Can commodities be sustainable?

In one of my financial seminars about two weeks ago, we have a very interesting discussion on how to put a sustainable portfolio together. One participant asked about adding commodities such as gold, coffee, or other raw materials - which are known to be beneficial from a portfolio-construction point of view, but which bear sustainability challenges. In this issue of Money's Impact, I wanted to explore the following question in more detail: can commodities be sustainable?

Why do commodities have sustainability challenges?

As more organisations and companies turn inwards to improve their impact on the world, there is one product which has garnered a lot of attention: commodities. A commodity is a raw material or agricultural product (such as gold, coffee, or soy), and typically falls into four categories: metal, energy, livestock, and agriculture.

Commodities such as soy or palm oil have a reputation for being unsustainable, mainly because of the extreme pressure that they can put on their local ecosystems when being farmed or mined. For example, the World Wide Fund reported that the Cerrado, a Brazillian savanna, has lost over half of its 100 million hectares of native landscape due to livestock and soybean farming.

Besides environmental damage, many of these commodities also have a history of bad social and governance practices, which has led to the establishment of organisations such as Fair Trade. Established in 1992, Fair Trade began with the purpose of appealing for 'fairness in trade from Mexican small-scale coffee farmers', and today, they reach over 1.7 million farmers and workers across 173 countries. That, almost 30 years later, Fair Trade is just as vital - if not more - for ensuring that workers are treated fairly, says a lot about our global commodity production.

The main reasons behind sustainability challenges with commodities include:

1. Supply and demand

Commodities such as coffee and soy are, for the majority of us, heavily intertwined with our daily lives, which means they are always in high demand. The rush to meet this demand, coupled with the fact that these products tend to be fairly inexpensive, means that companies have historically cut corners when it comes to their ethical responsibilities, all with the aim of maximising their profit.

2. Commodity-dependence

Around 54% of all countries in the world are known as 'commodity-dependent', which means that commodities make up more than 60% of their national exports. Of these 'commodity-dependent' countries, 64% are developing countries.

For countries who are reliant on producing commodities, this often leaves them extremely vulnerable to unsustainable practices. They are encouraged to produce as much as possible, which often means overworking farmland or destroying the environment through mining. Not only this, but external companies often take advantage of the vulnerable state that commodity-dependence puts these countries in, leading to situations I have already mentioned, including unfair pay or child labour.

Commodities in a sustainable context

Although commodities have a history of being potentially unsustainable, of course this does not mean that they will always be this way. In fact, there are many options available, at all stages of the production flow, that would improve their impact on the world.

PWC have some great resources that further explain the role of commodities in sustainability. They describe how commodities play a dual role in this focus:

• Commodities are driving the green transition
• Commodities are affected by the green transition

Take the example of coffee. In 2021, Nespresso was named the world's most sustainable coffee brand by the World Finance Magazine , having aligned itself not only with the Paris Agreement, but also with 11 out of 17 of the United Nations Sustainable Development Goals. Some of their sustainability efforts include:

• Partnership with the Rainforest Alliance to create a AAA Sustainability Quality Programme
• Creation of fully-recyclable coffee capsules, with over 120,000 capsule collection points across the globe
• Working with the Aluminium Stewardship Initiative, a global non-profit certification organisation which helps to maximise the sustainable usage of aluminium

In the case of Nespresso, do you think that their sustainable practices are a part of their DNA, or an effort to prove their ethics and values from a marketing perspective?

Leave a comment sharing your opinion below.

One of the biggest challenges facing sustainable commodities is a lack of transparency in the changes actually being made. Just as with the wider topics of sustainability, greenwashing and benchmarking remain two huge points for improvement. If companies are not held accountable for the changes they make, and if they are able to make inaccurate claims about their impact without repercussions, change is unlikely to occur.

An interesting point to note on this topic is that, although work has been done to try and ensure that commodities become more sustainable over the last few decades, a lack of benchmarking means that the solutions put in place might not be the most effective way forward. Innovation Forum , after researching smallholder farming, concluded that 'the current model used to achieve sustainability in this sector is itself sustainable'.

As a proponent of sustainability and sustainable investing, I often find myself talking about the successes int he industry, and the changes that have already been put in place. But it is equally important that we talk about the changes we make which don't have the desire impact. If, in the case of Innovation Forum's research, a sustainable model proves not to have the desired impact, there must be frameworks put in place which make it a priority to adjust and improve the model, rather than sticking with a solution that is only half-baked.

Sustainable commodities - a new reality?

As sustainability becomes more and more the 'norm', investors are more likely to push for transparency in the changes their companies make. There are also a lot of factors which show that this is the right time to be making these changes.

With the global goal to reach the UN's Sustainable Development Goals, as well as the larger target of peak emissions, by 2030, we are already in the final decade of progress. Establishing sustainable commodities now gives investors and consumers the time to test and implement effective strategies by 2030.

If you read last week's issue of Money's Impact, where we discussed what the 'G' in ESG actually means, this is where governance becomes especially important. As sustainability becomes a priority, there is likely to be increased demand for sustainable commodities, so ensuring that businesses have adapted to meet this new demand is essential.

'Lessons learnt from the financial sector allow parallels to be drawn with sustainable commodity products. Therefore, like the financial sector, questions about the 'greenness' of commodity products labelled in certain ways will arise sooner or later' - ReedSmith

Investors in commodities should be asking themselves - and the companies included in their portfolios, questions including:

• What frameworks currently exist to maintain a positive impact from this product?
• Does this include every stage of the production chain, from farming to distribution?
• How do these frameworks or guidelines ensure transparency?

For all three of these questions, a good place to begin your research is by looking at the likes of Fair Trade. If you company is 'Fair Trade Certified', you can trust that they aren't just making empty promises to 'do better'.

To return to PWC , they outline the four following steps to 'greening' commodity businesses:

1. Classifying green commodities using the EU taxonomy and setting quantitative thresholds, as well as distinguishing between 'green' and 'brown' commodities
2. Green funding and trading shaped by ESG and taxonomy-linked criteria
3. Integrating sustainability risk (and in particular climate risk) in commodity training
4. Providing transparency on ESG topics, sustainability commitments and taxonomy alignment

Are some commodities easier than others?

Many of the debates around whether 'sustainable commodities' are a realistic expectation have focused on one commodity in particular: gold. If not done ethically or responsibly, gold mining can lead to the destruction of natural landscapes, as well as producing huge amounts of toxic waste.

'Due to the use of open pit mining and cyanide heap leaching, mining companies generate about 20 tons of toxic waste for every 0.333-ounce gold ring' - Brilliant Earth

Compare this to sustainable coffee: from 2004 to 2014, Fair Trade coffee saw a 250% increase in retail sales.

There is definitely more opportunity for us to buy sustainable coffee than there is to buy sustainable gold, but that doesn't mean it is 'easier' to do. When I spoke about climate stress testing, I mentioned that, for many companies - or even entire countries, making the necessary changes to their economy to protect the environment is extremely costly. But the cost of doing nothing to limit our negative impact on the world is far worse.

What can you do?

While researching for today's issue, I found three organisations who are doing some amazing work to support sustainable commodities on three very different levels:

1. For companies: Ecosphere+ help companies to 'create and implement nature-based solutions that enable them to succeed in a world with global climate and development goals'
2. For governments: The Green Commodities Programme supports governments 'to take the lead in creating national environments where sustainable commodities sectors can grow' through a range of public-private stakeholder collaborations
3. For everyone: ForestMind is a new organisation which will collect expert insights and research into unsustainable forest-commodities, allowing retailers, producers, and investors, to clearly see where sustainable improvements can be made

Of course, the best way to promote sustainable commodities is to make sure that you are buying ethically sourced products wherever possible, and this is why transparency and good governance are so important. Some other options to look for in your investments include carbon-offsetting, or global taxation (as explained by Unigestion ).

It is vital that we keep asking these questions and keep pressing for more and better standards. As commodities are a huge and vital part of our global economy, besides investments, the decisions we make on our daily shop can have a big impact.

Let me know what you currently do to promote sustainable commodities in your daily life, and within your investment portfolio. Do you have any tips for making commodity investments sustainable?

• Article: Your Green Wealth, 'Water and Ocean ETFs - How to Invest Sustainably in Soft Commodity ETFs '
• Report: Swiss Sustainable Finance, 'Handbook on Sustainable Investments '
• Podcast: Food and Drink Federation, 'Sourcing Sustainable Commodities: The big picture '