Ksapa’s Farid Baddache focuses on an increasingly strategic issue for companies to address – that of ensuring their raw materials supply is both responsible and resilient – with input from experts Shivani Kannabhiran, OECD Center for Corporate Sustainability, and Hélène Vermont, Responsible Sourcing Manager for Michelin.
Designing Solutions for Resilient Raw Materials Supply, by Farid Baddache. With kind acknowledgements to Ksapa. Originally posted on the Ksapa blog.
Supply of resilient raw materials: An imperative
Regulatory pressure, stakeholder expectations and changing consumer behaviour are encouraging the transformation of commodity supply chains towards greater transparency and resilience.
The duty of vigilance incrementally establishes critical business processes for businesses and investors. New legal tools are emerging around the world that include the UK Modern Slavery Act, the French duty of vigilance, and the recent German law governing the due diligence of companies in supply chains (“Lieferkettensorgfaltspflichtengesetz”). Regulatory pressures are multiplying and pushing companies, leaders of industry, and investors to take action. Moreover, consumers, and especially young people – millennials – are now demanding ethical products that include traceability.
These criteria form an integral part of the purchasing decision, and cannot be ignored and, as such, the positive impact generated by companies is increasingly strategic. This nurtures consumer confidence and now ensures the survival of businesses themselves. Finally, addressing these challenges forces companies to act beyond their own scope and minimise emissions on scope 3 – the organisation’s indirect impact – of their value chain. This is a complex but not impossible task.
In this light, it is important to bring focus on the raw materials – the non-transformed materials, also known as primary products – a company uses in its product processes. These raw materials, although often only associated with agricultural products such as coffee, beef, tea, sugarcane or palm oil, can also include oil, plastics, natural gas, graphite, lithium or rare earths to name a few.
Harnessing responsible raw materials supply chains
Every agricultural or non-agricultural supply chain has environmental and social challenges. A compelling example is the direct impacts of the soybean supply chain on the deforestation of the Amazon rainforest in Brazil. Likewise, the cultivation of cocoa also increasingly encroaches on the Ivorian forest every year. Between natural habitat loss, soil erosion, biodiversity loss among others, deforestation plays a drastic role in global warming.
In 2018, the equivalent of 3.6 million hectares of forest were cut down, the equivalent in size of Belgium or Lebanon. Data shows that 80% of these losses were related to agricultural commodities. IPCC – the Intergovernmental Panel on Climate Change – reports have on multiple occasions demonstrated the devastating part raw material production plays in deforestation, and a recent study by the Carbon Disclosure Project shows that 9 out of 10 listed companies identify at least one risk of deforestation related to agricultural commodities such as wood, soybeans or palm oil. 32% of the companies surveyed have already identified direct risks.
In addition to environmental risks, there are real social risks that should not be overlooked. The textile industry, for example, is proof of this with working conditions that are often deplorable. The most basic human rights are neglected and regular controversies occur, with very few social norms actually in place to ensure the conditions for production and the transformation of supply chains.
Tools for building resilient raw materials supply
The importance of the duty of vigilance is becoming a fundamental regulatory trend, with the increase in the number of vigilance approaches demonstrating this. However, the notion of duty to be vigilant remains specific and requires study to understand how it works. In this light, the OECD – and specifically the team under Shivani Kannabhiran that leads the agricultural sector at the OECD’s Center of Corporate Sustainability – has published a series of guides to accompany companies.
One of these is the OECD-FAO Guide for Responsible Agricultural Sectors, providing strategic and practical recommendations for companies. The objective here is to help stakeholders adopt responsible conduct in their agricultural sectors and these recommendations are expected to be complemented by a regulatory system to be improved by governments.
Nevertheless, they represent a tool for greater understanding of the risks and alignment across the supply chain’s ecosystem. The recommendations included in these practical guides can especially play a supporting role for small and medium-sized enterprises and the OECD has subsequently made training a point of honour, opening up a digital training centre for SMEs.
The responsible sourcing approach of a multinational company: The Michelin example
Michelin, a world leader in tyre manufacturing, provide a good example of a responsible resourcing approach that others can benchmark. When developing the initiative, a number of key and very practical questions were placed on the table – how, for example, to define responsible sourcing principles in dialogue with stakeholders? What appropriate responsible tracing would be appropriate when sourcing raw materials from highly fragmented supply chains? Indeed, what do we buy, who do we buy it from, and how do we buy? Hélène Vermont, Responsible Sourcing Manager for Michelin, cites several strategic and practical considerations to be deployed across a multinational company such as Michelin. These include:
- Creating a code of conduct for suppliers to ensure the highest transparency of the company’s expectations of suppliers
- Designing a systemic approach for reporting of scope 3 emissions of supplier activities to encourage greater transparency (in line, for example, with the CDP Programme)
- Setting high emission reduction targets for supplier activities
- Implementing evaluation monitoring to examine which sectors are considered most at risk
- Promoting the purchase of recycled and renewable materials
- Establishing a conflict minerals policy for suppliers.
For Michelin, natural rubber still represents a quarter of its purchased raw materials. This category requires a specific approach in addition to all the elements mentioned previously, not least because the sector faces major environmental and human issues. Nearly 2 million farmers are involved in natural rubber supply chains which are by nature highly fragmented.
Tyre production alone accounts for three-quarters of the world’s natural rubber production. As such, together with stakeholders, Michelin has developed a dedicated natural rubber purchasing policy. Actions are carried out across the supply chain, engaging tier 1 suppliers, as well as exploring effective solutions to engage at the level of smallholder farmers directly.
Emerging economies and the importance of a smallholder approach
Ksapa CEO Farid Baddache points to the SUTTI impact investing solution the ESG consulting company offers its clients. This tool addresses commodity supply chains and is adaptable and replicable to all local circumstances and specificities with a single objective: to improve the social-environmental performance of supply chains and to help communities raise revenues above the poverty line.
Primarily, the SUTTI approach is designed to focus on smallholder farmers with a view to creating a positive impact within local communities. This involves vocational training in a hybrid format: digital (permanent access and high dissemination), as well as face-to-face formats (building trust and anchoring community engagement), the promotion of best agricultural practices, crop diversification, income growth, social inclusion, improved workplace security and labour market facilitation.
According to Baddache, it is essential to combine the needs of both smallholder farmers and industrials, with Ksapa also developing a strong financial dimension to the SUTTI programme, notably through the engagement of committed investors, carbon credits, and a “blended finance” model.
The CASCADE project, carried out in the central Sumatra Island region of Indonesia, is a solid example of directly contributing to smallholders in the natural rubber supply chain, grouping the entire natural rubber supply chain from the original players such as the small natural rubber operators to industrial buyers such as Michelin and its automotive customers like the Volkswagen Group. In this project, Ksapa trains up 1,000 farmers, supported by a local NGO responsible for ongoing villager engagement to adopt sustainable and efficient extraction methods.
Scale is crucial in creating positive impact on the ground
For Shivani Kannabhiran of the OECD, scaling up involves a multiple approach – hence the use of a range of instruments to enforce it such as regulation, certification, training, but also the multi-faceted integration of all stakeholders at all levels. This occurs notably through partnerships between companies themselves, but also with local governments.
On the other hand, the Michelin Group bases its strategy on a risk-based approach rather than a systematic approach to traceability and certification. This, however, can prove to be slow and does not apply to highly fragmented smallholder supply chains. Once the risk identified through the deployment of a dedicated tool dubbed RubberWay, appropriate remediation projects can be rolled out such as the CASCADE project outlined above. The vision of the Michelin scale-up therefore involves projects to minimise risks that can be replicated from one particular supply chain to another.
Recent years have seen ample transformation, with younger generations singling out the pain point and questioning companies where it hurts. Where does the food I eat come from? Do I eat responsibly? Indeed, the climate awareness of these young people has never been stronger than it is today, one of the effects being to exert pressure on companies to move the lines, adopt more virtuous behaviours, engage in real traceability processes and minimize risks across their value chain and the suppliers they work with.
As such, the pressure and expectations of stakeholders on scope 3 of supply chains not only mitigate carbon emissions in general, but also play an important role on the social dimension of corporate impact. As Farid Baddache points out, the environment and social are intrinsically linked. It seems difficult to approach one while omitting the other.
- Link up with Farid Baddache on LinkedIn
- Read a related article: The Achilles heel of environmental accounting – supply chains
- Discover Ksapa and its ESG solutions portfolio.
- Read Farid Baddache in the Global Voice magazine #21.
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