her role as Communications Officer for the International Trade Centre (ITC), Sarah is a columnist and writer for Coffee Intelligence, Perfect Daily Grind, and Barista Magazine, and lead co-author of ITC’s Coffee Guide, 4th edition.
In the print edition, this feature was accompanied by two short regulatory case studies focused on sustainability marketing claims and the recent EU deforestation legislation. Click here to read these case studies by MEL BANDLER and JANINA GRABS.
References
Introduction
[1] Ben Purvis, Yong Mao, and Darren Robinson, Three Pillars of Sustainability: In Search of Conceptual Origins,” Sustainability Science 14 (2019): 681–695, https://doi.org/10.1007/s11625-018-0627-5.
[2] Michelle Greenwald, “The Challenge of Chief Sustainability Officers: Creating a New Mindset Throughout an Entire Global Organization,” Forbes Online (January 27, 2023): https://www. forbes.com/sites/michellegreenwald/2023/01/27/the-challengeof-chief-sustainability-officers-creating-a-new-mindsetthroughout-an-entire-global-organization.
Article
[1] “What is Fast Fashion?,” Good on You, https://goodonyou.eco/what-is-fast-fashion/.
[2] For more on “climate injustice,” see Andrés Montenegro’s feature on climate justice in SCA News, https://sca.coffee/sca-news/read/understanding-the-climate-justice-approach.
[3] Nicola Dalla Via and Paulo Perego, “Determinants of Conflict Minerals Disclosure Under the Dodd-Frank Act,” Bus. Strat. Env., 27 (2018): 774, https://doi.org/10.1002/bse.2030.
[4] Rachel Chambers and Anil Yilmaz Vastardis, “Human Rights Disclosure and Due Diligence Laws: The Role of Regulatory Oversight in Ensuring Corporate Accountability,” Chicago Journal of International Law 21, no. 2, Article 4 (2021), https://chicagounbound.uchicago.edu/cjil/vol21/iss2/4.
[5] Liesbeth Enneking, “Putting the Dutch Child Labour Due Diligence Act into Perspective. An Assessment of the CLDD Act’s Legal and Policy Relevance in the Netherlands and Beyond,” Erasmus Law Review 12, no. 4 (2019): 23, https://ssrn.com/abstract=3891664.
[6] European Commission, Directorate-General for Justice and Consumers 2022.
[7] Coffee Barometer (2021).
[8] European Commission, Directorate-General for International Partnerships 2022, p. 33.
[9] European Commission, Directorate-General for International Partnerships 2022, p. 33.
We hope you are as excited as we are about the release of 25, Issue 20. This issue of 25 is made possible with the contributions of specialty coffee businesses who support the activities of the Specialty Coffee Association through its underwriting and sponsorship programs. Learn more about our underwriters here.