December 6, 2013

Risky Business: A Landscape Approach to Sustainable Supply Chains

Gabrielle KissingerLexeme Consulting

By Gabrielle Kissinger, Lexeme Consulting

On Wednesday, we saw how partnership and collaboration can facilitate the move towards sustainable agricultural production at a landscape scale. Yet risk is still a constant concern within supply chain management. In today’s post, author Gabrielle Kissinger examines the experiences of businesses taking more integrated approaches to mitigate risk and ensure long-term sustainability. She considers some of the financial and market instruments that can help achieve multiple benefits within a landscape.

Supply chains, markets and finance are integral components of agricultural management, so their role in supporting (or benefiting from) integrated approaches to natural resource use is critical. However, agricultural markets are inherently poor at bringing externalities – such as climate change, pollution, water scarcity, and ecosystem degradation – onto the balance sheet. Said another way, our food supply chains are slow to consider their effects on the environment, and how those in turn affect business performance over the long-term.

Increasingly, downstream businesses that are feeling the effects of resource depletion are finding innovative solutions by mitigating risks and investing in landscape approaches in key sourcing areas. For instance, SABMiller’s use of a business water risk assessment is one example of moving from a water risk assessment to identifying impacts on business operations and mitigation priorities. SABMiller and its affiliates are implementing this approach in a variety of water basins around the world in which they operate breweries.

Businesses are also increasingly measuring their carbon footprints and identifying ways to minimize high-risk agricultural raw materials in their supply chains, particularly those that impact forest conversion, greenhouse gas emissions, and negative social impacts. Third-party certification and standards offer an important tool for companies to pinpoint those products that meet a minimum set of criteria. Companies at the forefront are setting aggressive time-bound targets and goals for their sourcing and supply arrangements.

However, though landscape scale management is crucial for mitigating risks, production standards most often apply primarily at the farm-scale and rarely account for communities beyond the farm and the landscape as a whole. Consequently, standards bodies are increasingly considering how to incorporate a wider lens into their criteria for certification. This is particularly important for fast-expanding commodities such as oil palm, sugarcane, and soy, all of which can place strong pressures on land and water resources. Another approach is to work across entire jurisdictions, via ‘jurisdictional approaches,’ to ensure all production meets environmental and social performance standards, and integrated management can be better coordinated.

In concert with market structures, financial mechanisms must also shift to better serve integrated agricultural production and management. This is especially clear in developing countries, where it is necessary to meet the business development and funding needs of the world’s 500 million small-scale farmers.  Agriculture faces a massive finance hurdle in the future. It is estimated that the private sector will need to help bridge a $90 billion annual agricultural investment gap in developing countries in order to address food security needs up to 2050. From 1980 to 2000, the share of official development assistance dedicated to food and agriculture fell from 18% to 3%. So, while yields must rise on increasingly marginal agricultural lands to serve market demand, less ‘soft’ finance is available to support critical production practices and innovation with grants or below-market interest rate loans. Many local capital markets have high interest rates and short-term cycles, making them highly unsuitable to the higher-risk/lower return and long-term investment needs of most agricultural businesses. That means more risk for farmers, and more pressure to put social and environmental considerations on the side, in order to pay back high-interest rate loans.

Defining new architectures for mainstream finance to fit the integrated approaches in agricultural production is crucial, but to make this supply chain and market transformation happen beyond the farm-level requires further underpinning frameworks. Governments play a key role here. Often, effective policy platforms that integrate the perspectives of agriculture, water, forests, and the financial sectors do not exist in developing countries, creating a tension between the private and public sectors.  The coordination of policies is critical to set the right enabling policy frameworks to attract investment.

Finally, finance is often heavily siloed, focusing separately on agricultural productivity, water supply and sanitation, biodiversity, disaster risk response, or poverty reduction, for instance. Creating integrated approaches to agricultural management require spanning these different spheres to deliver finance to components within a coordinated approach. An example is a water company investing in changing agricultural practices upstream to lower its water treatment costs, while other finance sources might simultaneously target investments towards increasing agricultural yields.

The institutional planning and coordination of decision-processes to get to integrated solutions is often under-valued and under-financed. Yet it is essential in order to find integrated solutions that maximize value and minimize conflict for multiple stakeholders.