Businesses that have agricultural supply chains are facing increasing pressure from society to operate sustainably, due to actual and potential impacts from climate change. An increased focus on human rights considerations, demand for improved labor conditions, and changing government regulations globally are contributing to this pressure. Sara Stefanski, Manager in the Climate Change and Sustainability Services Department of EY Japan – explores why agriculture is a target and an opportunity for sustainable change, and what some leading companies are doing to minimize these pressures and maximize the opportunities to create beneficial circumstances for all stakeholders involved.
Sustainability in supply chains
Most of a company’s environmental and social impacts occur within its supply chain, making supply chain sustainability and related due diligence efforts important topics in today’s rapidly changing world. Society’s expectations have evolved quickly over the past several years – NGOs, investors, consumers, and other stakeholders are more interested than ever in how companies procure the products or services they offer.
Globally, governments are becoming more active in the sustainability conversation as well. In the U.K., the Modern Slavery Act requires companies to examine their supply chains for human rights abuses, while a newly passed regulation in France requires companies to conduct supply chain due diligence from an environmental and social point of view.
On the other hand, government changes in the U.S. have led to a relaxation of environmental regulations. Luckily, leading companies that could take advantage of weaker regulations are maintaining their commitments toward improving the sustainability of their operations. These companies are taking a long-term view of the risks of backtracking on progress, as well as the growth opportunities of staying the course, regardless of regulation.
Agriculture is a prime target for sustainability
The agriculture sector is a focus area for sustainability issues for many reasons. When we think of the various industries serviced by agriculture, we begin to get an idea of how crucial this sector is to the global economy. Some of these industries include food, fuels, textiles, and construction.
Since so many industries depend on stable and productive agricultural supply chains, climate change is identified as posing a high risk for disrupting growing regions, conditions, and crop yields, as well as impacting social and political factors in the form of resource scarcity or access, drought, land right issues, migration, and others.
Additionally, agricultural commodities, such as palm oil, soy, rubber, and timber, among others, are major contributors to deforestation, which result in greenhouse gas emissions and climate change when not produced sustainably. The production of these commodities pose a greater risk in some developing nations, but can be risky anywhere that regulations are weak or corruption exists.
In 2016, the Carbon Disclosure Project (CDP) surveyed 187 global companies on how they manage and mitigate risk associated with sourcing certain commodities. According to the report, “・・・ on average nearly a quarter of company revenues depend upon the commodities they reported on. The total annual turnover at risk for publicly listed companies that disclosed is estimated to be up to US$906 billion. Given the sums at stake, future growth is in jeopardy if companies do not establish a clear plan to source commodities securely and sustainably now and in the future.”
As an example, in 2011 major flooding in Thailand caused significant damage to 160 textile companies, which in turn disrupted much of the country’s garment production, increasing global prices by 28%.
From a social point of view, human rights, working conditions, fair wages, and others are commonly identified as posing risk in agricultural supply chains. Savvy consumers are continuing to question if business are producing or procuring their goods in a fair way, that ensures respect for human rights.
Leading companies see opportunity
In the face of this increased pressure, international companies are more clearly seeing the benefit of industry collaboration to tackle supply chain sustainability.
The cocoa industry is one example of the benefits of a collaborative approach. This past March, several global companies, including Cargill, Hershey’s, Mars, Mondelez International, and Nestlé have set out to target sustainable supply chain initiatives along with NGOs and governments. Their collective aim is to end deforestation in the global cocoa supply chain, focusing initially on Côte d’Ivoire and Ghana, which are major cocoa producing countries.
The participating companies stated their commitment to take measures to, “end deforestation and forest degradation, including greater investments in more sustainable forms of landscape management; more active efforts in partnership with others to protect and restore forests in the cocoa landscape; and significant investments in programs to improve cocoa productivity for smallholder farmers working in the cocoa supply chain.”
How Japanese companies can take action
Japan is home to several of the worlds’ largest trading companies, food producers, and other global companies which rely on the agriculture sector. With the approach of the 2020 Olympics in Tokyo, and Japan’s proximity to developing nations in South East Asia, there is ample opportunity to take leadership positions on sustainable agricultural supply chains.
Companies already working on these issues can take the next step by establishing clear, time-bound targets, with implementation plans and transparent progress reports.
Companies which have not yet taken action, can begin by analyzing the environmental and social impacts and risks in their own operations and supply chains. It is crucial to keep in mind that while one company can certainly have big impacts, it is not expected that one company do everything at once on their own.
For example, General Mills, a global food manufacturer based in the U.S., set a goal to source its 10 key ingredients 100% sustainably by 2020, representing over 50% of its annual raw material purchases.
After reaching their goal for these 10 key ingredients, it would be expected they extend their efforts to the rest of their business portfolio, working incrementally towards creating a sustainable business. This is an approach that companies can take to address complex sustainability issues in a more manageable, systematic way.
About the author:
As a manager in the Climate Change and Sustainability Services Department of EY Japan, Sara Stefanski works on creating sustainable conditions within global supply chains, from an environmental, social, risk management, and resiliency point of view. She builds strong relationships between companies and their stakeholders, with an end goal of bringing benefit to the entire value chain. Sara can be contacted at [email protected]
Source: EY Japan
EY Japan consists of the 14 member firms of EY in Japan, which include Ernst & Young ShinNihon LLC, Ernst & Young Tax Co., Ernst & Young Transaction Advisory Services Co., Ltd. and EY Advisory & Consulting Co., Ltd.