Cocoa market still ‘unethical, unfair’ despite 10 years of sustainability in the industry

By Laurent Pipitone

- Last updated on GMT

A cocoa farmer in West Africa. Pic: Mondelēz International
A cocoa farmer in West Africa. Pic: Mondelēz International

Related tags Cocoa Sustainability

The cocoa and chocolate sector is becoming more sustainable but smallholder farmers are yet to be convinced, writes analyst Laurent Pipitone.

The perception mismatch

The cocoa and chocolate sector has made tremendous progress towards sustainability. The main stakeholders agreed on a roadmap, the Global Cocoa Agenda in 2012; the main industry players are all implementing sustainability cocoa sourcing initiatives to assist smallholder farmers; they hired committed and passionate staff to lead their work on the ground; aligned their individual sustainability strategies through CocoaAction​; collaborate to address child labor through the International Cocoa Initiative​ and, increasingly, work in partnership with governments of cocoa producing countries.

In parallel, the share of Fairtrade, UTZ and Rainforest Alliance certified sustainable cocoa grew from less than 2% to up to 31%1​ in the past 10 years and the major cocoa trading, processing and chocolate manufacturing companies are reporting that between 26 and 75%2​ of the cocoa they source is now sustainable.

Yet most smallholder farmers are not convinced that increased sustainability translate into better life for them. They did not experience a commensurate improvement of their livelihood in the past 10 years. The chief executive of the Ghana Cocoa Board, Joseph Boahen Aidoo, stated last month at the World Cocoa Foundation partnership meeting in Brazil that the market is still “unethical, unfair​”.

Why is there such a mismatch in perception between the downstream and upstream sides of the value chain?

A brief history of the sustainability certification boom

The third-party sustainability standards area

The sustainability of the cocoa supply chain has received considerable attention over the past decades. It has been particularly driven by concerns over the high poverty prevalence among farmers, deforestation, child labor, and perceived risks of structural supply deficits, with the last two most probably acting initially as a catalyst for the largest cocoa and chocolate companies to engage in sustainability initiatives. 

The share of certified cocoa by the three main voluntary sustainable standards (VSS) active in the sector, Fairtrade, Rainforest Alliance and UTZ3​, was below 2% of cocoa sold worldwide 10 years ago. In these early days, these third-party sustainability standards were met with suspicion and resistance in several cocoa producing countries, by governments and by some other local stakeholders. They were perceived as driven by consumers from the western world, representing a new form of neo-colonialism, putting additional trade constraints and burden onto already struggling farmers.  The economic viability of sustainable certification was also questioned, stressing in particular the high associated costs and the likely gradual decline of the price premium for certified cocoa as it becomes mainstream. 

However, the cocoa and chocolate industry had to take action, and fast, or risk to be punished by legislators and consumers. Voluntary sustainability standard certification was seen as the best option, as they had the know-how and a sophisticated system for guaranteeing the credibility of their standards. As a result, they grew at an impressive rate, certifying up to 31% of the volume of cocoa sold worldwide in 2017.  This represents the second highest percentage of sustainable certified products within all tropical agricultural commodities, after coffee4​.

After 10 years of robust progress in cocoa, the voluntary sustainability standard certification growth model is now facing more acute challenges to respond to the industry needs and consumers’ concerns.

The landscape and jurisdictional approaches

One of the main constraints for voluntary sustainability standard certification to develop further is the lack of organisation of smallholder farmers into groups or cooperatives. The certification costs per unit produced tend to increase when reaching non-organized farmers, casting doubts that certification coverage could continue to progress at the same pace in the years to come as most organized farmers had already been reached. Landscape and jurisdictional approaches propose alternative strategies to achieve sustainable production at scale. If the production from a geographical area, instead of individual production units, can be verified to be sustainably produced, this would in particular reduce costs and companies would be able to source from “responsible regions”.  However, the process is tenuous and time-consuming, requiring the negotiation of a sustainable land use plan between all the parties involved in an administrative territory and then translating it into local regulations. This model is currently tested for palm oil certification under the Roundtable on Sustainable Palm Oil (RSPO).

From third-party standards to in-house sustainable sourcing

Most of the large cocoa and chocolate companies have made commitments in terms of sustainable cocoa sourcing. Mars Inc. was the first, in 2009, to commit to 100% of its cocoa to be sustainably sourced by 2020.  All others follow suit, either with a specific target date, such as Ferrero (2020), Barry Callebaut (2025) and Cargill (2030) or without committing to a specific date, such as Mondelez or Nestle.  For those committing to achieve full cocoa sourcing sustainability in the next few years, doing so through third-party sustainability standards is a very challenging commitment, particularly due to the costs associated and the limited flexibility of the system.  In response to these constraints and with the aim to fill the gap between sustainability expectations and achievements, companies are progressively transitioning to in-house sustainably standards, building on the experience acquired working with third-party standards and on the implementation of their sustainability initiatives.

However, this does not come without any risks as consumers and civil society may legitimately question the company’s sustainability claim. How can we objectively assess and compare the sustainability claims from one company to another? More transparency is a prerequisite to ensure their credibility. In addition, if it is approved in the coming months, the ISO standard on sustainable and traceable cocoa, which is currently under development, could be served as a minimum basis for the in-house standards and would prove really useful by providing them an independent guarantee.

Sustainability at the core of corporate business models

The good news is that in-house sustainability standards are an additional step towards integrating sustainability as a core part of companies’ business model. So far, sustainability is a separate branch in most companies. Embedding sustainability requires applying a sustainability lens to decision-making at each operational level and complementing financial indicators with non-financial indicators when reporting about corporate activity. 

This is more easily said than done as markets tend to focus on short-term value for measuring success. But already, the benefits of sustainability are becoming increasingly obvious for the following reasons:

  1. It responds to increasing legislations, regulations, and due diligence process imposed by national authorities;
  2. It addresses reputational risks and build resilience, which can keep CEOs awake at night; and
  3. It facilitates talent attraction: the millennials and the next generation (the centennials or generation Z) are more reluctant to be associated with non-sustainable operations in their working life.

An additional element can convince CEOs to fully engage their companies into sustainability.  There is increasing evidence that corporate valuation and profit margin are positively linked to sustainability efforts.  For example, a study5​ revealed that consumer goods companies enjoyed an 11% increase in their total valuation and 4.8% premium on their profit margin for top performers in terms of sustainability.

But the main critical element may be that global investors are increasingly incorporating sustainability factors into their investment decision.  The global socially responsible investing (SRI) market is now worth $23 trillion, representing a quarter of total global assets managed in the world. Similarly, green and sustainability loans are becoming increasingly popular, which I personally can see through requests that I receive from large investors asking for insights on corporate sustainability in the agri-commodity sector. Two major cocoa companies recently secured sustainably-linked loans, of an equivalent of $870m for Barry Callebaut in June 2017, and of $500mfor Olam in March 2018. The interest rates are reduced if the companies meet certain sustainability criteria, in order to encourage improvement in their sustainability performance.  This is a very promising development, but again, as for the companies’ in-house sustainability standards, transparency remains an issue as the details on the sustainability criteria on which the interest rate varies can be unclear to the public.

The mismatch between sustainability criteria and producers’ concerns

Are voluntary and in-house sustainable standards, development programmes and policies addressing the concerns from smallholder farmers? Low cocoa prices, price volatility, low income compared to previous generations, high cost of living, high cost of inputs, spread of pest and diseases, declining soil fertility are some of the main concerns mentioned by cocoa farmers when asked.

While almost all these concerns are covered to some extent in sustainability standards and initiatives, they often appear as ‘recommendations’ and not as ‘make or break’ requirements.  It means that cocoa can be considered as sustainable even if some key concerns of producers are not met. 

For example, in a commendable effort towards higher transparency, Fairtrade International commissioned a study6​ which shows that 58% of Fairtrade certified cocoa farmers live under the $1.9 a-day extreme poverty line, and 78% earn less than a living income in Cote d’Ivoire​.

A decision to include a poverty indicator within sustainability standards as a prerequisite for cocoa to be counted as sustainable would be, however, counterproductive. Who is going to tell a smallholder farmer that he cannot be certified and receive a price premium because he is too poor and therefore does not qualify? But we need to make sure that the sustainability process works for all, and in particular improve farmers’ livelihood in both the short and longer terms.

How to make sure that sustainability works for all

How can we close the gap between increased sustainability and sticky poverty? 

Almost three-quarters of the cocoa produced in the world comes from Africa, where the poverty rate is the highest by far and where infrastructures and services are the weakest. Cocoa sustainability faces a bigger challenge than other tropical agri-commodities as coffee, rubber, sugar, cotton main production zones are all located in either Latin America or Asia.

Poverty and farmers resilience are developmental issues. Official Development Assistance (ODA), international financial institutions, and NGOs have been dominant actors providing aid, technical assistance, and funding. But the context for development assistance has changed dramatically in the past decade. The private sector is now playing an increasing role in development; but it is not the core of their business and it is still learning on how best to really transform production systems to increase income. 

The private sector has been conducting training interventions and introducing innovation to facilitate transfer of knowledge or skills. But the evidence is quite thin, in particular in Africa, that this systematically results in improved farmers’ income and livelihood. Impact evaluations and anecdotal evidences from initiatives and programmes implemented in the agricultural sector show that training on agronomic practices often fail to generate the expected results. After 10 to 15 years of increasing interventions by the industry in the cocoa sector, we need to take the time to review what works and what does not and, as importantly, which contextual factors influence successful interventions.  This will result in better formulated interventions, better outcomes and better use of money spent.

We need to harness the strength of the various players now in the development area, in particular research institutes, civil society and the private sector.  But, this should not dilute responsibility from governments to provide an enabling environment for a thriving cocoa economy and for investing in improving their farmers’ livelihood, thereby increasing resilience and durably tackling poverty.

Laurent Pipitone is a cocoa consultant and former economic director of the ICCO. He is now a director of FarmBridge International, who provide advisory services to governments, development institutions and cooperatives.

[1] Source: Cocoa Barometer 2018 – Calculated as the sum of sold certified cocoa, incl. multiple certifications.

[2] Source: Cocoa Barometer 2018

[3] UTZ Certified and Rainforest Alliance merged in January 2018

[4] Cf. The State of Sustainable Markets 2018, ITC

[5] Source: Boston Consulting Group, 2017

[6] Cocoa farmers Income, True Price, 2018

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A classic situation...

Posted by overseas_chinese,

...wherein the major players in the market still keep things (including benefits) under their own control rather than passing it down the chain to the local farmers.

It may seem simple, but that's how it is.

At the end of the day, the sustainability "cost benefit" is kept within those handful of people, rather than passed on to those who should benefit from really making it sustainable.

Why is it so difficult to share monetary and social wealth to those who are really in need? Is the balance sheet really that important?

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The conclusions are erroneous

Posted by Pierrick marie Chouard,

Hello Sir;

Having been involved in encouraging cocoa farmers to use sustainable standards, I can assure you that the main problems are elsewhere. Small farmers are resourceful and help each other when possible . The main issues are: The control of the export to market by a small group of individuals ( traders in countries and exporters, who have no incentive for the system to change as their business lies in the price difference between low prices and selling a consolidated lot at the highest price possible) , state and investment organisations in country who control export markets and the graft and corruptions and high fees at the harbor in cocoa producing countries or in US or European harbors, where Mafia like unions , tolerated by local governments ) imposes extremely stiff tariff on anything passing through their docks, raising the price so much that its preventing chocolate making companies ( Unless you are Callebaut , cocoa barry ,cargill etc,, who reached enormous economies of scale and are known to operates under a different set of rules ) to source directly at a higher price cocoa from small farmers.

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