Good Practice Handbook Assessing and Managing Environmental and Social Risks in an Agro-Commodity Supply Chain A Editing: Publications Professionals, LLC Design: Studio Grafik Photo Credits: World Bank Group Photo Collection Kathleen Bottriell iStock Photo B GOOD PRACTICE HANDBOOK: E&S RISKS IN AN AGRO-COMMODITY SUPPLY CHAIN Good Practice Handbook Assessing and Managing Environmental and Social Risks in an Agro-Commodity Supply Chain The Handbook has a tabbed structure for easy reference. The following sign posts have been used throughout the Handbook to differentiate specific types of information. This symbol indicates information that is specific to potential or existing IFC clients. This symbol indicates information that explains how to do something in practice. This symbol indicates additional resources or references to support implementation. This symbol indicates key concepts and definitions discussed in the Handbook. Table Of Contents Acknowledgements .....................................................................................iv Introduction ................................................................................................v List of Acronyms .......................................................................................vii Executive Summary ....................................................................................ix Part 1. Agro-Commodity Supply Chains .............................................. 1 Part 2. The Business Case for Managing Environmental and Social Risk in Agro-Commodity Supply Chains ..................... 9 Part 3. Environmental and Social Risks in Agro-Commodity Supply Chains ..................................... 15 Part 4. Environmental and Social Management Systems..................... 25 Part 5. Case Studies: Environmental and Social Risk Assessment and Management in Agro-Commodity Supply Chains ........ 31 Case Study 1: Malaysian Palm Oil ...................................... 31 Case Study 2: Tanzania Sugar ............................................. 35 Case Study 3: Smallholder Cocoa in Côte D’Ivoire ................ 40 Case Study 4: Multicountry Multicommodity Trader ............ 46 Part 6. Traceability in Supply Chains ................................................. 49 Part 7. Certification ........................................................................... 55 Toolkit 1. Assessing Enivronmental and Social Risk and Leverage in a Supply Chain ........................................... 63 Toolkit 2. Managing Environmental and Social Risk in a Supply Chain .... 89 Annexes Annex I. Understanding Agro-Commodities ......................................... 125 Palm Oil .......................................................................... 125 Soybean ........................................................................... 130 Sugarcane ........................................................................ 133 Coffee .............................................................................. 137 Cocoa .............................................................................. 141 Annex II. Business Models in Agro-Commodity Production ................. 146 TABLE OF CONTENTS iii Acknowledgements: This Good Practice Handbook: Assessing and Managing Environmental and Social Risks in an Agro-commodity Supply Chain was prepared by the Environment, Social and Governance Department (CES) of the International Finance Corporation, with primary contribution from Patricia Miller (IFC Chief Sustainability Advisor, previously with IFC), Louis-Philippe Mousseau (IFC Principal Environmental Specialist), Amina El-Sharkawy (IFC Environmental and Social Consultant), and Kathleen Bottriell (IFC Operations Officer). The Handbook is based on primary contributions and technical expertise from William Vorley (International Institute for Environment and Development, Principal Researcher and Team Leader), Neil Judd (Pro-forest, Co-founder and Director), and Abbi Buxton (International Institute for Environment and Development, Researcher), as commissioned by IFC. Additional contributors include Larissa Luy (IFC Senior Operations Officer), Robert Gerrits, and Carmen Navarro (previously with IFC). The Handbook also significantly benefited from extensive comments from an internal and external peer review process, which involved a diverse group of individuals and institutions that are too many to acknowledge individually. However, the drafting team is very thankful for their valuable and insightful comments and hopes they find their input reflected in this final version. Finally, we would like to thank the CES Knowledge Management team, including Susan Botha, Dickson Tang, Fiorella Facello, and Amelia Hui Xin Goh who consistently and diligently supported the development of this Good Practice Handbook. iv GOOD PRACTICE HANDBOOK: E&S RISKS IN AN AGRO-COMMODITY SUPPLY CHAIN INTRODUCTION Supply chain risk has become a major area of concern for companies in the agribusiness sector, as well as for their customers, financiers, and external stakeholders. The threats that environmental and social (E&S) risks pose to brand values and product quality are making those risks more material, often reaching thresholds of major importance to the core business of agriculture and food companies. This Good Practice Handbook is intended for those agro-commodity companies that want to better manage supply chain E&S risks. Many companies are seeking to identify and manage E&S risks as part of their own responsible business practices—which are often part of their overall quality, phyto-sanitary, and food safety considerations and programs—and in response to (or anticipation of) demands from their customers and financiers. Agro-commodity supply chains often stretch over multiple supplier companies and multiple countries. In the past, the boundaries of responsibility extended only to directly owned operations and responsibility was largely delegated to suppliers, often through codes of conduct. However, the management of E&S risk is now continuing a trend toward strategic supply chain management with extended boundaries of responsibility that reach upstream to primary production where the key E&S risks are generally found. Through its eight Performance Standards on Environmental and Social Sustainability, the International Finance Corporation (IFC) requires its clients to identify, avoid, mitigate, and manage E&S risks and impacts as a way of conducting sustainable business. Where the IFC client can reasonably exercise control, the risks and impacts identification process also considers those risks and impacts associated with primary supply chains, defined more narrowly in the sections of Performance Standard 2: Working and Labor Conditions and Performance Standard 6: Biodiversity Conservation and Sustainable Management of Living Natural Resources that are dedicated to supply chains. Specifically, these primary INTRODUCTION v supply chain risks, which are to be identified and managed where a high risk has been determined, are child labor, forced labor, significant safety issues related to supply chain workers (Performance Standard 2), and significant conversion of natural and/or critical habitats (Performance Standard 6). These are also the focus of this Good Practice Handbook. IFC recognizes that there is a broader range of significant E&S risks in agro- commodity supply chains beyond these four core areas, and the approach set out in this Handbook can be applied beyond these areas. The Handbook focuses on five major agro-commodity supply chains—palm oil, soy, sugarcane, cocoa, and coffee—however, many of the tools, resources, and case studies can be used as guidance for other agro-commodities. vi GOOD PRACTICE HANDBOOK: E&S RISKS IN AN AGRO-COMMODITY SUPPLY CHAIN LIST OF ACRONYMS 4C Common Code for the Coffee Community CDC Cocoa Development Centres CEO Chief Executive Officer CMEG Chicago Mercantile Exchange Group COC Chain of Custody CODEX Codex Alimentarius Food Safety Standards CPO Crude Palm Oil CSR Corporate Social Responsibility CVC Cocoa Village Clinics EC European Commission ECX Ethiopian Commodity Exchange EHS Environment, Health, Safety EMAS Eco-Audit and Management Scheme ESIA Environmental and Social Impact Assessment ESMS Environmental and Social Management System ETP Ethical Tea Partnership EU European Union FAO Food and Agriculture Organisation FELCRA Federal Land Consolidation and Rehabilitation Authority (Malaysia) FELDA Federal Land Development Authority (Malaysia) FFB Fresh Fruit Bunches GIS Geographic Information Systems GIZ Deutsche Gesellschaft für Internationale Zusammenarbeit GM Genetically Modified ICA International Coffee Agreement ICE Intercontinental Exchange ICCO International Cocoa Organization IFC International Finance Corporation ILO International Labour Organization ISO International Organisation for Standardisation LIDAR High-Resolution Laser Range Detection NGO Non-Governmental Organizations NSEL National Spot Exchange Limited NYSE New York Stock Exchange OHS Occupational Health and Safety PKO Palm Kernel Oil LIST OF ACRONYMS vii PKM Palm Kernel Meal PPE Personal Protective Equipment RED Renewable Energy Directive RISDA Rubber Industry Smallholders Authority RPP Responsible Purchasing Policy RS Remote Sensing RSPO Roundtable on Sustainable Palm Oil RTRS Roundtable on Responsible Soy Association SAI Social Accountability International SAN Sustainable Agriculture Network SME Small and Medium-Sized Enterprise SPS Sanitary and Phyto-Sanitary TTF Timber