Author: Terry Tudor

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Using Blockchain for sustainability certification for agricultural commodities

In June 2017, the sustainability label provider, UTZ announced a merger with the Rainforest Alliance to issue a single sustainability certification label by 2019. The news was welcomed by stakeholders across the supply chain, including farmers and retailers. For example, Roberto Vélez, CEO of the Colombian Coffee Growers Federation, noted that:

“It should bring great benefits to them, such as being audited against one standard instead of two, thereby making major savings on auditing costs…This should allow coffee growers to invest more efficiently in sustainability and increase their income, hence contributing to their economic sustainability.”

UTZ which had income of just over €19m in 2016, is a program and label for sustainable farming. It provides sustainability certification (for farmers, products and companies), impact measurement, traceability along the supply chain, and training. The Rainforest Alliance is a global nonprofit that works with a range of stakeholders (e.g. large multinational corporations, small, community-based cooperatives, and individuals), whose livelihoods depend on the land, helping them transform the way they grow food, harvest wood and host travelers. The two organisations reportedly certify around 180,000 cocoa, coffee and tea farmers globally. However, their efforts benefits millions.

This merger continues interesting trends and shifts in the sustainability certification field. For example,  Fairtrade International another global sustainability certification provider, has shifted from certification of the end product, to focus on developing partnerships along the supply chain. Similarly, another organisation, SusConnect is also seeking to deliver value along the supply chain.

These shifts and trends in the market are as a result of various factors. While there is a growing market for products certified by major sustainability initiatives (e.g. Fairtrade International, the Forest Stewardship Council, the International Federation of Organic Agriculture Movements and the Roundtable on Sustainable Palm Oil), much of the switch to standard-compliant and certified production is about risk management and brand protection, rather than consumer marketing.

Indeed, within recent years, price premiums have been declining across certified markets. I have written previously about the need for the double bottom line of environmental and economic sustainability. It is easier to do business where there are economies of scale (e.g. in larger, more export oriented economies) that can offer better infrastructure and governance. One of the few exceptions to this rule of economies of scale is cocoa, where certified production is concentrated in less-developed economies (e.g. the Ivory Coast and Ghana), mainly because Africa accounts for around 70 – 75% of global cocoa production.

Not withstanding these issues, there is growth potential in the market through for example, higher productivity, higher-quality products, secure trading relationships and technical support. However, it is likely that there will be further mergers and consolidation, as strategic partnerships are forged to most effectively realise this potential. Blockchain technology could play a key role in the facilitation of these partnerships, as well as in the transfer of the sustainability labels and certificates.

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Tracking progress on sustainability certification

 

Driven in large measure by the ground breaking outcomes of the United Nation’s (UN) Rio Summit of 1992, on environment and development, and the more recent UN Sustainable Development Goals (SDGs) (which replaced the Millennium Development Goals – MDGs), there has in recent decades, been a growing move towards the development of a number of sustainability/environmental certification schemes. Indeed, the number of such schemes (e.g. for commodities trading), is endless and is somewhat of a mine field, without effective guidance and support.

For example, there are well known designations such as Fairtrade and the Forest Stewardship Council (FSC). However, depending on the commodity, there are others that might provide a ‘better fit’, for example, The Better Cotton Initiative for cotton producers, Bonsucro for sugar cane producers, or the Pro Terra Standard that is primarily focused on soy-derived products. For example, ProTerra is the first certification program in the food and feed commodities sector to respond to the demand for both non-GMO soy and improved sustainability. 

As I have written about in previous articles (e.g. on frugal innovation and shifts towards the developent of market equity portfolios that take account of the future impacts of climate change), there is an increasing drive towards organisations taking account of their social impact. Thus there are a growing number of ‘double bottom line’ companies being developed. For example, the B-labs of which there are more than 1,800 so called B-Corps’ that are committed to producing a measurable social impact.

Without doubt, this increasing move over the past decades towards increased socio-environmental impacts-based initiatives and certification is a good one. However, one question that does arise is how might progress towards these goals best be measured? And how might it be done in a manner that is transparent and with results that are widely available? Could Blockchain serve as possible option?

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Could Blockchain help in overcoming the challenges in commodities trading?

Global production and consumption of sustainable products (e.g. cocoa and bananas), is increasing rapidly. Indeed, the value of trade across listed agricultural and seafood commodities is worth in excess of £35 billion. Organisations are increasingly buying into this agenda. For example, in 2014, the cosmetics and beauty giant L’Oréal committed to sourcing 100% of the renewable raw materials it uses from sustainable sources, as well as a goal of ‘zero deforestation’ by 2020.

However, this rise in trade and consumption is not without its challenges. For example, as is the case in all commodity trading, there is significant price volatility in the markets (see graphic below).

Commodities have been on a roller coaster ride for the past couple of years due to a surge in demand (and subsequent slowdown) from emerging economies, such as India and China, and an increasingly strong dollar. For example, prices for industrial metals (e.g. nickel and copper), fell by almost 40% in 2015 due to decreased demand from China. Another challenge lies in the disparity of the markets. For smaller producers, the capacity to produce for sustainable markets more often than not tends to be concentrated in more developed, export-oriented economies. This is so simply because it is easier to do business where there is better infrastructure and governance. There are some exceptions to this general rule, including cocoa which is largely produced in less-developed economies such as the Ivory Coast and Ghana. Another exception is cobalt, the largest producer of which is the Democratic Republic of Congo, even though around 1/3 of the global market is controlled by the minerals giant Glencore.

Overcoming these challenges requires innovative approaches. Internally, one strategy might be through the use of Porter’s value chain analysis (i.e. the range of activities in taking a product or service from conceptualisation to delivery). Through this approach an organisation examines its production processes (i.e. its primary activities – e.g. marketing, operations, logistics, and support activities – procurement, technology development and human resource management), and identifies where improvements can be made. If the organisation is competing through differentiation advantage it will try to perform its activities more effectively and efficiently than its competitors. If it competes through cost advantage, it will try to perform internal activities at lower costs than its competitors, and therefore enhance its bottom line and competitive advantage.

However, it is in the trading of the commodities that there are significant opportunities for innovation to address the challenges. Blockchain, the method of recording data in the form of a digital ledger of transactions is one such innovation. Indeed, if traders started sharing data using a tailor-made version of Blockchain it could remove a lot of manual processing, smoothen the volatility, speed up transactions (thereby reducing costs), and overcome infrastructure and capacity differences (thereby leading to some rebalancing of the markets).

Various examples already exist. For example, the technology company Everledger is using Blockchain to develop a system of warranties that enable mining companies to verify that their rough-cut diamonds are not being used by militias to fund conflicts, and that they comply with the Kimberley Process – a government and community-backed certification scheme for diamonds. In 2015, the investment bank Goldman Sachs and Chinese investment firm IDG Capital Partners invested £35 million in Circle Internet Financial, a start-up to exploit Blockchain technology to improve consumer money transfers. Similarly, the tech company R3 CEV has developed a consortium, including more than 40 global banks (e.g. Barclays, UBS and Wells Fargo), to explore the use of distributed ledger technology. Therefore, the rise in resource consumption has brought with it challenges. However, innovative strategies to address these challenges do exist.