Earlier this year, my colleague shared an issue paper that provides background on and objectives of The European Commission’s (the Commission’s) new strategic approach on Strengthening the Role of the Private Sector in Achieving Inclusive and Sustainable Growth in Developing Countries. The Commission believes that a new approach to private sector engagement is needed to meet current development agendas because partnerships between the private and public sectors can have a greater collective impact in developing countries than each sector working separately can. 

The European Union (EU) is the largest donor of development aid worldwide. In 2010, the EU provided €53.8 billion – more than 50 percent of global aid. The Commission is the second largest donor globally, managing €11 billion of aid per year. As such a large donor of development aid worldwide, the EU is invested in ensuring that the funds are as effective as possible in this changing world.

The Commission aims to support the EU’s Agenda for Change, which focuses on new ways of engaging private sector partners through a blending of funds (e.g. loans and grants) to achieve sustainable growth in two priority areas:

1. Human rights, democracy, and other key elements of good governance
2. Inclusive and sustainable growth for human development
   
   

The Commission illustrated their impact objectives in Figure 1, which shows us that the real opportunity for impact lies in shifting the bulk of an industry. It also demonstrates where government regulations and voluntary standards fit in.


Figure 1: Shifting the bulk of an industry towards improved performance

The Commission proposed that its private partnership strategy will focus on the following top priorities:

1.     Business environment reforms: enhance effectiveness by improving the quality and prioritization of reforms that target regional and business needs.

2.     Employment impact and poverty focus of private sector development support: promote crosscutting issues such as women entrepreneurship, youth employment, and decent work.

3.     Support for micro-, small-, and medium-sized enterprises (MSMEs): support the creation of business opportunities and markets for local MSMEs.

4.     Vocational training and capacity development: provide a greater voice to employers when developing occupational standards and training programs.

5.     Access to finance: strengthen the capacity of international intermediaries and support regulatory framework reform and the development of financial infrastructure.

6.     Private sector partnership: engage in public-private partnerships and explore innovative financial instruments.

7.     Private sector as the “delivery channel” for development: consider the private sector’s ability to provide services that have traditionally come from the public sector.

8.     Private sector contribution to inclusive growth: provide economic opportunities to the poor that allow for sustainable livelihoods.

9.     Transformation towards a green economy: the private sector – a critical actor in the advancement of economic development, job creation, and poverty alleviation – should be guided by an appropriate framework.

10.  The role and responsibility of the private sector in a post-2015 framework: an active economic strategy to reach these objectives including providing incentives for public-private sector to contribute to sustainable and inclusive growth.

I am encouraged that the Commission recognizes the importance of the private sector in achieving its development goals, and I largely agree with their priorities. With this said, I would encourage the Commission to consider the following realities to allow for wider support across the private sector.

If government wants to shift the bell curve in Figure 1, they must ensure that its “pushing power” is scalable and effective. Regulations must also demand better performance over time. Government regulations often have more effect than voluntary standards (“pulling power”) on businesses’ investments and activities. An example of this is the impact that the US conflict minerals legislation has had on spurring companies and supply chain actors to act quickly – and largely consistently – across entire industries.

The importance of good governance in developing countries is understated by the Commission. Good governance is an essential foundation for any successful program or system. No private or public entity should be expected to invest in a poorly governed state. Governments are in a better position and have a responsibility to promote good governance in developing countries. The Commission should emphasize the importance of good governance and take action to address it.   

I support the Commission’s focus on MSMEs, an essential segment of the supply chain. The Commission must also recognize that MSMEs often have limited resources and resiliency, which means that they might possibly present the greatest opportunity for improvement if they are introduced and integrated into a global market. The Commission’s plan to create a platform to connect EU buyers with MSME suppliers is a good approach to facilitate these connections.  

Governments should also play a role in providing safety nets for, and building the resiliency of, the most vulnerable members of society such as MSMEs and the poor. Ideally the governments of developing countries would provide this, but governments in consumer markets may also have to contribute to such needs.

Businesses can provide demand, know-how, and needed innovation. They can influence policy and help align suppliers towards such common goals as sustainable and inclusive growth. They can be more flexible, responding to changing conditions more quickly than governments can. This greater flexibility can provide a deeper level of resiliency to changing realities and markets. 

However, many retailers or end buyers do not typically make capital and long-term investments, especially in indirect supply chains. They can commit to being a guaranteed buyer, providing value to the supplier (e.g. predictable and consistent income). This may be an area where the Commission’s desired financial “blending mechanisms” can be effective. For example, if a fledgling company needs capital, a business can commit to purchasing a product that could provide assurances to lenders and other investors, who in turn would be more likely to provide the capital. Such a ”blended” solution involving several mutually dependent parties is possible these days as longer-term partnerships are replacing transactional buyer-seller relationships.

Lastly, I believe the Commission should clearly identify what their measure of success will be, make sure that benefits are reaching the most vulnerable, and do their utmost to target investments that will become financially self-sustaining over time.  

I hope the Commission’s efforts to align with and foster collaboration among private and public sectors to build a sustainable and inclusive economy are successful.

Anyone who has been in Malaysia, Singapore or parts of Indonesia when forest and peat fires understands – and is likely a bit upset by – the magnitude of the devastating impact from forest and peat fires that raged last month in Indonesia –  the highest levels since the June 2013 haze crisis[1]. Roughly half of the fires burn on land managed by pulpwood, palm oil, and logging companies.

I have not been directly involved in palm oil for a few years and this news prompted me to update myself on how the Roundtable for Sustainable Palm Oil (RSPO), a multi-stakeholder, standard and certification scheme to promote sustainable oil, is progressing.

To learn a bit more, I referred to two recently released scorecards from reputable entities: Union of Concerned Scientist (Donuts, Deodorant, and Deforestation: Scoring America's Top Brands on Their Palm Oil Commitments, March 2014) and WWF (Palm Oil Buyers Scorecard: Measuring the Progress of Palm Oil Buyers: Sustainability, Conservation, Climate Change,2013). Union of Concerned Scientists’ scorecard criteria illustrates what I call the “traceability trap” that places too much emphasis on traceability as a key driver and core requirement for brands and less emphasis on scale and widespread adoption by the industry. WWF’s scorecard and related discussion provides insight into other dynamics of the RSPO scheme and how its members support the mission of RSPO.  Here are some key points I took away from these two scorecards and reports.

Union of Concerned Scientists

I came away after reading the Union of Concerned Scientists report and scorecard feeling that Union of Concerned Scientists have promoted a biased perspective and means to rank the top brands using palm oil – one that requires full traceability[2] of all the palm oil they use in their products. I don’t feel that the authors and the scorecard recognize the complexity and variety of issues involved in improving conditions and minimizing negative impacts associated with palm oil production. The Union of Concerned Scientists scorecard focuses on five elements: deforestation-free, peat-free, traceability, transparency, and early adoption. It neglects to give proper attention to important issues such human rights and labor abuses, indigenous rights, and in particular of land allocation, use, and ownership. Yes, these are captured within the RSPO standard but calling out deforestation and peat destruction when these two issues are also part of the RSPO standard seems biased without proper recognition of the credible multi-stakeholder process that was undergone to develop the RSPO standard that has taken into account the importance of all the interrelated issues (e.g. governance, land rights, social conditions).

Initially, I was frustrated that “traceability” was one of only five categories scored. There are many means of creating change that don’t require traceability. But as I looked deeper into all of the scorecard categories, I quickly realized that each category requires full traceability of certified product – not only the traceability category – to obtain complete score. This clearly places an enormous preference towards traceability.

Traceability is an indirect means to drive change based on the premise that consumers will selectively purchase products with certified materials or support brands that use CSPO. The evidence that this premise is widespread or powerful is weak at best. As an example, Bangladesh’s exports increased 15% year-on-year shortly after the Rana Plaza tragedy despite consumer demand for change and the manufacturing country is the one bit of information on all garments (keeping in mind this increase in exports was before the subsequent efforts to improve conditions in Bangladesh that warrant support). 

Traceability is one of the approaches brands can take to support responsible palm oil production – not the sole option. Training farmers, working with local governments and communities, supporting responsible operators through the Green Palm “Book and Claim” system [3] is also additional options that brands could pursue in such a way that their business can be supported. Incentivizing producers through Book and Claim certificates can provide financial support directly where we want change. As I would like to say, “tracing material from farm final product is only valuable for that one material during that one time. Training farmers on better practices can last generations.”

Allowing a variety of credible and effective mechanisms that mainstream businesses can support and implement in such a way that makes sense for their business could help bring solutions to scale and have more measurable impacts overall. Thus, we need scale to solve the problems at hand.

WWF Scorecard

WWF’s scorecard ranks RSPO members and top palm oil users in four areas:

·      RSPO membership
·      Public commitment to CSPO
·      Disclosing amount of palm oil used
·      Percentage of palm oil that is CSPO or is supporting sustainable production

I feel these are more balanced than those used in the UCS scorecard despite its promotion of CSPO or traceability. What I found most informative in the WWF report was seeing RSPO’s impact and how brands are using both Book and Claim Certificates and direct purchase of CSPO.

At the time of WWF’s report, RSPO had reached 15 percent of all palm oil produced. This is quite impressive, especially when compared to similar initiatives that were developed during the same general timeframe: 3 percent, 3.36 percent, 2.1 percent of global production of soy (Roundtable for Responsible Soy), sugar (Bonsucro) and cotton (Better Cotton Initiative), respectively.

WWF acknowledges that initial volumes of palm oil certified may benefit from the early adopters who have made public commitments to source 100% RSPO palm oil over time or have invested in RSPO. The next step increase will require additional, less progressive and committed companies to source CSPO or purchase Book and Claim Certificates. This will likely be more challenging for less committed brands, especially those that sell to less committed consumers such as Asia.

WWF recommends that brands that use palm oil should push their suppliers hard to make Segregated and Mass Balance CSPO available. While I can see the logic, especially if suppliers are required to obtain higher percentages of CSPO with each consecutive year, but I would argue that sourcing through identity preservation, segregation or mass balance should not be the end goal. Would it not be more powerful to require suppliers to only source RSPO oil and prohibit them from using conventional palm oil (which is allowed through the traceability systems)? I have seen how this requirement in the electronics’ industry’s conflict-free smelter program has led first tier suppliers to drive their suppliers (second tier to brands) to do the same. This is the sweet spot when the industry pushes for scaled change from within. This will certainly take time, in the meantime, end users should promote – and reward – the purchasing of Book and Claim Certificates by they suppliers.

Another concern raised in the WWF report is the fact that only 52 percent of CSPO produced was sold as such in 2012. This has frustrated some producers, who have committed to producing CSPO but then cannot sell their product as certified.

However, there is continued growth as growers benefit from the Book and Claim Certificates and not solely from the direct trade of CSPO.  RSPO recently announced that sales of CSPO have reached 16 percent of global palm oil production for the first quarter ending March 31, 2014 – a new high. Looking more closely at the numbers, on can see that 63 percent (853,338 Metric Tonnes (MT)) of transactions of RSPO compliant palm oil were done through GreenPalm Certificates, while 37 percent (506,586 MT) was purchased as CSPO.[4] Hence, much of the industry clearly is valuing the Book and Claim option while others prefer the benefits associated with direct purchases of CSPO.

In addition to providing a simpler way for brands to support certified RSPO growers, Book and Claim system provides a significant incentive to growers. According to GreenPalm, RSPO certified growers, many of whom are independent smallholders, who often sell to local mills and rarely have direct access to large multinational buyers, received a total of US$6.6 million through the GreenPalm Certificate system. Therefore, this investment goes directly to the agents of change we want to empower and encourage.

If we are going to gain the support of the vast majority of industry actors, we need to encourage the use of all means for them to engage in the wider solution. What we are really after is more responsible palm oil produced – and an end to devastating forest and peat fires. Where the resultant palm oil ends up is secondary.

[1] http://www.theguardian.com/environment/2014/mar/14/fires-indonesia-highest-levels-2012-haze-emergency

[2] According to the Union of Concerned Scientists report, fully traceable options to “physically sourcing” CSPO include (1) “identity-preserved” where the palm oil is traced and kept separate from other palm oils throughout the entire chain,” (2) “segregated” palm oil, which means it can trace a certain percentage of the oil in its products back to certified plantations, or (3) a “mass-balance” method that allows companies in the middle of the supply chain to combine CSPO with conventional palm oil and sell the corresponding percentage of CSPO in the mixture as CSPO; however, there is no guarantee that a final consumer product contains any CSPO under the mass-balance system.

[3] Under the GreenPalm Book and Claim system, certificates are granted to palm producers for the amount of certified crude palm oil or palm kernel oil they produce. These certificates can be bought by end buyers. 

[4] http://greenpalm.org/en/blog-press/blog/record-demand-in-2014-for-rspo-certified-palm-oil-and-palm-kernel-oil?utm_content=bufferd41c8&utm_medium=social&utm_source=twitter.com&utm_campaign=buffer