Creating a more sustainable chocolate bar

We increasingly want to know more about what goes into our food, including treats like chocolate, and its environmental and social impact: how is industry responding?

When we treat ourselves to a snack to ward off that sluggish afternoon feeling, a growing number of people consider not just how tasty a chocolate bar will be – or even how many calories it might have – but the affect it will have thousands of kilometres away, where the cocoa in that bar is grown.

“People’s attitudes to food have changed, especially for products with ingredients grown in developing countries,” explains Geert Bierman, product specialist commodity finance at ING. “We now know about working conditions and environmental damage on the other side of the world because of mass media and the internet. The world now wants food without slavery, child labour or negative environmental impacts – not least because most people have the money to choose between good stuff and bad stuff. We don’t want people to suffer for our pleasure or to have our luxuries tainted.”

Ensuring that our food doesn’t have negative consequences for those growing it is harder for some products than others. Cocoa, which is the primary ingredient in chocolate, is grown mainly on a small scale in countries such as Ivory Coast. Despite increasing demand for the commodity, most cocoa famers remain extremely poor. “Merchants, which buy the commodity, transport it and process it and end users, such as the brand names we see in stores, are working to improve these farmers’ livelihoods and protect the environment,” says Bierman. “But progress has been slow.”

Investing in production

While the plight of many cocoa farmers is moving – many live on little more than a euro a day – the merchants engaging with sustainability challenges are not motivated by charity, according to Bierman. “Helping farmers to gain access to fertiliser, trees and knowledge is essentially a business decision,” he says. Consequently, these beneficial inputs are not given away – although they are often sold at low cost – because it is important for farmers to recognise that they add value.

“Ultimately, merchants’ commitment to sustainability is about production stability and quality and to ensure farmers livelihoods so that they are there to produce the following year,” says Bierman. It’s also important to improve farmers’ livelihoods so that young people are encouraged to come into the industry and farms remain viable – many young people are leaving for towns because they see few prospects in agriculture. The average age of a cocoa farmer in Ivory Coast and Ghana is more than 50, which is extremely high for countries where over 50% of the population is under 25.

What can merchants do?

A large part of any effort to improve sustainability and farmers’ livelihoods needs to be focused on education. “It’s especially important because in many of these countries education infrastructure has been limited for decades,” explains Bierman. As a result, farmers may be resistant to change that could increase productivity.

For example, most farmers are hesitant to crop their trees because they believe it will reduce yields. The reality is that cropping increases yields by regenerating trees. Typically, merchants employ agronomists to work with farmers to show how cropping can increase harvests: information is usually disseminated on a pyramid basis to ensure as many people as possible reap the benefits.

Merchants can also help farmers to understand the benefits of division of labour. “By increasing the number of non-farm agricultural jobs – where people specialise in fertilisation or transport, for example – skills can be built up and farmers can concentrate on their crop,” says Bierman. “Overall, such specialisation improves local incomes more widely.”

Placing value on provenance

While increasing production is essential to helping farmers, it is equally important to increase what they earn per kilo of production. “The key to higher values is de-commoditisation,” says Bierman. For commodity products like grain, de-commoditisation is problematic because the product is interchangeable. “In contrast, cocoa and coffee can de-commoditise by putting the origins of the beans on the packet. Indeed, consumers increasingly demand such information.”

Cocoa producers can differentiate themselves by providing additional information about provenance. “Lindt, Starbucks and other companies have developed programs with merchants to ensure that their beans come from a specific place and species and that certain labour standards have been enforced,” says Bierman. “Such information is valuable from a reputational perspective: it appears prominently on their websites.”

There are industry efforts underway to use blockchain and other technologies to enhance traceability and track the supply chain. Alternative solutions include genetic coding or more low-tech solutions such as spraying bags of cocoa beans with a marker that can be detected when they reach their destination. Many farmers now have mobile phones, so it is conceivable that these could be used to help document the origins of cocoa beans.

While provenance looks set to become increasingly important, certification, which has been important in raising awareness and setting standards, is likely to become less so. “We expect the brand to become the effective certificate,” says Bierman. Organisations such as FairTrade have played an important role and many companies adhere to their standards in response to consumer demand. But the long-term benefits of paying farmers more than the value of their crop is questionable. “It might make more sense to help farmers to produce a stable and high quality produce that allows them to invest and improve their quality of life,” he says.

Ultimately, it would be advantageous for African countries to move up the value chain by developing processing plants (at the moment most beans are exported before they are processed into cocoa powder, butter and liquor). But buyers often believe that local processing cannot deliver the required quality or stability. “Moreover, obtaining bank finance is difficult because of high country risk: it is often safer to take the beans to Europe, North America or Malaysia,” says Bierman. “Organisations such as the World Bank and the IFC could potentially play a role in addressing this challenge.

Financing change

ING focuses on financing companies that follow all the relevant rules and regulations associated with soft commodities such as cocoa and palm oil (which is an important ingredient in many mainstream chocolate bars, and controversial given it is sometimes grown in cleared rainforest), according to Bierman. “But we also expect clients to go further than the minimum legal requirements in many instances: we recognise that some local standards can be inadequate and expect clients to be active in pushing to improve sustainability in the broadest sense.”

Bierman says that ING is in constant dialogue with merchants and processors about sustainability, traceability and their efforts to improve the social welfare of farmers. “Improving the use of pesticides and herbicides not only helps to preserve nature but can improve harvests and ensure that producers receive certification and make their products more saleable to Western, and increasingly Asian, consumers,” he says.

One company with a close relationship with ING is Barry Callebaut, the world's leading supplier of high-quality chocolate and cocoa products. Its long pedigree when it comes to sustainability informs its approach to finance. In June 2017, it completed a green revolving credit facility with ING acting as sustainability coordinator, providing advice on structuring and implementation to a syndicate of 13 international banks. “This innovative financing product perfectly fits into the Group’s Forever Chocolate [sustainability] initiative,” says Remco Steenbergen, CFO of Barry Callebaut.

The margin Barry Callebaut pays on funds borrowed under this facility is linked to its sustainability rating as assessed and determined by Sustainalytics, an independent, global research and ratings’ provider. “This important feature helps the finance organisation to contribute in a tangible way to our sustainability efforts and mission,” explains Steenbergen.

To date, ING has also made two sustainability-linked loans to Asian palm oil producers. In November 2017, Asian producer Wilmar International converted a portion of its $150 million existing bilateral, committed revolving credit facility into a sustainability performance-linked loan. Wilmar has committed to a wide range of environmental, social and governance (ESG) targets and, if they are met, will benefit from a lower interest rate for part of the loan in the following year. In March 2018, ING extended the sustainability loan concept further when it acted as sustainability coordinator for Olam International’s $500 million revolving credit facility – the first sustainability-linked club loan in Asia.

A healthier future

Our appetite for chocolate continues to grow; as people become wealthier in emerging market countries demand for this affordable luxury steadily increases. While progress is slow, the cocoa industry is committed to improving the sustainability of chocolate. That means we can all enjoy the occasional treat without feeling guilty (apart from worrying about the impact on our waistlines, of course).

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 Sector Expert – Agricultural Commodities

Geert Bierman

Sector Expert – Agricultural Commodities