HOW WE ASSESS TRACEABILITY AND TRANSPARENCY

Professor John Dumay

John Dumay is a Professor of Accounting and Finance who is working on ways to solve wicked societal and environmental issues through his research and writing – the pen is mightier than the sword!

The tipping point will come when economies of scale favour sustainable cocoa and when incentives and prohibition mechanisms strongly curb the demand for unsustainable cocoa, even if offered at significantly lower prices. (Stoop et al., 2021, p. 26)

Cocoa is cheap – dirt cheap, so much so that most cocoa farmers barely eke out an existence. The average cocoa farmer earns under US$1.20 per day, and women cocoa farmers are thought to earn around 50 cents per day. (Both well less than half what they need for a living income.) Moreover, some farmers resort to unsustainable farming practices that include child labour, slavery, monoculture, misuse or overuse of agricultural chemicals, and deforestation, including illegal deforestation.

It is key to distinguish between traceability and transparency. Traceability involves tracing a bean from its origin where it grew, to the place where it gets eaten. Transparency involves being truthful and open regarding the journey of that bean. One reason transparency around traceability is so key, is that the cocoa industry has long been characterised by opacity enabling myriad of rights abuses and environmental harms. Transparency is necessary for guaranteeing true, checkable, robust traceability that journalists, civil society, law enforcement, consumers, and academics can verify.

For the cocoa industry to reform and move away from unsustainable practices, cocoa must be traced transparently along the entire supply chain, from farmer to trader to producer to the consumer. Traceability is the basis of information-preserved cocoa. However, traceability is far from being achieved, with around half the cocoa covered by this Chocolate Scorecard being in ‘indirect’ supply chains. Until traceability becomes the norm in cocoa, most other reforms will remain elusive. For example, how can you know if your cocoa comes from deforested land if you do not know what region it is from – thus making it impossible to use the right satellite maps to track forest loss around one’s supply chain? The reality is that sustainable cocoa can only be achieved with full traceability and transparency.

There are a few main aspects of cocoa traceability to keep in mind (Stoop et al., 2021):

1. ‘First mile traceability’ starts by using unique farm identifications and farm mapping. Cocoa is traced from the farmer or ‘farm-gate’ to the next stage of the supply chain, often referred to as the ‘first purchase point’ – possibly a cooperative, or a local buyer (often called a ‘pisteur’ in Côte d'Ivoire, or ‘coxeur’ in Cameroon).

2. Then, traceability is the ability to follow a product or its components through stages of the supply chain (e.g., production, processing, manufacturing, and distribution). This involves identifying the actors in a company’s supply chain and the relationships among them.

3. Conventional is the lowest level, namely cocoa sourced without traceability; 'mass balance' is one step up; 'segregated' is yet another step up; and 'identity preserved' cocoa is the highest traceability type.

4. An extended concept of cocoa traceability goes beyond physical traceability, positioning traceability as a tool to foster sustainability in cocoa – and an extended definition of cocoa traceability can stretch to cover transparency, namely requiring disclosure of information.

Transparency on traceability is crucial. One key example of such transparency in chocolate, is transferring information about the cocoa to the end product package, so consumers know where their chocolate came from and if it is sustainable. One of the ways companies can undertake this is by placing a program label or certification label on their products. It is a ‘shortcut’ way of communicating that the journey of the cocoa from the farmer to the shelf can be verified to certain standards. (We note however that with a proliferation of such logos, and without guarantees that the program works to ensure traceability, it can actually become more difficult for consumers to make informed choices).

The stakes are high. “Cocoa traceability systems provide a foundation for improving transparency along value chains, and facilitate the development of monitoring systems, allowing access to information and improving the reliability of sustainability claims. By enabling transparency, traceability systems can build bridges between producers, governments, non-governmental organizations, and market actors, whilst providing a basis for ensuring that sustainability initiatives and standards are contributing to real impact.” (Stoop et al., 2021)

In my assessment of responses to our questions on traceability and transparency, it is evident that while many companies are working hard to begin to address transparency and traceability, only a handful seem to have made significant progress in achieving full traceability (or something close to it). There has been substantial and rapid improvement across the board in the last two years where the Chocolate Scorecard considered traceability, but a large percentage of the world’s cocoa – seemingly about half – remains untraced.

(image from Technical Brief on Cocoa Traceability in West and Central Africa)

In the best case, Beyond Good buys their cocoa directly from the farmers in their country of origin in Madagascar, processes the cocoa into finished products, and then sells it to retailers and consumers. However, this kind of approach is the exception to the rule, and most companies operate far more complex and murky supply chains. As one company laments, traceability costs more and they do not believe that their consumers are willing to pay for it in higher cocoa prices.

In the worst cases, companies have still not addressed traceability for most of the cocoa in their supply chain. This virtually guarantees that they cannot know if they have unsustainable cocoa entering their supply chains.

In an industry with millions of small farmers, poor infrastructure and considerable unregulated farming and commercial practices, achieving transparency is challenging. The responses from the companies confirm that there are many different approaches to achieving traceability.

One approach for some companies, seems to be to ‘outsource’ their traceability work to certification bodies. Based on answers to the 2022 Chocolate Scorecard, many companies rely on certifications from Rainforest Alliance and Fairtrade to argue that their cocoa is traceable. In dialogue with companies, they are sometimes not aware of what certification achieves on their behalf. However, certification does not mean that all cocoa labelled with a certification is fully traceable, especially because much certification operates with ‘Mass Balance’ (Rainforest Alliance definition; Fairtrade definition). Certification may help on the traceability journey, but as repeated scandals have indicated, certification cannot guarantee full traceability.

Another approach we see some companies take, is to eschew certifications and rely on their own efforts in conjunction with some monitoring systems provided by third parties, but these approaches are a beginning and not an end.

The cocoa supply chain is still largely split into two. One half of the industry – the indirect supply chain – supplies cocoa where sustainability issues in this Chocolate Scorecard are not seen as a priority or seen as ‘too costly’. The second half of the world’s cocoa – namely the direct supply chain[1] is far more traceable, and provides a bedrock for sustainability initiatives. Many companies operate with both types of supply chains, but their public reporting focuses only on the direct supply chain, which may be only around half of their business. ‘Mass balance’ approaches have enabled this split.

We do see some positive change in the industry’s overall traceability, over the past three years. It is encouraging to see more companies are rapidly mapping hundreds of thousands of farm gate polygons. Nearly all major cocoa/chocolate companies are increasingly disclosing online all the coops they buy from in their direct supply chain, at least in Côte d'Ivoire if not globally. Some are moving away from Mass Balance and using a segregated approach to their supply chains. Along with this, we note an increase in companies who are 100% (or nearly) certified, which gives them a basis to build on for further traceability.

However, challenges remain:

1. A lack of common vision, definitions and standards: Presently there is inadequate cooperation between companies to achieve traceability across the sector. The only platforms which thus far appear to consolidate all public available information on Ivorian cocoa supply chains are not on the  World Cocoa Foundation (WCF) or Cocoa & Forests Initiative (CFI) websites, not maintained by companies or any Initiative on Sustainable Cocoa (ISCO), not run by any government, but are managed by NGOs (For example, Cocoa Accountability Map, or Trase’s cocoa supply chains mapping webpage need to collaborate and use ‘big data’ and other new technologies to create innovative traceability systems that work for the entire industry.)

2. Limited traceability in companies’ indirect supply chains: Market-dominant companies like the world’s biggest cocoa trader Barry Callebaut still have half their cocoa indirect (with almost no traceability), as opposed to direct. We see that much of the chocolate industry is focused on getting ever better visibility on the best (direct) part of their supply chain, whilst neglecting the most preoccupying and likely most abuse-prone part of their supply chain (indirect). Dramatically shrinking the indirect supply - for example with improvements in forecasting purchase volumes - will be vital. Ensuring some traceability on whatever indirect supply companies retain, will also be vital.

3. Overall weak first mile traceability: Few companies can trace the first mile for all their cocoa and most transparency on traceability is to coop level, instead of to farms. GPS technology is now being used more to accurately map farm boundaries by many companies for at least some of their cocoa (in their direct supply chains), but more remains to be done.

4. A risk of financial loss to farmers, and possibility of financial benefits: How to ensure that improvements to traceability benefit farmers, will be crucial in the years to come.

   1. Several companies outlined that traceability is expensive and thus they might use this as an excuse for paying lower prices to farmers rather than passing costs on to their customers. This must not happen.

   2. Traceable cocoa may bring a premium, and if so, getting that extra money into the hands of farmers would be key.

   3. Another issue is that non-traceable cocoa might become unsellable. In such cases, farmer well-being must be considered.

   4. Some traceability can be achieved via mobile money payments to cocoa farmers, and if this happens then farmers can benefit from being lifted out of the ranks of the unbanked – or they may suffer financially, especially if they live in a remote area where mobile money is not commonly accepted for household goods, school fees, or other daily expenses. Eliminating cash payments could mean that theft and corruption can be better tackled and eliminated as much as possible. All these considerations should be taken into account, and overall, any shift to traceability via mobile money ought to be carefully implemented, with farmer well-being at the heart of the shift and farmer engagement in the planning, implementation and evaluation stages.

5. The need for rapid change to ensure compliance with imminent regulation: Rapid traceability reforms are needed in response to plans by the European Union, France, United Kingdom, U.S.A., New York, California, and other jurisdictions to ban or curb imports of commodities linked to deforestation and human rights abuses. The proposed European law may signal a tipping point for fuller traceability. If cocoa companies do not ensure they are ready to comply with such regulation speedily, they risk seeing their shipments disrupted such that many farmers may suffer. Compliance – including via full traceability – ought to be fast-tracked to avoid trade disruptions and economic harm to already-vulnerable smallholder farmers.

6. Eliminating practices that undermine the trustworthiness of traceability systems: For example, some traceability and certification systems failed to identify that cocoa from deforested areas ended up as certified cocoa. Just because the cocoa is certified does not 100% guarantee the cocoa comes from where it is claimed.

Much could change with the advent of new deforestation traceability programs announced by the Ivorian government, as well as traceability reforms announced by Ghana and Cameroon. Additionally, Côte d’Ivoire and Ghana are also jointly developing a regional sustainable cocoa standard that will contain requirements for physical and financial traceability. This could constitute a welcome change as thus far, most cocoa-producing countries have been unable or unwilling to guarantee anything approaching transparent traceability for their cocoa.

Overall, the results show that there is a long way to go as there was little evidence of coordinated approaches across the industry. It mostly seems that everyone is running their own race, and that is not achieving the level of traceability and transparency needed to address the multiple problems in the cocoa supply chain.

REFERENCES

Stoop, P., N. Ramanan, H. Geens, Lambrecht, A. and Dekeister, S. (2021), Technical Brief on Cocoa Traceability, C-Lever.org, IDH and GISCO. https://www.idhsustainabletrade.com/uploaded/2021/04/Cocoa-Traceability-Study_Highres.pdf

The World Cocoa Foundation Monitoring and Evaluation Guidance Manual. https://www.worldcocoafoundation.org/wp-content/uploads/2021/12/MEL-Guidance-Manual-1.2.pdf

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[1] We are using the most referred to definition in the World Cocoa Foundation Monitoring and Evaluation Guidance Manual. https://www.worldcocoafoundation.org/wp-content/uploads/2021/12/MEL-Guidance-Manual-1.2.pdf

Direct supply / supplier: Recognising that "membership" of farmer organisations is dynamic and not controlled by the upstream purchaser, "direct suppliers" are those farmers / producer cooperatives / organisations which operate at the point where their cocoa is collected / aggregated for onward sale. The buyer at first purchase point serves as the source of financing for the direct purchase of that cocoa from the farmer; in which companies are implementing longer term sustainability related programs; and in which there is a positive historical record (at least 1 year) of payments and deliveries with each cooperative or organisation included in the count. Such direct supply chain relationships should include the documentation of and sharing of records of farmer members, including GPS farm locations, polygon boundary mapping, and basic household information. In cases where intermediaries are involved in purchasing, the above criteria apply in order to be considered “direct”.

Indirect supply / supplier: All cocoa that does not meet the above definition. This would include all cocoa purchased through independent middlemen (such as traitants and pisteurs in Cote d’Ivoire) as well as cocoa purchased from farmers / producer cooperatives / organisations which operate outside of companies’ longer term sustainability related programs or without a positive historical record (at least 1 year) of payments and deliveries.