Supply Chain

Sustainability: How improved trade rules can encourage better business behaviour

Keynote speech delivered by Lord Mandelson, Chairman, Global Counsel, at the Innovation Forum conference,”How business can tackle deforestation”, 28th-29th October, 2014, London

From Birmingham to New York

Lord Mandelson

“As Brendan May said, you might ask what I am doing here with you this morning.  The last time I spoke at an event similar to this, a low-carbon energy summit, I had the privilege of being covered by green custard before I had even entered the venue.  Some of you may recall the incident, indeed some of you might have known more about it…

But, I have never shied away from controversy, and it indeed has never shied away from me.  But today is an important event because it shows, in another part of the climate change forest that collaboration between business, government and NGOs can make real progress in tackling the causes of climate change.

My thoughts today are informed by the work which my colleagues and I have been doing with Brendan and his team in Indonesia.  As some of you may know we have been supporting Asia Pulp & Paper fundamentally change their business model to meet the changing needs of their customers, satisfy new regulatory criteria and respond to NGO pressure.  You’ll hear more from Aida Greenbury tomorrow morning more of APP’s remarkable story.

I don’t need to tell you about the impact deforestation in Indonesia, Brazil and West Africa.  Equally, in your own different ways you also know about the progress that has been made in tackling it.  The most recent milestone agreed in New York last month.

The events in New York illustrated three broad trends in the global campaign to support the zero deforestation movement.

The first is a geographic shift of momentum in the debate around climate change, from the north to the south. It is striking that when I meet with politicians be they in Beijing, Singapore or Dar es Salaam they often have a clear sense of the need for credible sustainability policy. Not to satisfy the demands of Western politicians but to meet the expectations of their local populations, especially in managing the impact of growth on the lived environment of their citizens.

They may be suspicious or skeptical of multilateral processes like Kyoto / Copenhagen. But they are not dismissive of the fundamental need to control the impact of their industrialization and globalization on the environment – for the Chinese Communist Party this may actually become an issue of political survival.

The second is the fact that whereas previously politicians set the terms of the debate and tried to drag business screaming and kicking behind them, we are now seeing the opposite. I remember the 1998 Birmingham G8 summit, which set a lot of the current anti-illegal logging debate in motion. A lot of the work that was done after Birmingham was done in the teeth of resistance from business and ‘business friendly’ governments.

The Anti-illegal logging agenda had to advance in the face of accusations of trade protectionism – and sometimes there was a grain of truth in this. But most of the time it was just a belief that globalization and the race to arbitrage labour and input costs meant that all bets were off – ‘competitiveness’ must trump all other arguments.

Well, not any more. The New York Declaration on Forests last month was not led by governments, but by businesses. It is now the policymakers who are watching Paul Polman and his colleagues move ahead of legality frameworks and set their own terms of trade for sustainability. And the key thing is that this is not presentational. It is fundamental – it is based on auditing and retooling supply chains right down to the level of the last square mile. And doing that because the short-termist alternatives are commercially untenable in anything but the shortest term.

Finally, the third is a change within the business community which has begun to appear. For many years customers and buyers have been the ones to talk about standards and to complain that their suppliers were not keeping up. This now too has changed, and today we see the major producers of commodities leading the debate in determining how the industry as a whole can meet higher standards of sustainability.

Why? Well, in part because they know that they have no choice but to stay ahead of the debate in their markets on sustainability – because to fall behind here can often mean exclusion. Emerging world suppliers know they are dealing with prejudice and skepticism – how could they not? – and the smartest among them are proactively campaigning to show that the emerging world does not have to be a poor sibling to the developed on sustainability.

So what has happened, and how are policymakers responding? That’s what I want to talk about today, taking our work in Indonesia as a starting point.

The moment

When we look for that moment when companies started picking up from policymakers in driving this agenda I think a couple of things strike us.

The first is trade itself. After about 2000, imports of timber and timber-derived goods into the EU boomed – doubling in about six years. For procurers and environmentally-conscious retailers this was both a boon and a nagging worry. Volumes were high, unit prices were low, and suppliers were keen – but the evidence of deforestation was mounting up and certification systems like PEFC and FSC were only part of the solution as they were not actually present in many of these markets of origin.

If companies weren’t willing to audit their supply chains, then NGOs will do it for them. In a world where you can watch a rainforest being cleared in real time by satellite from a desktop in London, there is no over the horizon anymore. And the market has in many respects started policing itself. Risk-averse companies under NGO pressure have abandoned suppliers who can’t provide the required guarantees in that total transparency world.

In both the US and the EU policymakers have seen themselves as playing catchup with these increasingly demanding consumers. Both the EU Timber Regulation of 2010 and the revised Lacey Act of 2008 criminalised the import and sale of illegally-harvested timber in slightly different ways. But the point is that they were a response to that need to audit global supply chains

Yes, they imposed a due diligence burden on importers. But they were essentially an insurance policy – against reputational risk. And if anyone thinks that that is the kind of black swan you can ignore, or the kind of irritant that it is not worth losing you no claims bonus over – well, they haven’t meant the kind of campaigning machinery that a modern global NGO can deploy when they are minded too. As some companies in both the developed and developing worlds have learned the hard way.

What was interesting about the EU is that it took this process a step further. The EU was sensitive to the charge that its rules were de facto green protectionism. It is, after all, much easier to do due diligence on a Finnish pine forest than an Indonesian of Ghanaian forestry plantation.

So the EU agreed that for states that could establish timber governance frameworks that met a set of pre-determined standards, the EUTR due diligence requirements would effectively be waived.  This recognition would be codified in what is called a Voluntary Partnership Agreement.

As a piece of international public policy the VPA process enters interesting and potentially very difficult territory.  It subjects the governance systems of one sovereign state to explicit scrutiny by outside parties, and ties trade privileges in a third country market to the result of that scrutiny.

It places the onus on policymakers, assisted by NGOs and civil society to make big – and diplomatically sensitive – judgements about the conduct of third countries.

And it is, for the developing or emerging economies that aim to participate in such a system, a significant governance challenge in its own right.

These markets are problematic for illegal timber precisely because their governance capacity is weak, as anyone who has ever flown over an Indonesian rainforest, as I have, and seen the evidence of opportunistic and slash and burn clearance by illegal palm oil farmers knows.

But fifteen countries have either signed or are aiming to sign VPAs – including Indonesia.

And what has been most impressive about this whole process is how it has energised Jakarta. Over the last three years I have seen a remarkable shift in the attitude and energy with which the Indonesian system has embraced the challenge.

Jakarta has come to see the VPA not as a burden or as an attempt to discriminate – which was the tone of a lot of its early reluctant engagement – but as an impetus for domestic reform of its forestry governance, for external pressure on standards.

Indonesia has embraced the VPA model. The SVLK – the Indonesian domestic legality licensing system – whilst still far from perfect – has come a long way from where we were three years ago. There is now a website where you can track the volumes of timber which are receiving SVLK certification in real time.

Looking ahead

Over the next decade it seems to me that the challenge is two fold. First, we need to keep giving momentum to the public policy process. To succeed a model like a VPA needs a deep level of trust between authorities and a very frank dialogue. The VPA process brings NGOs and civil society inside the audit process for the first time and I think that is a very good and necessary thing. We need to keep defending initiatives like FLEGT and the VPAs from glib charges of protectionism.

Second, we need to be ready to move beyond these legality frameworks. To turn them into the baseline for innovative and ambitious suppliers and procurers to build on. Since the mid-2000s we have seen large retailers in Europe and North America showing their willingness to proactively start discriminating on behalf of their customers – often under pressure from increasingly sophisticated NGOs. Plenty of suppliers over the last decade have found their European and American buyers becoming more and more picky and more risk averse.

Over the last decade we have seen consumer-facing businesses increasingly understanding how striving to meet higher standards can give them an edge over their competitors. This trend is now so far advanced as to become a norm, with supermarkets here in the UK routinely competing aggressively and substantively on their green credentials.

The cynic says, well, you know, the end customer doesn’t really care. Give ‘em horsemeat in their burger. What the hell. Well, maybe. Maybe once or twice. But maybe the point is that the customer does often rely on and expect big intermediaries to make these judgements for them. Exercising sustainability judgements on behalf of customers is not patronising, it is duty and a trust.

Finally, commitments from companies like APP, GAR and Wilmar show us that it is the suppliers now who are leading the charge in many respects. What was remarkable to me about the New York Declaration is the prominent role played by not just the buyers but the producers of commodities who are now calling for change. And they are walking the talk.

I think there are some sceptics in the industry. Companies who are pursuing business as usual practices, who do not see any pressing incentive to change their practices which ultimately have been making them good money for many years. Why should they change, why should they take the risk?

For me, I think this is a short-termist attitude. We know which way the wind is blowing. In my engagement with large companies in Indonesia I have seen businesses that ultimately decide to radically change their business models, and to build new ones based on a more sophisticated understanding of resource stewardship. They do this not only because they care about forests (and of this I have no doubt) but because ultimately they understand the larger global trends that will define the timber, palm and other forest related industries over the next decade and beyond.

Does it matter that these companies are – at least for now – contemplating going further than the law requires? Far from it. In fact, I would argue that it is a sign of how far we have come.”

© Global Counsel W: www.global-counsel.co.uk

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