Investors would be wise to assess companies’ investments in supply chain resilience
There is a healthy race to the top with momentum towards tangible action on the ground to raise income levels worldwide. Small-scale farmers who can make the necessary operational investments while still meeting family maintenance costs are better prepared to survive adverse business events such as crop diseases, temporary price fluctuations and climate impacts. In addition to being essential for smallholder farmers, enabling a living income is a cornerstone for businesses of all sizes seeking a stable and resilient supply chain. Companies that manage ESG risks in their supply chains and make targeted investments to improve their resilience are better positioned to build investor confidence.
Living income: from dialogue to action
Just seven years ago, the Living Income Community of Practice brought together businesses, civil society organizations and certifiers to discuss corporate responses to poor smallholder income levels in agricultural supply chains. I personally attended an in-person workshop where enthusiastic congressmen and civil society representatives introduced the topic of Living Income. At the time, the business community regarded Living Income as a relatively progressive topic. Companies were present and listening attentively, but few had begun any meaningful work to enable producers in their supply chains to earn a living income.
Today, Living Income is a critical consideration for leading companies in certain sectors and their suppliers across the agricultural and food supply chain:
- Several companies have issued corporate commitments or positions on living income and wages, including Olam, Hershey, Tesco and Unilever.
- Beyond chocolateA multi-stakeholder partnership has been established, committed to helping farmers earn a living income by 2030.
- Several living income benchmarks exist for cocoa growing areas in Côte d’Ivoire and Ghana, and several studies on how to increase income levels have been conducted, authored by the likes of Mondelez and Mars.1
Discussions between companies, governments, civil society and investors have matured alongside such developments. Leading companies have made concerted efforts to increase revenues and wages in their supply chains. The latest example comes true from Nestlé “income accelerator program” – true Nesting will provide a financial incentive to cocoa farming households for certain activities, such as enrolling children in school, diversified income activities and good agricultural and agroforestry practices. Nesting plans to reach all cocoa farming families in the global supply chain with the program by 2030.
Likely drivers of these positive developments include human rights due diligence legislation, investor pressure and the reputational impact of increased media reporting on child labor in the cocoa sector. We also hope that there are intrinsic business drivers that argue for closer collaboration to build supply chain resilience for the actors involved.
A smart mix of measures to overcome challenges
Enabling small farmers to achieve a living income is not without challenges. In Ivory Coast and Ghana, the average cocoa farmer earns less than 40% of a living income. Governments in these leading cocoa-producing countries introduced the Living Income Differential (LID) initiative: a mandatory higher price for products from cocoa farmers. The cocoa and chocolate industries quickly followed with a statement of support for the LID. However, when it came time to test it during the first cocoa harvest season that started in late 2020, production exceeded demand and they failed to sell all their products at the new higher price, leading to a price drop in Ivory Coast. Early indications of the 2021 season look more positive so far.
It remains a challenge to determine what measures companies can take to meaningfully increase the income levels of small farmers. Price is a factor, but differences in farm size make it difficult to substantially improve the income levels of the smallest cocoa producers. Increasing productivity is often the industry’s best action to increase worker income, but market demand is variable and may not support higher production. Moreover, in some cases, overproduction can create an unsustainable surplus, which tends to cause price declines – creating a cyclical challenge that has not proven to be a sustainable solution. Businesses, market participants and other key stakeholders generally agree that income diversification is important, but in practice, the income opportunities available to small farmers alone cannot close the living income gap. The industry could benefit from a mix of different solutions to achieve a living income on a broader scale. Either way, income-boosting interventions need to be scaled up.
Sustainalytics’ Thematic Engagement guides joint investor activity toward corporate action on living income
Sustainability analysis promotes corporate action on a living income by engaging with companies, speaking at events, sharing best practices and collaborating with stakeholders.
We recently collaborated with IDH, the Sustainable Trade Initiative–a foundation that works with businesses, financiers, governments and civil society to realize sustainable trade in global value chains, to investor approval of the organization’s living income and living wage roadmaps. Sustainalytics brought together 45 global investors representing more than €6.3 trillion in assets under management to publicly announce their support for the IDH roadmaps. The roadmaps show concrete actions that companies can take to tackle the issue of living income and wages in their supply chains. To date, approximately 30 companies are working with IDH to create their roadmaps. We would like to see more companies join forces.
Sustainability analysis Thematic involvement on child labor in cocoa, focusing on living income, has enabled meaningful dialogues with cocoa and chocolate companies about living income for cocoa farmers. Our team reviews their progress twice a year and encourages action through business commitments, strategies and implementation. Our 2022 assessment showed an improvement compared to our 2019 baseline. Companies participating in the engagement also indicate a scale-up in the implementation of targeted living income actions in cocoa growing communities.
Sustainalytics will continue to recognize the work leading companies are doing to address living income and wages in the final months of our crisis. Child labor in cocoa involvement. In our recently launched Thematic Engagement – Accelerator for Human Rightswe continue to engage with issuers on livelihoods and fair pay, including in sectors and supply chains beyond cocoa.
For more information about how Sustainalytics engages companies on living income and living wages, please contact me at [email protected].
 https://www.cocoalife.org/~/media/CocoaLife/en/download//article/wur-mdlz-cacoa-life-balancing-the-living-income-challenge-november-2021.pdf; https://www.farmerincomelab.com/sites/g/files/jydpyr621/files/2022-02/Agri-Transformation-2021-DIGITAL-2.pdf