Corporate America & Climate Change: McDonald’s Sets Pace for Strategies & Action in Global Fast-Food Industry

by Hank Boerner – Chair and Chief Strategist – G&A Institute

Game changer – early adopter – first mover – tipping point – striving for excellence:  These are some of the familiar themes of their work offered by best-selling business authors. These phrases help to frame our understanding of established or emerging trends.

Peter Economy, the “leadership guy” at Inc. magazine, offers us his take on the McDonald’s food chain announcement that “will change the future of the fast-food industry”.

Leadership:  The company says that 84 percent of its trademark “McCafe Coffee” for the U.S. outlets (and 54% globally) is verified as sustainably sourced.

That means the company is on track to meet its goal of 100% sustainably sourced coffee everywhere by year 2020.

Keep in mind that the familiar golden arches food outlets sell more than 500 million cups of coffee annually.  (The company has 37,000 restaurants in 120 markets, serving 69 million people daily.)

Why take this course of action?  The company says rising temperatures may dramatically affect coffee production and so McD will work with “thousands of franchisees, suppliers and producers” on the future of coffee production — and other societal issues related to climate change.

The “size and scale” of the McD brand operations will help to make a difference in this and other climate change matters, the company thinks.

For example, on beef production – the company sells more than 1 billion pounds of beef annually – McD ranks among the highest of all fast food companies in the Business Benchmark on Farm Animal Welfare…demonstrating concern about animal welfare.

McDonald’s in 2018 works through its “Scale for Good” initiative — which includes addressing such challenges as packaging and waste, restaurant energy usage and sourcing, and beef production.

The company will work to reduce GhG emissions — to prevent 150 million metric tons of GhG emissions from release to the atmosphere by 2030. That plan aims to reduce GhG emissions related to restaurants and offices by 2030 from the 2015 base year by 36%.  There is also the commitment to reduce emissions intensity across the supply chain against 2015 levels.

Note that franchisee operations (stores), suppliers and products account for 64% of McDonald’s global emissions – the company’s effort will be among the most sweeping in its industry to address the entire footprint of operations.

If you are a McDonald’s supplier or business partner – take note!  If you are a competitor – take note!

As part of its sustainability journey, McDonald’s has adopted SDG Goal #7 (Affordable and Clean Energy), Goal 13 (Climate Action) and Goal 17 (Partnerships for the Goals).

Click here for more information.

This Week’s Top Stories

McDonald’s Stunning New Coffee Sustainability Announcement Will Completely Change the Future of Fast Food
(Friday – November 30, 2018) Source: Inc. – Today, fast-food giant McDonald’s made a stunning announcement that will change the future of the fast-food industry. According to this announcement, 84 percent of McDonald’s McCafé coffee for U.S. restaurants (and 54 percent…

Critical Development for CDP Responders in 2018 & 19: CDP Introduces Additional Alignment With FSB Task Force on Climate-Related Financial Disclosures Recommendations

By Hank Boerner – Chair & Chief Strategist, G&A Institute

Corporate ESG Data, Data, Data – it’s now everywhere and being digested, analyzed and applied to corporate equity analytics and portfolio decision-making.

Whether your public company participates in the annual round of organizing responses to the ever-more comprehensive queries from leading ESG / sustainability / CR rating agencies or not, there is a public ESG profile of your company that investors (asset owners, managers and analysts) are examining and applying to their work.

If you don’t tell the story of your firm’s progress in its sustainability journey, someone else will (and is).  And if you have not embarked on the journey yet…and there is not much to disclose and report on…you are building the wrong kind of moat for the company.  That is, one that will ever-widen and impair access to capital and affect the cost of capital.  And over time, perhaps put the company’s issues on the divestiture list for key investors.

This sounds a bit dramatic, but what is happening in the capital markets these days can be well described as a dramatic shift in focus and actions, with corporate ESG strategies, actions, programs, achievements, and disclosure becoming of paramount importance to a growing body of institutional and retail investors.

Consider these important developments:

  • The influential Barron’s editors, reaching hundreds of thousands of investors every week, beginning in Fall 2017 made coverage of corporate sustainability and sustainable investing a mainstay of the magazine’s editorial content.
  • Morningstar, the premier ranker of mutual fund performance, added sustainability to the analysis of funds and ETFs with guidance from Sustainalytics, one of the major ESG rating firms (and Morningstar made a significant investment in the firm).
  • SustainableInvest, headed  by Henry Shilling, former leader on sustainability matters for Moody’s Investor Service, noted that in 2Q 2018 as the proxy season was ending, 2018 voting was notable for the high level of “E” and “S” proposals, some achieving majority votes in shareholder voting at such firms as Anadarko Petroleum, Kinder Morgan and Range Resources.  Assets in 1,025 sustainable funds analyzed added $14 billion during 2Q and ended in June at US$286 billion; more than $1 billion was new net cash inflows, demonstrating investor interest in the products.

Significant:  according to the Harvard Law School Forum on Corporate Governance and Financial Regulations, two-thirds of investor-submitted proxy resolutions focused on having the company follow through on the 2-degrees scenario (testing) were withdrawn and company boards and managements agreed to the demand for climate risk reporting.

The FSB TCFD Impact on Corporate Sector and Financial Services Sector

The Financial Stability Board, an organization founded by the central bankers and financial leaders of the G-20 nations, created a Task Force on Climate-related Financial Disclosures (“TCFD”) to develop climate-related financial disclosures for adoption by financial services sector firms and by publicly-traded companies in general.

The 32-member Task Force, headed by Mayor Michael Bloomberg, announced financial recommendations for companies and investors in June 2017.

The essence of the recommendations:

  • Corporate boards and managements should focus on the risks and opportunities present and in the future taking into account a global temperature risk of 2-degrees Centigrade (3.5-F), and in the future, 4-C and even 6-C global temperature rises.

The risks (presented are not just to the affected companies but to the financial sector institutions investing in the company, institutions lending funds to the company, carriers insuring the company, etc.).

The risks and opportunities related to climate change should be thoroughly analyzed using the scenario testing that the company uses (an example would be projecting future pricing, regulations, technologies, and “what ifs” for an oil and gas industry company).

The company should consider in doing the scenario testing and analyzing outcomes the firm’s corporate governance policies and practices; strategies for the long-term; risk management policies and resources; establishing targets; and, putting metrics in place for measuring and managing climate risk.  Then, the next step is disclosing this to investors and other stakeholders.

Key Player:  CDP and its Wealth of Corporate, Institutional and Public Sector Data

The CDP – formerly known as the Carbon Disclosure Project – was founded almost two decades ago (2000) as a United Kingdom-based not-for-profit charity at the urging of the investment community, to gather corporate “carbon” data.

Timing:  soon after the start of meetings of the “Conference of the Parties” (or “COP”), organized by the United Nations as the Climate Change Conferences. (The “UNFCCC”.)

In the mid-1990s, the Kyoto Protocol emerged that legally-bound nations to their pledge to reduce Greenhouse Emissions (GHGs).  The U.S.A. did not sign on to the global protocol during the tenure of President George W. Bush, and the agreement reached in Paris at the COP meeting in 2015 was finally agreed to by President Barack Obama.

And then began the process of withdrawal under President Donald Trump.  The U.S.A. is now the prominent holdout (among the community of 197 nations signed on) in the global effort to address global warming before the danger point is passed.  In Paris, the COP agreed that the threshold was 2-degrees Centigrade.

Today, a growing universe of investors and many other stakeholders are increasingly focused on the role of carbon emissions in the framing of questions about what to do as scientists charted the warming of Earth’s climate.

And so — ESG / environmental data is critical to the mission of determining “what to do” and then implementing measures to address climate change challenges.

The Critical Role of CDP 

CDP over almost two decades since its founding has become the premier repository of corporate data related to climate change – with more than 6,000 companies’ data collected and shared in organized ways with the investment community.  (That includes the ESG data of half of the world’s public companies by market cap.)

The CDP emissions data focused has broadened over 16 years to now include water, supply chain, forestry (for corporates) and environmental data from more than 500 cities and some 100 states and regions available to investors.

Key user base:

  • 650-plus institutional investors with US$87 trillion in Assets Under Management.
  • Corporate Supply Chain members (such as Wal-Mart Stores) that collect data from their suppliers through CDP—a universe of 115 companies with over $3.3 trillion in combined purchasing power.

When the TCFD recommendations were being developed, CDP announced a firm commitment to align with the task force recommendations.

Following their release of the Task Force recommendations in July 2017, CDP held public consultations on a draft version of the TCFD-aligned framework. The current 2018 Climate Change questionnaire that corporations received from CDP is fully aligned with the TCFD recommendations on climate-related disclosures related to governance, risk management, strategy, and metrics and targets.

The TCFD recommendations are already aligned with the majority of CDP’s longstanding approach to climate change disclosure, including most of the recommendations for climate-related governance, strategy, risk management as well as metrics and target disclosure.

However, this year CDP has modified some questions and added new ones — the most impactful being on climate-related scenario analysis to ensure complete alignment.

Some modifications include:

The Governance section now asks for more information about oversight of climate change issues and why a company doesn’t have board-level oversight (if applicable). CDP also requests information about the main individual below the board level with the highest responsibility — and how frequently they report up to the board.

Next, in the risks and opportunities section, CDP now asks for the climate-related risk & opportunity identification, and assessment process.

As in past years, questions are posed in the Business Strategy module to allow companies to disclose whether they have acted upon integrating climate-related issues into their strategy, financial planning, and businesses.

CDP has also added a question for high impact sectors on their low carbon transition plans, so data users can gauge and further understand the sustainable and strategic foresight that these companies aim to achieve.

CDP also added a new question on scenario analysis, explaining that scenario analysis is a strategic planning tool to help an organization understand how it might perform in different future states.

A core aim of the TCFD recommendations is for companies to improve their understanding of future risks and develop suitable resilience strategies.

Finally, the TCFD recommendations highlighted five (5) sectors as the most important. In 2018, CDP rolled out sector-specific questions for the four non-financial sectors that the TCFD highlighted (they are energy, transport, materials, and agriculture).

TCFD also highlighted the financial sector – looking forward, in 2019, CDP is planning to release a financial sector-specific climate change questionnaire.

The TCFD resources for investors and corporate managers are embodied in three documents – (1) the Main Report; (2) an Implementation Annex; (3) the Technical Supplement for Scenario Analysis.  These are available at:  www.fsb-tcfd.org

G&A Institute Perspectives:

Our team has been assisting corporate managers in organizing the response to the CDP annual survey and we’ve tracked over the years the steady expansion of information requested of companies.

Our advice to companies not reporting yet:  get started!  The CDP staff members are very cooperative in assisting new corporate reporters in understanding what data are being sought (and why) and providing answers to questions.

CDP’s founding CEO Paul Simpson cautions:  “Big companies:  get better at telling those who hold the purse strings how climate risks could affect your bottom line.”

And so, our mission at G&A includes helping corporate issuers tell a better sustainability and ESG story, including the story told in the data sets communicated to 650-plus institutional investors by CDP!

CDP data is everywhere, we advise clients, including for example being part of the volumes of ESG data sets that Bloomberg LP shares on its terminals (through the terminal ESG Dashboard).

On the supply chain side, we point out that more than US$3 trillion is the collective spend of companies now addressing their supply chain sustainability factors and environmental impacts (customers see suppliers as part of their own CDP footprint).  Corporate leaders in this effort include Apple, Honda and Microsoft, CDP points out.

Resources:

CDP’s Technical Notes on the TCFD are available at: https://b8f65cb373b1b7b15feb-c70d8ead6ced550b4d987d7c03fcdd1d.ssl.cf3.rackcdn.com/cms/guidance_docs/pdfs/000/001/429/original/CDP-TCFD-technical-note.pdf?1512736184

The “A” List of CDP naming the world’s business leaders on environmental performance (160 firms) is at: https://www.cdp.net/en/scores-2017

The CDP USA Report 2017, focused on key findings on Governance, ESG and the Role of the Board of Directors is available at: https://b8f65cb373b1b7b15feb-c70d8ead6ced550b4d987d7c03fcdd1d.ssl.cf3.rackcdn.com/cms/reports/documents/000/002/891/original/CDP-US-Report-2017.pdf?1512733010

There’s an excellent interview with CDP CEO/Founder Paul Simpson at: http://www.ethicalcorp.com/disruptors-paul-simpson-atypical-activist-who-woke-c-suites-climate-risk

You can check out Henry Shilling’s SustainableInvest.com at: https://www.sustainableinvest.com/second-quarter-2018-sustainable-funds-investing-review/

 

Food & Ag Sector – Sustainability is in Focus from Farm-to-Table As Companies Make Progress / Stakeholders Say “More”

by Hank Boerner – Chair & Chief Strategists, G&A Institute

Hey, a Cuppa Joe – the morning treat for many people around the world.  That first hot cup of dark coffee can set the tone for us for the day. And when our spirits (and energy) may lag, the cuppa joe can perk us up again for a while at any time of day.

But – how many of us give thought to how that wonderful dark liquid arrived in our grocery stores, at the local Starbucks or Dunkin’ Donuts or other local coffee counters?

The Ecologist took a close look at the business of coffee recently and their commentary (and report on the industry) is our Top Story for you this week.

The writer set out characterizing the global coffee industry as one that has been mostly “unsustainable” but lately, major coffee producers have been working to create more sustainable business models.

Guest Writer Emily Folk explains:  the coffee industry spans countries and cultures, is centuries old, and from harvesting the beans through roasting to the final retail product, the industry is recognizing public expectations about some practices – and is undergoing changes.

She ventures that “people have begun to take note and hold companies accountable” – like Starbucks – and in response, major coffee companies are making promises to do better.  But are they keeping the promise? Doing enough?

Alas, there is a lack of progress to be reported, she says.  As well as some progress to cheer about.

Starbucks according to a news report in the UK runs water 24 hours a day in the production process.  Bad practice?  The company has also been selling reusable cups and installing recycling bins at every store.  Certainly good practices.

Should the buying public pressure brand name companies like Starbucks to do more?  The writer delves into that.

It would be good to recognize that progress is being made by growers through retail food marketing companies and to be thoughtful about what is next in that company’s (and other companies’) sustainability journeys.

The G&A Institute team has been working with food and agriculture companies on various issues over many years.  This is a sector (Food & Ag) rich in traditional practices and ripe for positive change as stakeholders and consumers present their expectations for the firms to be more sustainable – and accountable to society.

Every week in the newsletter we present Food & Ag news, commentary and research content for your consideration.  There are several items in this issue on the topics.

Top Stories

Making the coffee industry sustainable
(Wednesday – May 23, 2018)
Source: The Ecologist – Sustainability is increasingly important for implementation in businesses. One of the industries that has been unsustainable since its inception is coffee. However, some major coffee producers have been working to make a more…

Are We Making Progress? Considering Recent News About “Apparel Fashion and Sustainability” — and the Investor Initiative to Help Make East Asian Factory Workers Safer and Better Paid…

by Hank Boerner – Chair, G&A Institute

In monitoring the growing abundance of news stories and commentary about “supply chain,” “globalization” or “trade” topics and issues, our editors often see the focus is on apparel, clothing, textiles, fashionand related topics & issues.

Companies in the developed economies widely source apparel footwear and related items in the developing and under-developed nations – and what happens there can quickly make news that travels around the globe.

Example:  The focus five years ago about this time was on the East Asian nation of Bangladesh and the Rana Plaza vertical factory tragedy in the capital city of Dhaka (or Dacca) that killed more than 1,000 garment industry workers.  The labels of leading western nation marketers were scattered about the debris and ashes — and those familiar brand images as well as images of the collapsed building and details of the tragedy helped to focus attention on worker conditions in the East Asian region in both North America and Europe.

The Interfaith Center on Corporate Responsibility (ICCR) investor coalition is keeping the focus on worker safety as the “Bangladesh Accord on Fire and Safety” is renewed for another three years.

ICCR institutions and their investor allies organized as “The Bangladesh Investor Initiative” (with collective AUM of US$4.5 trillion) on the 5th anniversary are urging a stronger corporate response and demonstrated commitment to local worker safety and adequate wage levels.  The link to our blog commentary on recent developments and background information for companies and investors is below.

Some good news to share is that sustainability is catching on in the fashion industry.  The uber fashion magazine from publishers Conde Nast – Vogue, with more than one million readers — just published a story about the embrace of “eco-friendly” fashion, spotlighting “the best designers of a new generation are stitching sustainability into everything they do…”

“While sustainability has long been considered a “byword for hemp-heavy bohemia,” writer Olivia Singer explains, “a new generation of designers is building brands with a more conscious approach to fashion at their core.”

Fabrics are sourced through collectives in India empowering female weavers as just one example.  In the article designers explain why sustainability is important to their brands (Richard Malone, Le Kilt, Elliss, E.L.V. Denim, Alyx, Marine Serre, Richard Quinn are featured interviews).

A number of creative approaches being adopted by the designers is explained — just think about the contribution to global sustainability of turning recycled plastics and viscose into yarn and fringing, using organic cotton as well as recycled polyester for “new” fashions, creating ECONYL from fishnets to make swimwear, and using recycled cotton and plastics as part of the effort of making sustainability a “pillar of luxury”.

The encouraging details are in our Top Story this week – a cautionary note:  some of the fashion photos are edgy and might offend.

Top Stories

The Young Designers Pioneering A Sustainable Fashion Revolution
(Thursday – April 26, 2018) Source: Vogue – While eco-friendly fashion has never had particularly glamorous connotations, the best designers of a new generation are stitching sustainability into everything they do.

And of interest, our own related content on G&A’s Sustainability Update Blog:  The Bangladesh Garment Factory Workers Tragedy and Investor and Corporate Response Five Years On…

As the Global Demand for Palm Oil Rises, There is More Focus on the Growing Areas – and on Industry Behaviors Such as Deforestation

By Hank Boerner – Chair, G&A Institute

Palm Oil is one of the world’s most popular vegetable cooking oils and in western nations is widely used as prepared food ingredients. Food industry interests promote the benefits: lower cholesterol levels, less heart disease, more Vitamins A and E, and much more, derived from the rich beta-carotene from the pulp of oil palms.

Palm oil also shows up in our detergents, shampoo, cosmetics, pizza slices, cookies, margarine — and even in biofuels. Palm oil is especially used for cooking in Africa, Asia and parts of South America and is growing in favor in other regions such as in North America.

The palm oil plantations are located in such regions of the world as Southeast Asia – and there the industry is linked to the downside of the beneficial consumer product: deforestation, degrading of flora and fauna habitat, abuses of indigenous peoples, and negative impact on climate change as old growth land and tropical forest is cleared to make way for oil palm plantations.

Stakeholder reaction resulted in the creation of “reliable No Deforestation, No Peat, No Exploitation” policies – the “NDPE”.

These were developed for certification (to buyers) by the Roundtable on Sustainable Palm Oil (RSPO) and adopted in 2013 and 2014 by numerous Southeast Asian palm oil traders and refiners.

The policies (spelled out as best practices) are designed to prevent clearing of forests and peat lands for new palm oil plantations. There are 29 company groups, reports Chain Reaction Research, that have refining capabilities and have adopted NDPE policies. (Climate Reaction Research is a joint effort between Climate Advisers, Profundo and Aidenvironment.)

“Un-sustainable” palm oil practices are an issue for investors, customers (buying the oil), companies with sustainable practices, and countries in which palm oil is grown and harvested.

According to a new financial risk report from Chain Reaction Research, major markets with customers that accept “unsustainable palm oil” include India, China, Pakistan and Indonesia.

One of the major centers of production is the huge – more than 3,000-miles wide — Pacific Basin archipelago nation of Indonesia (once known as the Dutch East Indies). Almost half of the world’s palm oil refineries are in Indonesia and Malaysia.

The Indonesian government (the Ministry of Agriculture) reacted to the NDPE policies and proposed changes to its own certification program – known as the “Indonesian Sustainable Palm Oil Standard” (ISPO) – that would appear to be presenting companies with pressure to adopt one or the other of the certifications.  (The ISPO policy focus is on reducing Greenhouse Gas Emissions and addressing environmental issues.)

For Indonesia, palm oil is a strategic product that helps the government to meet job creation and export market goals. “Small holders” account for more than 40% of production in the country.

“Evidence suggests that the need for edible oil and energy will continue as populations grow, “Darmin Nasution, Coordinating Minister for Economic Affairs for Indonesia points out. “Land that can be utilized will decrease, so the question is how to meet those needs in the limited land area. Increasing productivity will be the key.”

Companies using the existing Indonesian ISPO certification were accused of human rights abuses and “land grabs” and so in January the government developed the new certification, which opponents claim weakens protection (the draft changes for the regulation removes independent monitoring and replaces “protection” with “management” for natural ecosystems).

Stranded Asset Risks

CDP estimates that global companies in the industry had almost US$1 trillion in annual revenues at risk from deforestation-related commodities. As the developed nation buyers looked carefully at their global supply chains and sources, “stranded assets” developed; that is, land on which palm oil cannot be developed because of buyers’ NPDE procurement policies. Indonesia and Malaysia have some of the world’s largest suppliers.

Western Corporate Reaction

Early in 2018 PepsiCo announced that it and its J/V partner Indofood suspended purchasing of palm oil from IndoAgri because PepsiCo — a very prominent global brand marketer — is concerned about allegations about deforestation and human rights were not being met.

Institutional Investors are busily identifying companies that source Crude Palm Oil (“CPO”) without paying attention to sustainability requirements, putting pressure on both sellers and buyers and perhaps pushing the smaller players to the sidelines. European buyers import CPO in large quantities to be used in biofuels.

The bold corporate names in western societies show up in rosters of company groups with refining capacity and NDPE policies, including Bunge, Cargill, Louis Dreyfus Company, Unilever, and Wilmar International. These are large peer companies in the producing countries (like IOI Group, Daabon, Golden Agri-Resources) are aiming for “zero deforestation” in their NDPE policies.

Other companies that source palm oil include Kellogg’s, Procter & Gamble, Mars, General Mills, Mondelez International, and other prominent brand name markets.

Your can check out the Chain Reaction Research group paper – “Unsustainable Palm Oil Faces Increasing Market Access Risks – NDPE Sourcing Policies Cover 74% of Southeast Asia’s Refining Capacity” at: http://chainreactionresearch.com/2017/11/01/report-unsustainable-palm-oil-faces-increasing-market-access-risks-ndpe-sourcing-policies

What About Exercise of National Sovereignty?

This situation raises interesting questions for developed nation brand marketers. If the government of Indonesia presses forward with the country’s own standards, should the purchaser in a developed country ignore or embrace the country standard? Instead of the Roundtable on Sustainable Palm Oil (RSPO) standard? What about “sovereign rights,” as in the ability for a sovereign nation to establish its own policies and standards governing the products developed within its borders?

As industry groups create their own standards and invite industry participants to embrace these (such as for product certification), corporations may find themselves bumping up against “nationalistic” guidelines designed to benefit the internal constituencies rather than “global norms” imposed from outside the country’s borders.

# # #

Responding to the streams of negative news coming out of Indonesia, Chain Reaction Research on April 26 reported that Citigroup has cancelled loans to Indofood Agri Resources and its subsidiaries. Citigroup will exit its overall relationship with Indofood other than specific financial relationships that are not related to the palm oil business, says the research organization.

The research firm said that labor and environmental violations by Indofood and other companies related to Anthoni Salim and his family have been documented. The web of companies: Salim and family own 44% of First Pacific, which owns 74% of Indofood.

In April a report commissioned by Rainforest Action Network Foundation Norway and SumofUS and prepared by Chain Reaction Research alleged deforestation of almost 10,000 hectares of peatland by PT Duta Rendra – which is majority owned, the report says, by Salim and PT Sawit Khatulistiwa Lestan, which is associated by Salim.

Notes:

As we prepared this commentary, the Danish Institute for Human Rights and The Forest Trust carried out a Labour Rights Assessment of Nestle’s and Golden Agri-Resources palm oil supply chain in Indonesia.  Nestle’s and GAR and going to share their own action plans in response to the findings and recommendations.

For The Roundtable on Sustainable Palm Oil information: https://www.rspo.org/

There is information from a recent conference in Jakarta for you at: https://www.scidev.net/asia-pacific/forestry/news/science-can-keep-palm-oil-industry-sustainable.html

The Indonesian Government ISPO information is at: http://www.ispo-org.or.id/index.php?lang=en

General Mills Statement on Responsible Palm Oil Sourcing is at: https://www.generalmills.com/en/News/Issues/palm-oil-statement

Rainforest Action Network information is at: https://www.ran.org/palm_oil?gclid=EAIaIQobChMIuJyBg97i2gIVE1mGCh3A-QMYEAAYASAAEgKZePD_BwE#

The Union of Concerned Scientists information is at: https://www.ucsusa.org/global-warming/stop-deforestation/drivers-of-deforestation-2016-palm-oil#.WudvOKjwbAw

Global Trade – Good or Bad For Nations – For Individuals — a Factor in Encouraging Greater Sustainability for Society?

by Hank Boerner – Chair, G&A Institute

“Trade” can be viewed in the macro-environment or the micro, with personal advantages and disadvantages for men and women in both developed and developing nations.

With a new administration coming to Washington DC in January 2017, the heated rhetoric of the 2016 presidential primaries and during the general campaign quickly moved “trade” as a loose-lip and often-un-informed talking point at rallies in the direction of possibly enacted national public policy.

Tear up NAFTA  – punish China – make cozy deals with countries one-at-a-time instead of multi-lateral agreements.  That’s seemingly the direction of the Trump Administration policy-making in 2018 — if we believe the rhetoric.

So — the question hangs — is global trade good or bad for U.S. workers…for the economy…for workers in both developed and developing nations…as a positive or negative in the quest for greater global sustainability?

As in all policy making, we must search for truth and evidence to help answer the questions — and guide public governance.

We do have help if we want to tune in to the source:  The independent, not-for-profit National Bureau of Economic Research (NBER) weighed in in April with a Working Paper: “How Large Are the U.S. Economy’s Gains From Trade?”

FYI – NBER (founded in 1920) is based in Cambridge, Massachusetts, and has a huge cadre of economists and researchers that work to provide us with “objective, quantitative analysis of the American economy.”

The scholars issue a steady stream of Working Papers for public consumption (and study and discussion by policy makers looking for “truth, fact, objectivity, reliable findings”  — my characterizations).

The name may ring a bell — NBER is the non-governmental organization that declares the official start and end of a U.S. recession, for example.  Their declaration is often separate of what is going on in the capital markets so it stands out.

In the current paper, the researchers examined “estimates of the economic benefits of a globally-open economy.”  And the impact plus or minus on the American economy.

Most likely results: they see a gain for the U.S. domestic economy of from 2% to 8% through open global trade, depending on certain assumptions about consumer and producer behavior.

What if we actually slammed the door shut on trade beyond our borders?  Authors Arnaud Costinot and Andres Rodrigues-Clare explain there is [surprisingly] little direct quantitative evidence on how the economy would react if we did begin to close the doors on global trade. (Note to policymakers: That’s why we don’t make hasty or dumb decisions on trade!)

Looking at such factors as labor and capital embedded in goods purchased from around the world, they estimated the gains from trade by comparing the size of a “counter-factual” U.S. economy that would depend entirely on domestic sources compared with a nation (like the USA) that has ready access to foreign services and goods.

While the dollar value of U.S. imports is large, as a percentage of national spending it is actually really small.

There are varying impacts of open trade on individual industries – and the enterprises and their workers.

For garment and apparel companies the demand for cheap labor is “in-elastic” in economic lingo. Not much wiggle room or flexibility. That is why the companies go to East Asia for labor inputs.

For an American automaker, the import of German-made transmissions for installation in Detroit’s models is somewhat lesser of an impact (there are always alternatives).  US manufacturers used to be more “integrated” and made most of the components for their trucks and cars. Now the industry is defined as a global sourcer.

For U.S. farmers, the impact depends on where else in the world wheat is grown and the ready availability and pricing for that wheat. Trade is critical to the American farm belt.

Think of rare minerals used in manufacturing — if vital minerals are only available in certain areas of the globe, and are needed (say for making cell phones or other electronic products), the dependency is greater for U.S. manufacturers (again, in-elasticity reigns).

Tradeoffs in global trade exist everywhere: Lower consumer prices are enjoyed (as designer-label garments flow to U.S. retailers’ shelves from cheap East Asian labor sourcing) — but too many American workers may lose jobs and/or work for lower wages.  And in turn, local communities suffer.  The 2016 elections showed one of the results of that suffering as voters signalled their discontent with trade policies.

Global Trade ESG Issues

NBER researchers looked at a different topic in the trade bucket for their Working Paper: the effects of Fair Trade Certification.

The movement began led by a church-affiliated NGO in Holland and quickly spread throughout Europe and to the U.S.A. and various groups coalesced in the Fair Trade Labelling Organization (“FLO”) in 1997.

In this research effort, NBER authors Raluca Dragusanu and Nathan Nunn examined the impact of the Fair Trade movement on coffee producers in the Central American nation of Costa Rica, in the heart of the global coffee belt (typically countries near the Equator).

They looked at FLO impacts on incomes of coffee growers, their neighbors and communities.

Fair Trade policies, they assert, is a positive as it raises prices for local growers, to begin with, high enough to cover the cost of production. The higher prices are typically intended as well to raise the quality of life in the coffee-growing region.

Premium prices paid by buyers above the set minimums are used to build schools and establish scholarships, create local health care facilities, and various infrastructure, and to help improve growing practices.

Through fair trade practices, income rises in Fair Trade growing areas, for both certified growers and many of their non-growers neighbors.

Income levels were on average 3.5% higher for growers and as much as 7.5% for “skilled” coffee growers (when the “intensity of fair trade increases in an area).

The researchers found that price premiums for growers increased school enrollments (2%-to-5%) for children ages 13-to-17 — critical ages for young men and women preparing for their adult lives.

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We found this and other NBER research interesting. We have “cold, hard facts” about the economy and trade and the “what-ifs” if present trade policies and practices are messed with, and the results are in the main “unknown”.

And we see that global trade is lifting people and their communities in a Central American country where coffee growing is an important agricultural pursuit.  And a benefit of open and fair trade.

Like climate change and many other public issues, there are plusses and minuses in trade affairs — and no easy answers!

Therefore, we can argue, let reason reign, common sense be applied — and science and facts and evidence-based research be the foundations of good public sector decision-making!

Thanks to NBER researchers for their efforts (in producing more than 1,000 Working Papers a year) to continue to produce research and surface evidence that can add to be leveraged to develop both public and private sector strategies.

You can learn more at:  www.nber.org

The Bangladesh Garment Factory Workers Tragedy — and Investor and Corporate Response Five Years On

By Hank Boerner – Chair, G&A Institute

We are five years on from the Rana Plaza “Savar” five-story factory building collapse and fire that killed more than 1,000 garment workers in Dhaka (Dacca), the crowded capital city of Bangladesh. (The accident was on April 24, 2013). In the ashes and debris there were the labels of prominent developed nations’ apparel marketers. Reputations were at stake — “Reforms” discussions were immediately underway in Europe and North America.

The Europeans moved on with the “Bangladesh Accord on Fire and Safety” while in North America brand marketers were moving on “The Alliance on Bangladesh Safety.”

Where are we today?

The Interfaith Center on Corporate Responsibility (ICCR) is keeping the accident and aftermath in the focus of the investment community and stakeholders. Yesterday ICCR (a coalition of 300-plus institutional members managing $400 billion AUM) and the group of allied investors issued a statement that helps to explain where we are.

About The Accord

Right after the building collapse, the Bangladesh Accord on Fire and Building Safety was created as a model for collective action by brand marketers and retailers that source in Bangladesh.

The Accord is now being extended (as the five-year deadline is reached in May) for another three years to complete the remediation of the 1,600 factories and companies that have not signed on (yet) are being invited by the investor coalition to become signatories and to implement the reforms spelled out in the Accord.

The Accord, the investors point out, is still serving as a model that can be adopted and applied to other at-risk countries and sectors.     

The Bangladesh Investor Initiative – led by ICCR – was a catalyst that brought together 250 institutional investors with US$4.5 trillion in AUM in May 2013 to urge a stronger corporate response to the Rana Plaza tragedy, including urging companies to sign on to the Accord.

The coalition invited companies to commit to strengthening local worker trade unions to ensure a “living wage” for all workers, and to engage with the Bangladesh government.

About the Accord:

  • Corporate signatories agree that global and local trade unions and NGOs could be invited to inspect the country’s apparel factories and implement reforms to protect workers.
  • Companies were asked for transparencies in publicly disclosing their suppliers – including those located in the nation of Bangladesh.
  • Worker grievance mechanisms and effective remedies (including compensation) should be put in place for all workers and their families.
  • The investor coalition argued that supply chain transparency is critical to safeguarding workers and employer responsibility – including information on sub-contractors.
  • Note that the Accord is legally-binding for signatories.

Making the Case

Lauren Compere, Managing Director of Boston Common Asset Management makes the case for companies: “Stakeholders, including investors, rely on transparency as a tool for evaluating corporate performance on a range of social, environmental and corporate governance issues. The Accord has been very transparent in requiring disclosure of each of the 1,600 companies it covers, which helps investors track progress. This is a ‘best practice’ that all companies need to implement, beginning with Tier One suppliers, then throughout their supply chain.”

Progress Report – 5 Years On

To date, 220 brands and retailers have signed on to the original Accord. Remediation plans have made 2.5 million workers in “Accord factories” have been made “meaningfully safer”. A steering committee made up of an equal number of brand and union representatives and a neutral chair from the International Labor Organization govern the Accord.

The Accord provided for in-depth health and safety training to personnel in 846 factories, reaching 1.9 million workers. A grievance process is in place; to date, there have been 183 worker complaints investigated and resolved.

Detailed information is required for each factory.

The Rana Plaza Donors Trust Fund has been established to compensate workers injured in the collapse and families of workers who were killed (note that Bangladesh has no national employment injury system). $30 million has been raised to date; companies sourcing garment/apparel work in the country were asked to contribute; 30 companies did so, along with several union funds and foundations. The ILO is the trustee and oversees distributions.

The investor coalition is pleased with the progress made to date – but stresses that there is much work still be done (therefore the 3-year extension is necessary). “The job of mediating all of the issue is far from done and we will continue to urge those companies that have not signed on to the 2018 Accord and its three-year extension to do so.”

The New Elements to the Accord

The 2018 Transition Accord has gathered140 signatory companies to date, with 1,332 factories covered. The new elements include:

  • Safety Committee & Safety Training at all covered factories;
  • Training and Complaints Protocol on Freedom of Association;
  • Severance payments for affected workers in factory closures and relocations.
  • Voluntary expansion of the scope to include home textiles; fabric and knit accessories;
  • Transition of Accord functions to a national regulatory body.

We’ll bring you updates as the Transition to the new Accord continues.

About the Nation of Bangladesh

Located in Southeast Asia, the People’s Republic of Bangladesh is the world’s 8th most populous country, according to Wikipedia (163 million estimated). It was once part of “British India” until East Bengal became part of the Dominion of Pakistan, was re-named East Pakistan and then became independent in the early -1970s. It is characterized as a “developing country,” one of the poorest, and trades with the USA, EU, China, Japan, India, and other nations. Per capita income was estimated at US$1,190 in 2014.

The largest industries are textiles and ready-made garments; leather-goods (footwear is the second largest in exports. Bangladesh is the second largest exporter of clothes in the world.

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Notes / Information:

There’s more information for you on the ICCR web site: www.iccr.org

Information about the Accord: http://bangladeshaccord.org/

The Accord Update for April is at: http://bangladeshaccord.org/wp-content/uploads/ACCORD_FACTSHEET_Apr2018.pdf

There’s information for you in G&A Institute’s “To the Point!” management briefing platform:

https://ga-institute.com/to-the-point/a-big-year-2018-for-developments-in-corporate-sustainability-sustainable-investing-the-two-halves-of-the-great-whole-of-the-new-norms-of-capitalism/

CNBC in commenting on the five year anniversary (on April 24) noted the factories still pose a life-threatening risk, with 3,000 of 7,000 factories endangering the lives of low-paid garment workers (according to a New York University Centre for Business and Human Rights Study).

The story is at: https://www.cnbc.com/2018/04/24/bangladesh-factories-still-pose-life-threatening-risks-five-years-on-from-rana-plaza-disaster.html

The NYU report authored by Paul M. Barrett, Dorothee Baumann-Pauly and April Gu is at: https://static1.squarespace.com/static/547df270e4b0ba184dfc490e/t/5ac9514eaa4a998f3f30ae13/1523143088805/NYU+Bangladesh+Rana+Plaza+Report.pdf

Human Rights Watch also weighed in with “Remember Rana Plaza: https://www.hrw.org/news/2018/04/24/remember-rana-plaza

Supply Chain Responsibility – A Signal of Excellence in Corporate Accountability? Stakeholders Are Increasingly Thinking That Way…in the “New World Order”

Back in 1991, the tense “Cold War” environment of the post-WWII era was coming to an end.  President George H.W. Bush, a veteran fighter pilot in WWII and “Cold War Warrior,” addressed the U.S. Congress (January 19th) to deliver his State of the Union address.

“We stand at a defining hour,” he declared. “What is at stake is more than one small country (referring to Iraq at that moment); it is a big idea – a New World Order, where diverse nations are drawn together in common cause to achieve the universal aspirations of mankind…peace, security, freedom, and the rule of law. Such is a world worthy of our struggle and worthy of our children’s future.”

While the comments included references to the winding down of the Cold War and the enduring division of nations into two competing blocs (the USA and USSR) and standing-by status of “the Third World” of developing nations, the term “New World Order” captured the imagination and has endured.  But what does it mean?

Among other things, it means a freer flow of goods, capital and people among the nations of the world, relatively more peaceful conditions and more freedom to create more opportunity in every corner of the globe.  And that meant the s-t-r-e-t-c-h-i-n-g of the corporate procurement and sourcing efforts and the building of a much-more complex and far-flung supply chain for many developed society companies.

And as that supply chain became a more universal practice and more deeply embedded into the vital operations of the corporate sector, indeed many aspects of the “New World Order” became apparent.  And questions began to arise: What are the conditions of the workers within your global supply chain?  What are the environmental protections being put in place as the local suppliers in less-developed nations strive to produce more for the major customers in developed societies? What is your firm’s contributions to the well-being of the local community at which you source your goods?

Many company managements do struggle with the answers to these questions – and investors and stakeholders continue to raise questions about the nature of, the operation of, conditions within, the supply chain of many companies in their portfolios.

We have brought you numerous reports from around the world on the subject of global supply chains in these weekly newsletters. This week’s Top Story is about survey results from DNV GL; the company conducted a survey of professionals at global companies across Europe, the Americas and Asia – out of 1400 responses, 60 companies emerged as supply chain “sustainability leaders” based on attributes defined by DNV GL.  You’ll want to read this.

The New World Order has come to define many business and investing activities over the 25-plus years since President Bush delivered his remarks.  The USA has signed on to the WTO treaty, which was a departure from the traditional GATT talks encouraged by the U.S. after WW II.

The fundamentals of manufacturing have significantly been re-ordered over these years – with apparel and footwear and accessories as examples virtually disappearing from assembly lines in North America.  Yes, we are living in the New World Order – ask a veteran purchasing manager or sourcing manager about that if you can – we are miles beyond the operating conditions of 1991.

With rising purchaser expectations of greater accountability on the part of companies they do business with, supply chain responsibilities inch closer and closer to the top of priorities. Tell us, show us, the mantra of the stakeholders seems to be!

This Week’s Top Story

Supply chain management survey indicates greater pressure on companies to demonstrate sustainability
(Thursday – February 22, 2018) Source: Modern Material Handling – A new international survey by DNV GL, a global quality assurance and risk management company, reveals an emerging gap between beginners and leaders when it comes to managing sustainable supply chains