Sustainability and commodities accrues momentum

Ensuring the metals in your mobile phone are not perpetuating conflict; knowing your coffee is not destroying the ecosystem; providing education for the growers of cocoa; the "sustainability" movement in commodities has grown over the past few years as companies and industries have shifted from the initial denial that any problems had anything to do with themselves.

Although many are still at stuck the box-ticking level or regard raw material sustainability as a PR exercise, others have moved on to a different stage, say consultants and analysts. And while the early sustainability movement focused on consumer-facing brands and retailers, the pressure to change is moving up the supply chain.

"First of all you have a problem, but the leader of a company will usually say 'we are not responsible'. It takes a couple of years for things to change, but they do," says Friedel Hutz-Adams, researcher at Sudwind, a Germany supply chain research and consulting firm.

For example, as recently as two to three years ago, German car companies refused to accept that they were responsible for the raw materials used to produce cars. Cobalt, a mineral of which the war-torn Democratic Republic of Congo is a leading supplier, is an important mineral used in electronic parts, but as the number of electronic components increases, the car industry is becoming concerned about conflict minerals, he says.

As a food company, the sustainability challenges were easy to acknowledge, says Jonathan Horrell, sustainability director at Mondelez International, formerly Kraft Foods.

The interest in sustainability and projects has been around since the 1990s, but the initial challenge was the lack of direct control over the commodity production. This was eventually overcome by the company recognising that it had "the power to influence as well as change behaviours", he says.

Food and agriculture industries are at the forefront of increasing their sustainability efforts, says Lucas Simons, chief executive of NewForesight Consultancy, who has mapped out the shift in sustainability awareness into four phases.

In the first phase, companies or sectors are hit by a crisis, where long standing problems surface. Non governmental organisations and the media jump on the news and some companies start taking symbolic action and initiate high "mediagenic projects".

The problem, however, fails to go away and in the second phase, some forward looking companies decide to be the "first mover" and to solve the issue, turning it into a competitive opportunity.

The next stage sees some in the industry realise that competition will not solve the systematic failure and move on to organise sector-led initiatives. Stakeholders like governments, NGOs and donors, may resist changes as they feel their authority threatened or worry that they may lose their raison d'etre as drivers of sustainability.

In the fourth phase, interests are eventually aligned and industry standards and laws start to change.

Many of the "soft" agricultural commodities such as coffee, cocoa, palm oil and sugar are in phase two, but "some extractive sectors are in phase one," says Mr Simons.

There are efforts to drive the shift faster. One of the "carrot" approaches has been through measures such as cheaper financing for sustainable projects. For instance, working with commodity buyers, trade finance banks, and the World Bank's International Finance Corporation, the Cambridge Institute for Sustainability Leadership has put together a letter of credit offering to reduce the cost of capital for trading of sustainably produced soft commodities

Meanwhile, the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act in the US requires manufacturers to audit their supply chains and report conflict minerals usage as well as payments to governments for oil and gas extraction.

The rising demand for sustainable raw materials has increased the call for retailers, manufacturers, commodities traders and producers to certify that commodities are extracted or grown according to certain standards.

This has had its downsides. The myriad of standards has confused consumers and farmers and has also led to fraud and false auditing in some cases. There is also criticism among some social activists and farmers that standards and certification programmes are expensive tools that fail to reduce poverty.

Certification requires farmers to make investments and changes that do not necessarily lead to high enough prices of the commodity to cover the costs. They may help farmers to be slightly more socially and environmentally sustainable, but nevertheless they remain mired in poverty, says Mr Simons.

Fernando Morales-de la Cruz, a coffee entrepreneur, says the amount the coffee farmers get in return for certification is too low. "As long as I see girls who don't go to high school, I know that there is something wrong [with the system]," he says.

The Financial Times will be addressing the issue of sustainability of raw materials at the FT Commodities Global Summit 2015 in Lausanne on Wednesday.

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