Sunday, November 4, 2018

Voluntary Sustainability Standards: The infinite talent that may never become a real star

A big part of my life I worked with certification and standards for organic agriculture, both in Sweden and globally. I was also a foundning board member of the ISEAL-alliance 1999 and have consulted the development of standards and certification for fair trade, sustainable forestry, gender,  eco tourism. While I see a role for those systems I believe the results of them are rarely as spectacular as the proponents claim and that there are many weaknesses and drawbacks, some of which are integral of the concepts and can't be mitigated by smarter design.

I don't often feature guests on the blog, but here is a well reasoned piece on voluntary sustainability standards by Ulrich HOFFMANN*, Senior Associate, International Institute for Sustainable Development (IISD). It is a paper prepared for World Standards Cooperation Academic Roundtable 2018, Hangzhou, China, 6-8 November 2018.

This paper aims at making a few conceptual observations on the challenges and chances for mainstreaming the use of voluntary sustainability standards (VSS) in global production and trade of agro-food products. Although being very heterogeneous, the analysis in this paper will refer to VSS as generic category, no matter how significant their differences are in real sustainability impact and issues covered. For illustrative purposes, if need be, the paper will use the example of organic standards, which stand for a standard with transformational potential to real sustainability in agriculture.     

Green consumerism: what is the role of VSS therein?

People’s despair with political inaction or inefficiency has given rise to the ethical consumer movement, premised on the idea that private purchasing decisions can determine what kind of society we live in. This said, however, the decisive drivers for rising VSS use have been hyper globalization, the outsourcing pressure of labour and resource-intensive industries, the concept of international supply/value chains and their governance, as well as the curtailment of the state as economic agent and regulator.  In the end, key players in global supply chains, based on their market power and partly in concert with NGOs that commercially benefit from standard setting and certification coin VSS, set their agendas, and use them as management and (not rarely) unilateral dependence tool.

There is the risk that ‘green consumerism’ distracts from the very need for public regulation and mandatory rules for controlling long international supply chains. It is a myth that consumers can play the role of national policy. Individual purchasing decisions can rather help avoid or alleviate excessive consumption implications. Lasting changes towards true sustainability or transformational change however require structural changes in policy, incentive systems and economic structures (e.g. organic standards on their own are insufficient to transform agriculture). The plea for the ‘power of sustainable consumption’ overestimates the real leverage capacity of consumers. As global production conditions are far too complex, information on the supply chain and true sustainability impact too nebulous, as well as alternatives rare or not available at all, consumers may find it difficult to really buy more sustainably. Even VSS that have the potential for some change are mostly confined to specific products or specific product characteristics. Although many consumers tend to think that by purchasing VSS-certified products they can already make concrete steps towards true sustainability without waiting for policy initiatives in this regard, on scrutiny of facts it transpires that many VSS only represent marginal improvements or pseudo-solutions that may even hinder or inhibit real transformation, do not or only marginally improve the situation of producers, but often usher into higher profit margins of processors and traders/retailers.

Key systemic pros and cons of VSS

Most VSS that emerged in great numbers in the 1990s were triggered by government-inspired due diligence requirements (against the background of food scares, most prominently BSE, and the first Rio Earth Summit). A risk management, rather than a risk prevention approach by systemic or structural changes has therefore been at the center of the majority of VSS, particularly in the agri-food sector. This translated into incremental, rather than transformational change and a particular focus on management of risks related to agro-chemical use in external-input-intensive, highly specialized and economies-of-scale-driven agriculture.    

Pros of VSS

VSS tend to be flexible tools that may encourage material and energy efficiency, increase labour productivity, promote innovation, improve product quality, and foster desirable shifts in production and consumption patterns. VSS can be a tool for some internalization of environmental and (to a much lesser extent) social externalities.

As a business/company-level tool, VSS primarily pursue micro-economic sustainability objectives, which in a number of respects overlap or support macro-economic/societal sustainable development objectives. VSS may however also imperfectly feed into, compromise or even contradict societal sustainability goals (e.g. certification of soy as responsibly produced does not overcome the problems of mono-culture production, nor alter the role soy plays as high-protein feed for unsustainable factory-like livestock production).
VSS are no substitute for public regulation and enforcement of basic social and environmental requirements. VSS may however drive and serve as reference point for new or extended governmental regulation.

If VSS are couched within frameworks of cooperative and fair production and marketing, e.g. in the context of community-supported agriculture, cooperative marketing boards etc. VSS may become a constituent tool for new and much more just market relations, including fairer international trade (yet, recent trends in the marketing structure seem to contradict such opportunities: whereas in 2009 every second consumer bought fair-trade products in special ‘world shops’ in Germany, which offer better terms to producers, in 2017 only every 10th consumer used these shops, whereas the others bought fair-trade goods in supermarkets (source: Forum Fairer Handel)).    

Cons of VSS

The market mechanism encourages shifts/outsourcing of production to least-costly locations (i.e. absolute competitive advantage), but also leads to shifts in competitive position to producers that comply with VSS in the least-costly way. This causes cost pressure, encourages specialization and increasing scale of production and thus enhances the risk of marginalization of small-scale producers and smallholder farmers, all things that often undermine or contradict truly sustainable agriculture.

Assuring the economic sustainability of VSS-compliant producers remains a key and largely unresolved issue. Yet, economic sustainability (and thus cost internalization) is the linchpin for achieving social and ecological sustainability objectives. This is closely related to the power imbalance in large international supply chains between hundreds of millions of producers, on the one hand, and a small number of globally active traders, processors and retailers, on the other. What is more, market consolidation in retail and the recent formation of international purchasing alliances/cartels among some big European supermarkets (e.g. between TESCO and Carrefour as well as between Metro, Auchan, Casino und Schiever) compound an already lopsided position of producers.

Most VSS are micro-economic tools embedded in the neo-liberal logic of long international supply chains. This raises the question of micro versus the macro-economic sustainability perspective. Related to that is the abuse of VSS for ‘green lies’ and a very narrow, one-sided or arbitrary definition of ‘sustainability’. This also points to shortcomings in the system of certification: it verifies whether the concerned production practices are in conformity with the VSS requirements, but does not tell us anything about the validity of the claim, nor whether the conformity really improves true sustainability at producer and societal levels.

The prevailing risk management approach among most VSS cements incremental change within conventional tracks, rather than transformational change. Many VSS therefore result in locking producers into specific (very often only slightly modified conventional) development paths, because the required capital investment would otherwise be lost. VSS are imbedded in the neo-liberal concept of giving more prominence to (anonymous, corporate-driven) international supply chains than to national (government-influenced and partly democratically controlled) economies that are bound to strive for societal, rather than corporate sustainability objectives. 

As documented in a recent Oxfam study on a dozen of international commodity supply chains, the more pronounced use of VSS has not resulted in increasing the share of producers in retail prices even for products with a high share of standard-compliant production. The historical trend of decline has rather continued (Oxfam, Ripefor change, 2018).

Can VSS-governed sustainability markets really be mainstreamed and graduate from current market niches?

Mainstreaming of VSS-compliant production is often simplistically perceived as a linear process, all too often couched within the logic of business-level economics. Quite a number of VSS protagonists believe that better information on VSS for producers and consumers, more capacity building for producers, and two demand-related factors, i.e. stepping up public procurement linked to VSS and VSS-compliant sales’ targets set by large companies, should be the key drivers. These factors may well jack up the share of VSS-compliant products in global markets somewhat, but they should be put and examined within the context of macro-economic factors and challenges.

As market shares of VSS-certified products increase, competition from other VSS-compliant, but also conventional producers (with quality and sustainability claims similar to or not remote from VSS-certified products) intensifies, which leads to a so-called cost-treadmill effect. It is reinforced by the power imbalance between producers and large buyers along the supply chain.[i] As a result, internalization of externalities becomes increasingly difficult and the economic sustainability of VSS-compliant producers is put in jeopardy. This is the most challenging dilemma for many VSS-compliant producers (except large-scale and well-resourced once), to which there are as yet no or only imperfect remedies. The cost-treadmill effect applies to producers both in developing and developed countries.

As long as a reasonable internalization of true costs of production is not forthcoming and thus economic sustainability of producers threatened, many producers are not at all keen on expanding VSS-compliant production unless alternative markets are unavailable. Faced with the ‘cost-squeeze’, producers have to step up productivity, but are often confronted with the challenge that increased efficiency of input use and the deployment of new technological and managerial tools are still insufficient to even out cost increases from adapting production to the standards, related monitoring and certification costs, as well as the cost pressure from buyer markets. Before producers drop out from standard systems, they often resort to ‘casual’ or illegal practices or straightforward fraud (such as informal employment of temporary workers, mostly women, engagement of illegal migrant workers from abroad, use of child labour or cheating during the certification process). Achieving economic sustainability of VSS-compliant smallholders is of paramount importance for avoiding their drop out from certification schemes. However, in many cases smallholders are made part of contract farming systems that lock farmers in exclusive input purchase and product sales’ systems that create relations of unilateral dependence, market domination and not rarely border on forms of modern slavery.

Evidence from market-share expansion expectations for organic and fair-trade products, for instance, suggests that increasing market shares has been slower and more problem-laden than expected. Once markets for certified organic products, for example, reach or surpass the benchmark of some 10% in total food sales, competition among organic products (including low-cost imports) and from products with similar quality/sustainability claims (such as pasture milk or fresh fruit and vegetables from known local producers) intensifies. This puts pressure on organic price premiums, which shrink or disappear altogether, in particular in supermarket stores. Against this background, the further expansion of the organic market share becomes increasingly difficult and economically unattractive for producers. Organic agriculture certification on its own, the increase of public procurement and higher purchase targets for certified products of key market players cannot overcome the economic sustainability dilemma of producers and thus some internalization of true ecological and social costs. Faced with this dilemma, the big marketing agents often resort to launching new standard schemes, claiming premium characteristics. Such efforts might appear temporarily helpful for improving the position of particular standard systems in the market, but tend to confuse consumers and producers, and undermine the reputation and solidity of organic certification in general.

Efforts towards an internalization of true social and ecological costs and thus the assurance of economic sustainability of producers require a number of governmental interventions at supply and demand level that set a framework for harnessing the direct and indirect effects of VSS. These measures include on the supply side:

·        Setting or supporting minimum wages at the level of a decent living wage.

·        Guarantee equal pay and working conditions for men and women.

·        Guarantee adequate minimum prices for small-scale farmers.[ii]

·        Invest in support for small-scale farmers to improve education, infra-structure, and the use of appropriate technologies under local conditions.

·        Modify agricultural support policies to reward the generation of environmental goods and services by farmers, instead of subsidizing fertilizers, agro-chemicals, and irrigation.

·        Promote the creation and expansion of collective/cooperative/equitable business structures in the agri-food sector.

On the demand side, the following measures are called for:

·        Effective use of competition law to check the accumulation and misuse of market power.

·        Ban or drastically curtail unfair business and trading practices (as regards contractual terms, pricing and payment systems, as well as extortion of fees from suppliers).

·        Introduce legislation that obliges supermarkets to enhance transparency and accountability for human rights violations along their supply chains, as done by the UK Modern Slavery Act of 2015.

·        Support alternative agri-food networks, like farmers’ markets.

·        Consider a pro-active governmental facilitating role in marketing, such as the revitalization of marketing boards or the creation of public bodies, like the Federal Agricultural Marketing Authority (FAMA) in Malaysia, which plays an intermediary role between farmers and large corporate buyers.

·        Consider the creation of international commodity-related environmental agreements between producing and consuming countries that support through various mechanisms farmers to achieve specific environmental and social targets with the help of VSS.    

Only through the above outlined public measures will VSS-compliant product markets have a real chance of getting mainstreamed (to be successful, government intervention and support must combine measures that reward environmental goods and services, guarantee sufficient living incomes, as well as restrain market forces that squeeze value from producers). The above-mentioned measures however de facto imply that the neo-liberal dogma on liberalized and self-regulating markets is given up.[iii] In fact, the above-sketched public measures provide a regulatory framework and supportive measures, within which VSS can play a constructive supplementary role, not the other way round.

[i]                           Four companies account for 70% of global trade in agricultural commodities; 50 manufacturers account for half of all global food sales; and just 10 supermarkets account for over half of global food retail sales (Friends of the Earth Europe, Heinrich Böll Foundation, Rosa Luxemburg Foundation (2017), Agrifood Atlas: Facts and Figures about the Corporations that Control what we Eat).

[ii]                          According to Oxfam, from Ecuador to Côte-d'Ivoire and Thailand, some governments have already moved to reintroduce minimum producer prices for crops like bananas, cocoa and rice. Oxfam’s analysis for a basket of 12 products suggests that where governments have intervened in this way, small-scale farmers receive a share in the end consumer price that is around twice as high as that received by farmers without such support (Oxfam, 2018, op.cit).

[iii][iii]                       The neo-liberal agenda preached by WTO, IMF and World Bank in the last three decades led many developing country governments to reverse measures that provided some level of income or price support to rural farming communities. Marketing boards were dismantled; statutory price floors that could stabilize prices and income for domestic farmers were overhauled; and subsidies and investment in state-supported agricultural credit or inputs were slashed (Oxfam, 2018, op. cit). It should also not go without comment that most African governments have remained far behind the commitment made at an African Union summit in 2003 to allocate 10% of state expenses to agriculture in the next few years.   

Ulrich Hoffmann holds a PhD and advanced doctoral degree (i.e. habilitation). He was a university professor on international economic and financial relations in Berlin, Germany and then worked for some 30 years in senior positions in the UN secretariat, mostly at the UN Conference on Trade and Development (UNCTAD), where he extensively published on issues of sustainable agriculture, sustainability standards and climate change economics. He was the editor-in-chief of the recurrent Trade and Environment Review, one of UNCTAD’s flagship reports. He is now a senior associate with the International Institute for Sustainable Development (IISD)(Canada/Switzerland/US). He is member of the Federation of German Scientist.     

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