Supply chain scandals involving human rights issues and poor labor standards can quickly hit food producers or supermarkets, with big consequences for their shareholder value. As investors, we expect companies to be sufficiently prepared to manage these risks. Engagement Specialist Peter van der Werf describes RobecoSAM Governance & Active Ownership’s new engagement theme focusing on social issues in the food & agri industry.
Direct relevance for investors
Companies are increasingly being held accountable for social issues in their supply chain. The food supply chain consists of various companies, each with its own role. For companies at the start of the chain, such as producers and traders, sustainable operations are necessary for gaining acceptance from the local population and government and maintaining the company’s license to operate. For producers that deliver directly to consumers or that have a brand name to protect, having good insight into the production processes is important for managing sustainability in the supply chain. In addition, declining availability of land and water for irrigation can lead to instability in supply and higher prices, posing a direct risk for food producers, as they cannot always pass higher prices onto consumers. Olam International, an important producer of a large number of commodities and trader in cocoa has revealed that demand for cocoa, for example, is growing by 3% per year whereas supply is steadily decreasing because of the declining number of farmers producing cocoa.
10 commodities and 18 companies
We have selected ten major agricultural commodities with exposures to social risks: palm oil, soy, cocoa, coffee, tea, sugar, cotton, hazelnut, malt barley and dairy. Based on this, we will engage with 18 food & agri companies, including Carrefour, Wilmar and Nestlé, on the most relevant commodities for their business. As part of our engagement efforts, we will also join forces with other investors through the Principles for Responsible Investing (PRI) collaborative engagement projects on Labor standards in the agricultural supply chain and Water risk in the agricultural supply chain.
Five engagement objectives
We have identified five key social themes relevant to the food & agri supply chain: human rights, labor rights, sustainable agricultural production, payment of a living wage and building smallholder capacity. For each of these themes, we have set specific targets for the food & agri companies. Over the next three years, we will engage with the 18 selected companies and monitor their progress in the following five areas:
Respecting human rights
We expect companies to develop a human rights policy and conduct human rights impact assessments to identify production areas exposed to potential human rights abuses, which can pose a risk for their reputation and business. For example, Olam International, one of the world’s most diversified listed plantation players, has told us that they will soon publish a plantation policy that will cover customary land rights issues of indigenous people.
Complying with labor standards
According to the International Labor Organization (ILO), farming is one of the most hazardous occupations. One third of the world’s workers is employed in agriculture, most of whom are located in de-veloping countries1. We expect companies to respect the ILO conventions on child labor, forced labor, discrimination, freedom of association and collective bargaining. By enforcing a supplier code of conduct, companies can safeguard a proper working environment for both their own employees and those of their suppliers. Wilmar, for example, has a released a No Deforestation, No Peat, No Exploitation policy that sets specific labor standard requirements for suppliers of palm oil.
Sustainable agricultural production
Agriculture can have a severe impact on biodiversity and contribute to climate change. Deforestation is a major concern, particularly in tropical countries, where the rainforests house a large proportion of the world’s biodiversity, store massive amounts of carbon and play an important role in ecosystem services of global importance. Soy production, palm oil and cattle rearing are considered to be the main drivers of large-scale deforestation. Companies active in these commodity chains must have sound policies to combat deforestation and limit adverse effects on water availability. Furthermore, they need to improve their transparency by reporting through CDP Water and CDP Forest. Carrefour, which has a responsible procurement policy that favors suppliers and products that respect biodiversity and is committed to procuring sustainable palm oil and soy, is a good example of a company that is helping to promote sustainable agricultural production.
Paying a living wage rather than a minimum wage
Workers require a living wage to meet their basic needs. In commodity production, smallholders often do not receive a set wage, but instead earn their income from the sale of agricultural products. In order to earn sufficient income, smallholders must receive a fair price for their products, which will in turn create workforce stability and a stable supply base. We expect companies to develop a policy that ensures a living wage for their own workers and discuss how to address living wage with their suppliers. For example, our risk assessment for Nestlé shows that the company sources its product inputs from several high-risk countries, where ensuring a living wage would contribute to supply base stability. We will discuss ways in which the company can establish partnerships with smallholders and develop a policy to guarantee living wages.
Building smallholders’ capacity
Approximately three quarters of the world’s poorest people live in rural areas in developing countries and depend on agriculture to make a living2. As smallholders, they participate in global and local food production networks. Despite their significant contribution to global food production, smallholders make up the largest share of undernourished people in the developing world3. They are increasingly confronted with degradation of the natural resource base they depend on, have reduced access to suitable land and face rising prices of agricultural inputs. We regard sustainable intensification of smallholders’ agricultural production as a key strategy to meet the challenges of global food production, such as supply security. Unilever, for example, has a ‘Livelihood for Smallholder Farmers’ policy to help smallholders improve their crop yields, and ultimately, their livelihoods.
1 http://www.ilo.org/global/publications/books/WCMS_159457/lang--en/index.htm (accessed 1 December 2014)
2 IFAD (2011) Rural Poverty Report 2011 (Rome: IFAD)
3 IFAD (2011) Environment and natural resource management policy: Resilient livelihoods through the sustainable use of natural assets (Rome: IFAD)
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