Regulatory pressure is growing for companies to have more sustainable supply chains. Such rules have great potential. They could change the incentive structure of the market, allowing companies to overcome competition hurdles that have hampered sustainability action in the past.
But beyond the right market conditions, companies also need credible solutions that enable efficient compliance with the rules and help realise the intended sustainability impacts.
Market-based sustainability systems, like ISEAL members, have a strong history of developing credible solutions for impact.
ISEAL has distilled this into emerging good practice through the ISEAL Credibility Principles. I believe our Credibility Principles are equally applicable for companies seeking to be more responsible supply chain actors.
I have had the pleasure of engaging with companies in the cocoa supply chain recently, so I will use insights gained from those conversations and the example of the EU Deforestation Regulation (EUDR) implementation to illustrate this here.
The EUDR as an illustration
The EUDR is a significant milestone in corporate sustainability regulation. Deforestation and forest degradation pose a long-term threat to climate, biodiversity and human rights.
Regulatory solutions are urgently needed. But while the EUDR is a step in the right direction, many companies and their supply chain stakeholders are grappling with implementation complexities. So much so, that the EU Commission has proposed a one-year delay to its application date. If passed, this additional time will create the opportunity to do things right.
What are companies in the cocoa-sector grappling with?
Commodity-specific complexities: The cocoa supply chain includes a vast network of remote smallholders and informal upstream business practices. This creates traceability challenges that differ from commodities dominated by large-scale plantations or producer countries with more formalised upstream business practices.
Data ownership dilemma: The valuable data required for EUDR compliance comes at a cost. Companies are worried about how market forces beyond their control will mean third parties are extracting this value, yet leaving most of the costs on those least able to bear them.
Disproportionate impact on smaller companies: The costs associated with EUDR compliance can disproportionately affect smaller businesses. While the regulatory tiering in the EUDR makes compliance for smaller companies simpler, many fear it cannot compensate for the economies of scale of larger companies, potentially creating an uneven playing field.
Diverging outcomes of risk assessments: The decentralised nature of EUDR risk assessments leaves a lot of room for differing conclusions between different supply chain actors. The instruments offered by the EU for risk assessments, such as the EU Forest Observatory’s map, have been criticised for lack of accuracy and usefulness for demonstrating compliance.
ISEAL’s Credibility Principles can point companies towards solutions
ISEAL’s Credibility Principles not only define the core values of credible and effective sustainability systems, but also speak to themes companies are grappling with during EUDR implementation. What does this mean for the specific challenges mentioned above?
Impact-focused approach: Sustainability impacts should remain at the core of any action. Maximum impact requires adaptation of tools for specific circumstances. If the EUDR is to achieve its full potential, its implementation needs to be flexible enough to accommodate different supply chain realities.
Value creation: It’s important to ensure that the effort and resources invested in compliance across the supply chain, particularly by producers, are fairly rewarded.
Impartiality: Credible sustainability action depends on the impartiality of the system that supports it – including competitive dynamics between supply chain actors. Concerns about disadvantages faced by smaller companies need to be addressed.
Reliability: It’s key to design tools and standards that can be consistently implemented and assessed, addressing any ambiguities in EUDR risk assessments.
Turning ISEAL’s Credibility Principles into action
The EU Commission faces many industry questions surrounding clearer guidance and solutions to EUDR challenges. But how can companies develop their own solutions, embracing the lessons of ISEAL’s Credibility Principles?
Collaborate on commodity-specific solutions
- Action: Engage deeply with industry peers, sustainability systems and regulators to develop commodity-specific good practices for EUDR implementation.
- Benefit: Tailored approaches that better reflect supply chain realities, potentially reducing compliance costs, improving effectiveness and legal certainty around EUDR implementation.
Invest in open data platforms
- Action: Support and participate in non-proprietary data platforms like the ITC Deforestation-Free Trade Gateway.
- Benefit: More equitable distribution of data costs and value, reducing the risk of unfair exploitation by third parties and damage to supplier relationships.
Leverage sustainability systems
- Action: Partner with credible sustainability systems, to pool compliance resources and to contribute towards broader sustainability objectives.
- Benefit: Reduced costs for smaller companies and access to established, credible processes that are being adapted for EUDR compliance and can simplify your due diligence process. As an added benefit, gain access to wider sustainability system infrastructure that can support compliance with other sustainability regulations and create impact beyond just compliance.
Support improved risk assessment tools
- Action: Contribute to efforts to improve open-source GIS forest layers and other assessment tools, like national risk assessments.
- Benefit: More reliable and consistent risk assessments between supply chain actors.
Advocate for reasonable flexibility in implementation
- Action: Work with regulators and industry bodies to agree where reasonable flexibility is needed, especially on traceability, for example, the acceptance of controlled mass balance chain of custody systems.
- Benefit: A compliance process that accommodates diverse supply chain realities while still meeting EUDR objectives.
The path forward
The EUDR represents both a challenge and an opportunity for companies committed to sustainable supply chains. By embracing the ISEAL Credibility Principles, businesses can deliver on regulatory requirements and drive meaningful sustainability improvements.
Collaboration will be key in this new regulatory landscape. Companies, sustainability systems, regulators and producers must work together to refine implementation strategies and improve risk assessment tools, ensuring that the EUDR achieves its intended impact without undue burden on vulnerable stakeholders.
By embracing ISEAL’s Credibility Principles, companies can turn regulatory challenges into an opportunity for leadership in sustainable business practices. The journey may be complex, but with the right approach, it’s a path that leads to more resilient, ethical, and sustainable supply chains for all.