Using sustainability in branding; finding the sweet spot

The 'reality distortion field' between sustainability claims and facts

On the one hand the brand wants to be as transparent as possible towards the consumer. Telling the consumer the entire story of the product. Who is the farmer that cultivates the produce, where does he work and live? Who is the person that works in the factory, under what conditions? But there is a limit to what the brand actually knows about the origin of its products. Consequently there is a limit to what the brand knows about its sustainability.

Lesson learned from Financial Crisis

As history is currently written about the financial crisis, it has become clear that the independent credit agencies, did not protect the consumer as they should have. The following Great Depression in the US, the Sovereign Debt Crisis in Europe, all were accelerated because of the poor job the credit agencies had done. In hindsight they were not as independent as everyone thought. The financial institutions that needed to sell their product to the public, would pay for the agency's services and got the required rating.

Authorities are now applying stricter oversight on what the rating agencies are doing, to avoid that it could hurt consumer confidence again.

Claim Sustainability

It is big business for the global brands to claim that their products are sustainable. Reason is their bottom line. Studies show that consumers trusts independent labels that support the producer’s sustainability claim.

Then again, there is not really a choice for these brands. There is a ‘first mover’ advantage for the first brand that starts eco-labeling its products. Then the second and third brand follow suit. Soon the eco-label becomes the minimum requirement to enter the market as a new brand.

Now, the only way forward from a marketing perspective has become Sustainability.

Flipside of sustainability claims

If you claim sustainability as a brand, you need to be able to back it up. That means through your supply chain you should be able to provide the transparency the consumer is looking for so they can trust your claim.

Now this is very tough for any large multinational. They have very complicated supply chains. Let's take an example:

In 2015 Nestlé won the award for Best Corporate Responsibility Report and was the 2nd runner up in 2016. In 2015 Nestlé admitted to modern slavery claims among some of their seafood suppliers in Thailand. This all came to light during an internal investigation Nestlé initiated a year earlier. In 2016 Verité, an independent Fair Labor NGO, conducted an investigation and published a report with recommendations on how to combat modern slavery in seafood supply chains.

This is not unique to Nestlé. Cargill was in a similar spot. A finalist the 2016 Corporate Citizen Award of the US Chamber of Commerce, while still fighting child slavery claims in US and foreign courts.

These companies are the 'tall poppies' and will be scrutinized perhaps even more than their peers. It is very difficult to entirely avoid these types of misconducts from happening in your supply chain. More importantly might be, how the brands react to these types of situations. Are they trying to cover it up, or are they doing everything they can, to dig up all the dirt that might be out there.

Consumers (with the help of corporate watchdogs) have developed a keen nose for detecting bogus sustainability claims or a genuine effort to be transparent and avoid future misconducts.

Managing of Risk through the Supply Chain

There are 3 mayor areas in the supply chain to manage risk from the company's perspective:

• The Supply Side: focus on the relationship with the suppliers of raw materials, produce, semi-manufactured goods etc;
• Internal: focus on the control of internal processes at the company's own sites and plants;
• The Demand Side: focus on the relationship with the consumer, where its more about logistics and communication.

This is traditionally called the ‘one-back, one-forward’ approach in food safety regulations. Basically it requires a producer to know who are his direct suppliers and clients.

The management of Supply Side risk has become much more challenging in an open economy where consumers demand transparency and brands claim sustainability. Brands that deal with commodities that are sourced from different places in the world, are having a really hard time to keep track of the origin. Yet, consumers and lawmakers are more demanding. Now how can brands trace the commodity?

Especially in Food & Beverage the circumstances are constantly changing because of external factors. A couple of examples:

• Vietnam is faced with an outbreak of leaf rust, where does a coffee brand source his coffee from?
• A tanker is stranded and the following oil spill affects the local lobster industry, where is the supermarket sourcing his seafood from?
• A severe drought hits the Horn of Africa, where does your favorite beer brand source its sustainable barley from?

This challenge will only increase as we can expect more extreme weather, increasing standards of living and increasing demand for transparency.

Currently the food supply chain has completely siloed ERM data systems that at best use the same file formatting. You can imagine how challenging it is to quickly trace down any risk in food safety, let alone support the sustainability claim.

Different Models of Traceability

Eco-labeling can help companies with traceability. There are basically 4 different traceability models:

• Identity Preservation; This is the most comprehensive model where you can trace the product back to its source. In the case of food & beverage commodities it allows for producers to communicate almost directly to the consumer (through the platform of the brand). This will provide the consumer with all the information he or she is looking for. Also from a food safety perspective, it becomes much easier to trace any risks to public health straight to the source;
• Segregation; In this model the sustainable product is separated from the non-sustainable product through the entire supply chain. Based on this model the brand can guarantee the consumer that the product is 100% sustainable. Knowing the exact source of the product has become much more challenging though;
• Mass-Demand; In this model both sustainable and non-sustainable product (imagine, coffee, cacao etc.) is being mixed. So the only claim the brand has, is that their product is only for X% sustainable. In the case of Rainforest Alliance this percentage can be as low as 30% for coffee or orange juice;
• Book & Claim; Under this model farmers with sustainable products offer their 'sustainability rights' through an online platform to a buyer that is looking to offer his product under a sustainability claim. This is transaction is entirely virtual. On the one hand there is the producer with a sustainable product and no access to the market (Producer A). On the other hand is the producer with access to the market and no sustainable product (Producer B). Producer A now sells his sustainability claim to Producer B. The brand claiming sustainability based on this model might be legally viable, but for a consumer it is highly confusing.

The External Certification Bodies

The entities that form the independent certification bodies and issue sustainability labels form a crucial part in the entire supply chain. They are the gatekeepers for those that want to enter the sustainable world. Comparable to the independent credit agencies that rate products of institutions that want to sell in the financial world.

Let's look at a couple of them in more detail:

1. UTZ

UTZ last year announced a merger with Rainforest Alliance. Their focus is to become the biggest eco-label in world. The difference with other eco-labels mentioned here is their focus, or lack thereof. You can find their label in a wide variety of industries and verticals. Their focus is less on becoming an authority on coffee or cacao (which they originally were), but more on establishing sustainability authority with the consumer of the brand;

1. FSC

The Forest Stewardship Council (FSC) is an eco-label for the timber industry (like PEFC). For example the wood in furniture Ikea sells is for 60% sourced from FSC certified forests. They expect to hit 80% by 2020. 100% apparently is a challenge still.

Illegal logging of timber is a serious social & environmental issue. Especially in countries like Brazil and Indonesia where about 50% of all logging is illegal. According to Global Witness illegal logging is linked to what they call ‘conflict timber’.

The EU (which accounts for roughly 50% of worldwide tropical hardwood market) has incorporated the EU Timber Regulation (‘EUTR’) in 2013. But watchdogs are complaining that EU’s efforts have not been enough. One of the biggest problems is that not all member states are enforcing the EUTR. In other words, there are still backdoors to get non-certified timber into the EU.

European timber buyers struggle with the EUTR due diligence obligation they have been tasked with. They rather prefer to rely on a third party certification like FSC (or PEFC), that basically de-risks their supply chain.

1. MSC

The Marine Stewardship Council (MSC) is another eco-label, but focused on the vertical of the fishing industry. Similar to what FSC is doing for timber. Obviously the thorny social issues attached to timber, do not exist for MSC.

The MSC eco-label has helped the sustainability of the fishing industry, but critics also mention that the certification is throwing up barriers for operators in developing countries limiting their access to the international markets.

Whole Foods Market is a great example. They will only sell sustainably certified seafood. Only fish with the MSC eco-label (and 2 others) is accepted by the green wholesaler. For their brand reputation they demand sustainable fish. And while their sales are increasing (with the help of Amazon Prime), so should sustainable fishing. This puts significant strain on the sustainability of the supply chain.

Tech for real time sustainability

Over the recent years new technology has emerged that make it possible to trace the product through the entire Chain of Custody. Not one product is the same, and especially where a lot of manufacturing is going on between raw material and end product, there is still a challenge.

Three great examples are:

• ThisFish: According to Oceana's report of traceability in seafood last year, using tracking systems like ThisFishand others, it becomes easier for the fisherman to tell their story, the retailer to know where the fish is coming from, and for the consumer to scan the code and check in the app the information on the particular product they want to buy.
• Geotraceability: Geotraceability is more industry agnostic. They take on very diverse sectors. Like conflict free minerals or cacao and coffee. The system allows to follow these commodities from the first bag that is being mined or harvested, through the processing plant, to the end product (be it gold, roasted coffee or chocolate);
• Harvestmark: Finally Harvestmarkis system focusing on agriculture. The type of product they track are mostly fruits & vegetables.

As also legislators are going to put more pressure on brands, these technologies (and their data collected) will no longer be a luxury, but a necessity. An example of heightened interest in this data is the acquisition of Geotraceability by PwC (Consultants). Consumers will not be waiting for the annual Corporate Social Responsibility Reporting of the brands. They now are getting all this information real time. What is the legal status of all the information shared through online tracking software? Who is the owner? What is their social or environmental value?

As sustainability data is being collected and analyzed, other technologies are needed for securely store and exchange this valuable information. In comes the blockchain. To the general public this technology is better known because of Bitcoin.

Linux Foundation, IBM and Hyperledger have helped multinational organisations to embrace the blockchain technology. It is not the intention to make all this data publicly available, but to store it securely and have real time access when needed.

You can expect more interest from consumers (or their representative bodies) on what happens to all this data. They might demand access instead of being fed the data that brands feel comfortable releasing.

As Mark Twain put it: “Figures often beguile me…particularly when I have the arranging of them myself”. He continues: “There are three kinds of lies: lies, damned lies, and statistics”

No Trust without Transparency

From a study conducted last year by Label Insight it is very clear that the consumer would stay loyal (or switch) to the brand that is providing more information on their product. With the advent of more technology in traceability, consumers expect to have access to even more information on their product and at a faster pace.

No Ethical Sourcing without Traceability

The biggest challenge for brands over the next number of years lies in the ethical (or sustainable) sourcing. On the front-end the brand claims sustainability, and the consumer takes his word for it. But then on the back-end there are significant challenges to support this claim.

The market models for a large number of commodities have existed for centuries and have not changed in any fundamental way. Between the producer of the commodity and the brand lots of different intermediaries are involved. And their agenda is not necessarily in line with that of the brand. So getting the necessary information on sustainability and origin will remain a challenge. For the intermediary this could feel like giving up competitive advantage as they now have to tell them their source.

So with all the technology, models, regulation, audits and reporting in place, it could very well be that the people in the supply chain will keep muddying the waters for their own perceived benefit.

Sustainability is a road of no return, but it might take a while before that has sunk in through the entire supply chain.

Legislator in the Supply Chain

On an international level the UN published a reporting framework for human rights issues. There are now about 20 countries that have their own National Action Plan in progress or published, based on the same UN Guiding Principles (UNGP).

In 2015 the UK published, as one of the first countries, a Modern Slavery Act, to promote transparency in the supply chain of UK based companies.

Since then thousands of companies in the UK published a statement on the online Modern Slavery Registry, in which they express their commitment to comply with the new Act.

In the Guidance Paper to the Modern Slavery Act, the UK Government lists the benefits for companies to be mentioned in the registry:

• protecting and enhancing an organisation’s reputation and brand;
• protecting and growing the organisation’s customer base as more consumers seek out businesses with higher ethical standards;
• improved investor confidence; and
• greater staff retention and loyalty based on values and respect.

In the US the CALIFORNIA TRANSPARENCY IN SUPPLY CHAINS ACT entered into force in 2012. Any California State Tax payer with earnings over $100m and selling produce in California, should publish their effort on how the combat slavery and human trafficking in their supply chain. California, measured in the GDP, is the world's 8th economy. Five years after the enactment studies find that still only half comply fully with the disclosure requirement under Californian legislation.

There is now a debate on whether or not legislators should regulate the voluntary CSR Reporting by companies. France, as often is the case, has far reaching CSR regulation in place. It covers listed as well as unlisted companies. These companies are obligated to also obtain 3rd party assurance on their social and environmental indicators.

Legal Risks in CSR Reporting

On the one hand most brands with sustainable products use their annual reporting on Corporate Social Responsibility as a display for their best possible sustainable behavior. A number of them have been doing this for more than a decade already. There is however a downside. If you are the first one reporting on your Corporate Social Responsibility, you have a competitive edge. If everybody in the industry starts doing it, you’d better start reporting as well. This is now the new norm (same as eco-labeling). 

But could CSR reporting also backfire? As a brand, you have to think a couple of steps ahead. What happens in case of a class action filed by some of your suppliers? These are not hypothetical risks.

Among the Top 20 companies with the best CSR reputations In the world in 2016, a study performed by the Reputation Institute, are IKEA and Ferrero.

If you take a look at IKEA's report and the detail that is being displayed, it could give consumers the impression that the brand personally knows their farmers. In their 2016 report there is an interview with Khalil Ahmad, a cotton farmer from the Punjab province of Pakistan.

The same happens in the reporting of Ferrero. They publish interviews with farmers they work with. One of them, Olomi Rotini, a cacao farmer from Nigeria that is participating in one of Ferrero's programs. So Olomi's cacao ends up in Ferrero's Nutella. And viceversa the perception is created that Ferrero knows exactly from which farmers it gets its cacao. That has of course big implications.

Lets follow that train of though for a second. This would make sourcing a lot easier if you would know all your farmers. No need for complex mass-balance or 'book & claim' traceability models. You apparently have established direct communication with your farmer. Ferrero would not interview Olomi this year, if they would not be working with him next year. It would not be very sustainable because of the negative social impact incurred by the farmer as his quality of life would diminish. The brand creates a different perception of the reality of sustainability.

Although it is not their intention to mislead, the brand could suffer disloyalty from its consumers if it would get involved in the next sustainability scandal.

Child labor in Cacao

Close to 70% of the world's cacao is coming from Ghana and Ivory Coast. Over 2 million children work on cacao farms in these countries. And according to a report of the Tulane University, the number of child labor actually grew by 20% between 2008 and 2014 .

So this would make it statistically almost impossible for Ferrero to guarantee zero child labor in their supply chain. I'm not picking here on Ferrero, but remember that they work directly with Olomi in Pakistan. How could the same brand not know who they are working within Ghana or Ivory Coast.

Because the same applies for all big chocolate brands that needs to source large quantities of cacao from the world market. Sooner or later they all end up in those markets and become exposed to these risks.

Conflict Minerals

Similar thing is happening to another natural resource, cobalt. Tech giants and increasingly more car makers need cobalt for their batteries. More than 50% of the world's cobalt is mined in the Democratic Republic of the Congo ('DRC'). The DRC is also home to more than 50% of the world's cobalt (un-mined) proven reserves. Although officially not on the SEC's list of 'conflict minerals', various NGO's are arguing it should be.

Prices on cobalt have doubled from last years. Demand over the next 10 years could be 30-fold of what they are today. Bringing a mine into production takes years and often more than a decade. So it will be ‘all hands on deck’ to secure steady supply to resource hungry battery plants.

Already big brands like Apply and Tesla have stated bold claims that they will be sourcing only 'non-conflict minerals'. It will be a challenge for these Tech companies to deliver on that claim.

In Conclusion

As I mentioned above, the road to sustainability is without return. This road however, will be a winding one. Watchdog organizations will stay on top of, cases of violations of social and environmental sustainability. And they will keep ending up in the news. The brands can stay ahead of the curve by thoroughly investigating, communicating violations and work on solutions. For legislators there will be the eternal balancing act between top down regulation and bottom up (free market) voluntary reporting. The consumer will be most loyal to the brand they trust most with sustainability issues.

The biggest risk in my humble opinion is the ‘reality distortion field’ created by the brands themselves. They are not as sustainable as they purport to be. The laws of the commodity markets will not allow for this. Unless we radically change the way we perceive commodities. Commodities, in the end of the day, are nothing more than natural resources extracted and cultivated by our own communities in order to put it in the hands of the consumer.