SUPPLY CHANGE

 

April 26, 2018

Dear Colleagues,

Climate Advisers’ Gabriel Thoumi is delighted to be a guest contributor for this month’s Supply Change newsletter.

Global commodity-driven deforestation continues to rise in 2018, even as environmental advocacy groups have dialed up pressure on companies (and increasingly investors) to demonstrate progress through shareholder and marketing campaigns. These campaigns have typically encouraged corporate adherence to certification standards, investor policies, environmental regulations, and/or voluntary company commitments. Yet, these campaigns often miss a key seemingly unrelated risk: corporate governance.

Strong corporate governance encompasses company systems, rules, practices, and processes which effectively manage staff and shareholder interests while adhering to government regulations, creditors’ covenants, and contractual obligations.

Climate Advisers and Auriga recently analyzed the links between deforestation risk and corporate governance risk to better understand how corporate governance might influence a company’s ability to achieve their deforestation commitments. Their results, summarized below, could be important for companies struggling to meet their 2020 deadline to reduce or eliminate commodity-driven deforestation in their supply chains.

Corporate governance matters. It sets the tone, determines the rules, and establishes the strategic direction for the company. Also, shareholders and their capital depend on corporate governance processes to steer the company in a direction that efficiently maximizes shareholder value while minimizing material risks.

Corporate governance drives trust. When a corporation has effective and transparent governance systems in place, it can respond to and stay ahead of business risks. Also, it can have a greater ability to obtain financing, including better access to credit and ability to raise capital via equity and debt issuance.

Corporate governance matters for deforestation. Industry experts (paywall) recognize corporate governance as a “major operational risk to companies and their investors,” that should be considered when addressing deforestation risk. The Chain Reaction Research coalition of Aidenvironment, Climate Advisers, and Profundo’s previous research finds that palm oil growers in Indonesia may have over 6 million hectares of stranded assets (assets with unanticipated or premature write-downs, devaluations, or conversion to liabilities). These stranded assets are partially the result from poor corporate governance.

Without properly functioning governance systems in place to manage risk, companies may inefficiently spend shareholder money on deforestation related practices that buyers are uncomfortable with. For example, last June the palm oil producer, Sawit Sumbermas Sarana, saw its share price decrease by 15 percent and lost its client Unilever (responsible for 8 percent of its revenue in Q1 2017), after violating its No Deforestation, No Peat, No Exploitation policy.

That’s why we teamed up with a fellow research and policy group, Auriga, to investigate corporate governance risks within palm oil production in Indonesia. We targeted this industry and region because of well-known and documented corporate governance concerns regarding land-use tenure and labor rights violations. In March 2018, we reviewed all 19 publicly-traded agriculture companies – many of which are palm oil producers – operating in Indonesia that trade on the Indonesian Stock Exchange. We conducted this research because, as public companies, they were obligated to disclose consistent and accurate information on governance.

We found that two of the 19 publicly-traded Indonesian companies – Salim Ivomas Pratama and London Sumatra – have corporate governance trends that run afoul of the law, with 33 cases of allegedly breaking Indonesia’s 1999 Anti-Monopoly Law.

These legal issues occur when an executive, director, or board member simultaneously holds a similar position at a competitor, buyer, or supplier. As a result of these duplicative roles, this person has access to non-public, insider information on business strategies and pricing. This means they have both conflicts of interest and competing interests. These executives, directors, and board members must work for the shareholders of two different companies that are competing with each other while simultaneously develop concrete strategies to address material deforestation risks.

Why do deforestation risks matter? The corporate parent of the aforementioned companies, Indofood Agri Resources, recently lost part of its financial relationship with Citigroup. Other banks may follow Citigroup out of concern for deforestation risks, which many ofthe world’s central bankers in the Financial Stability Board Task Force on Climate-Related Financial Disclosures recently agreed is a key financial risk that global financial institutions and corporations must address. Together, these corporate governance and deforestation risks can scare away capital.

In sum, corporate governance is a risk multiplier for deforestation risk. Insider information and complex corporate structure can enable companies to cover up poor performance and relevant violations – making it difficult for buyers, investors, and campaigners to manage risk and ensure accountability.

Looking ahead, campaigns may seize the opportunity to target corporate governance risk as a point of leverage for ensuring compliance with the growing number of 2020 zero-deforestation commitments tracked on Supply-Change.org.

 

Sincerely,

Gabriel Thoumi, CFA, FRM, Director Capital Markets

Climate Advisers is a mission-driven policy, capital markets and politics shop working to deliver a strong low-carbon economy. In the United States and around the world, we create and implement large-scale, cost-effective strategies to strengthen climate action and improve lives.

More stories about changing supply chains are summarized below, so keep reading!

- The Supply Change team

 

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Upcoming Events

TFA2020 General Assembly: Sprint to 2020                              Accra, Ghana, May 15th 2018                                                         

This day-long meeting will bring together the global forest community to help accelerate action on commitments to remove deforestation from major commodity supply chains by 2020. Already confirmed to participate are professionals from Unilever, Ferrero, Golden Agri Resources, Olam, Mighty Earth, and many others.

 

ISEAL: 2018 Global Sustainability Standards Conference
São Paulo, Brazil, 22nd-24th May 2018

The three-day conference will consist of in-depth case studies, interactive panel debates, fish bowl conversations, networking opportunities, and more. Participants will explore the theme of “driving change for greater impact” with a deep look into how to make standards work best in addressing deforestation, living income, forced labor, and other issues. Already confirmed to participate are professionals from Nestle, Forest Stewardship Council, IDH, Imaflora, and many others. 

 

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Recent News

Are khakis killing forests?

A recent review of Supply Change research found that apparel brands like H&M, ASOS, and Clarks International are employing a range of creative strategies for promoting transparency and ensuring supplier compliance around low/no deforestation commitments. Many firms are seeking to trace their supplies of leather and wood-based fiber back to their origin in order to identify and mitigate hidden deforestation risks. Faced with a huge network of commodity suppliers, H&M has begun a process of mapping its first- and second-tier of wood-based fiber suppliers, while its competitor ASOS is completing its map for its third-tier suppliers. Once the origins of a commodity are determined, companies like Clarks International have established corrective action plans for helping non-compliant suppliers.
Read more on Ecosystem Marketplace

 

Sustainability is brewing

A group of coffee producers, traders, and manufacturers joined several civil society and government agencies in signing a pledge to ensure the legal and deforestation-free production of coffee in the Indonesian island of Sumatra. Signatories agreed to establish a multi-stakeholder roundtable with the intention of protecting and restoring forests within Sumatra’s Bukit Barisan Selatan National Park, while boosting livelihoods and legal coffee production for farmers living around the World Heritage Site. “These pledges demonstrate a unique approach to addressing commodity-driven deforestation, and a commitment from companies to actively engage in the protection of specific, at-risk forest landscapes,” said Noviar Andayani, country director of the World Conservation Society’s Indonesia branch to Landscape News.
Learn more from the Global Landscapes Forum

 

No farmer left behind?

The Indonesian Government’s goal to have 100% of palm oil production certified by 2020 faces serious hurdles, according to newly-published research by the Bogor Institute of Agriculture. Researchers found that smallholder palm oil producers in Jambi, Riau, and Central Kalimantan provinces often don’t have land permits and use low-yielding seedlings (more affordable), both of which are required for certification under the Indonesian Sustainable Palm Oil scheme. In contrast, smallholder palm oil producers with purchasing contracts with large buyers are more likely to have received better financial training and support, and thus be in compliance. The stakes are high for Indonesian farmers; non-compliance could result in a 10-year prison sentence and 10 billion rupiah ($700,000) in fines!
Learn more from Mongabay.com

 

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Monthly Insights from the Supply Change Desk

Each month, the Supply Change team reviews hundreds of corporate commitments to reduce deforestation in commodity supply chains. Monthly Insights shines a spotlight on companies that deserve recognition for their diligence or innovation at crafting, implementing, or reporting upon their commitments.

 

Corporate Governance

As Climate Advisors found, strong corporate governance is crucial in helping companies effectively manage deforestation risks in their commodity supply chains. The Dutch consumer goods company, Unilever, shines a spotlight on some of these key activities. Unilever established a clear management structure to meet its sustainable sourcing targets as part of its Sustainable Living Plan. At the board level, an Audit Committee oversees independent assurance of progress toward these targets. The company also established a dedicated cross-disciplinary steering committee represented by leads in finance, supply chain, R&D, communications, legal, and sustainability departments, which meets five times a year to address its commodity commitments. Finally, the firm’s chief procurement officer has convened a Sustainable Sourcing Steering Group of external experts to provide guidance.
Learn more on Unilever’s profile

 

Mas Clarity

Faced with accusations of deforestation, human rights abuses, and other problems within their agricultural supply chains, many companies struggle to be transparent about how they resolve these complaints in a timely manner. The Supply Change team finds that at least 48 out of the 794 corporate commodity commitments we track have aspirations and/or procedures in place to manage grievances at the site of commodity production. The palm oil producer Musim Mas provides both a public list of all grievance cases as well as a detailed flowchart on its procedures for addressing those grievances. Outlining this process is one step among many which can help manage expectations for claimants and the public alike.
Learn more on Musim Mas’s profile

Supply-Change.org
 

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