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FAQs on the 'Soft Commodities' Compact

Context

What is the Banking Environment Initiative (BEI)?

The Banking Environment Initiative is a group of international banks working to transform the way banks operate so that capital supports environmentally and socially sustainable economic development.

The BEI was created by the CEOs of the member banks in 2010 and is co-ordinated and supported by the University of Cambridge Institute for Sustainability Leadership (CISL), which also supports other similar business platforms.

What is the ‘Soft Commodities’ Compact?

The Soft Commodities Compact focuses upon the four food and timber commodities that have the largest impact upon deforestation and biodiversity. The commodities are soy, palm oil, beef and PP&T (pulp, paper and timber).

The goal of the Soft Commodities Compact is to achieve net zero deforestation in the soft commodities supply chains of Consumer Goods Forum members by 2020.

It is a unique, company-led initiative that aims to mobilise the banking industry as a whole to contribute to transforming soft commodity supply chains and therefore help clients achieve zero net deforestation by 2020. It is one of the key workstreams of the BEI.

Which commodities are covered by the ‘Soft Commodities’ Compact?

Four commodities are covered by the ‘Soft Commodities’ Compact: palm oil, timber products, soy, beef.

Conversion of tropical forests to agricultural use for the production of these four commodities alone is estimated to contribute more than 50 per cent to tropical deforestation. Deforestation accounts for up to 20 per cent of global greenhouse gas emissions, more than the entire global transport sector and second only to the energy sector.

How was the Compact founded?

The Soft Commodities Compact was developed by the Consumer Goods Forum (CGF) and the Banking Environment Initiative (BEI) with the support and advice of the WWF. The goals of the compact support the CGF commitment to achieve net zero deforestation in the supply chain of its over 430 member businesses in the manufacturing and retail sectors.

In 2010, the Chief Executives of the CGF Board of Directors resolved that, with its combined procurement power of over $3 trillion, the CGF will help to achieve zero net deforestation by 2020. To do this, the CGF has prioritised four supply chains that have the largest impact on deforestation (palm oil, soy, beef and pulp and paper). Full details can be found here.

The Compact was adopted by the Banking Environment Initiative in 2012 and endorsed by the CGF Board in late 2013. It was welcomed by the Obama Administration at a meeting at the White House shortly after and used as an example of a powerful industry-to-industry partnership at a special session of the World Economic Forum’s Annual Meeting in Davos in January 2014.

Why was WWF involved as a civil society actor in the development of the Soft Commodities Compact?

Both BEI and CGF members invited the WWF’s participation because of its knowledge of market-based approaches to achieving sustainability in agricultural supply chains.

Supporters and stakeholders

Which banks are members of the Banking Environment Initiative?

There are twelve international banks that are currently members of the BEI, headquartered across Asia, Europe and North America: Barclays, BNP Paribas, BNY Mellon, Deutsche Bank, Goldman Sachs, Lloyds Banking Group, Northern Trust, Royal Bank of Scotland, Santander, Standard Chartered and Westpac.

The banks that have now adopted the Compact account for approximately 50 per cent of global trade finance.

Why is the Consumer Goods Forum important to the Banking Environment Initiative?

Collaboration with groups and major corporate bank clients that share similar ambitions is central to the Banking Environment Initiative’s overall strategy for change. Achieving sustainability goals within complex systems is challenging and cannot be achieved by one organisation or group alone.

Change in one part of the system, such as banking, can be far more effective if aligned with change in another part of the system, such as the buying practices of major manufacturing companies that use large quantities of the soft commodities.

The CGF brings together the Chief Executives of over 430 consumer goods retailers and manufacturers. A full list of CGF members can be found here. Members have a combined procurement power in excess of US$ 3 trillion and a presence in 70 countries.

As well as the leadership demonstrated by the CGF Board’s deforestation resolution in 2010, individual CGF members have played key roles in the development of internationally recognised sustainability standards and initiatives for commodities that they procure.

The CGF’s combined influence and expertise is considered a good match to enable the BEI to deliver on its mission to direct capital towards environmentally and socially sustainable economic development.

Why is the Banking Environment Initiative important to the CGF?

The CGF’s strategy to secure “better lives through better business” is centred upon collective action to achieve change. It recognises that its chances of achieving its deforestation goal will be significantly increased if it can collaborate with other actors that have material influence over the functioning of soft commodity production and supply chains. The CGF has therefore adopted a multi-stakeholder approach to the challenges.

Governments create the enabling framework within which companies operate. This is why the CGF founded the Tropical Forests Alliance (TFA) 2020 with the Government of the United States. TFA 2020 is a public-private partnership with the goal of reducing tropical deforestation associated with key global commodities. The Governments of the United Kingdom, Norway and the Netherlands, as well as several NGOs, have since joined TFA 2020 and the Government of the Republic of Indonesia co-hosted the first major TFA 2020 workshop in June 2013.

The provision of finance is vital to the production and trade of soft commodities. This is why the CGF welcomed an alliance with the BEI, given the Initiative’s ambition to lead the banking industry in identifying ways to collectively direct capital towards environmentally and socially sustainable economic development.

What is CISL?

The University of Cambridge Institute for Sustainability Leadership (CISL) is an institution within the University of Cambridge’s School of Technology.

CISL’s mission is to build strategic leadership capacity to tackle critical global challenges. Its business platforms help senior practitioners identify what needs to change within their sector or system, and take practical action to achieve this with their peers.

Who can get involved in the Soft Commodities Compact?

The CGF and BEI are actively encouraging all international and regional banks to adopt the ‘Soft Commodities’ Compact.

In addition, the BEI and CGF welcome comment and input from all interested parties, and in particular relevant banking institutions, international bodies, governments and civil society organisations. The Compact process is an evolving one and can benefit from constructive contributions from other stakeholders.

Implementing change

What does ‘zero net deforestation’ mean?

“Zero net deforestation” can be distinguished from "zero deforestation", which means no deforestation anywhere.

“Zero net deforestation" acknowledges that some forest loss could be offset by forest restoration. “Zero net deforestation” is not synonymous with a total prohibition on forest clearing. Rather, it leaves room for change in the configuration of the land-use mosaic, provided the net quantity, quality and carbon density of forests is maintained. It recognises that, in some circumstances, conversion of forests in one site may contribute to the sustainable development and conservation of the wider landscape (e.g. reducing livestock grazing in a protected area may require conversion of forest areas in the buffer zone to provide farmland to local communities).

However, “zero net deforestation” is not achieved through the conversion of primary or natural forests into fast growing plantations. Such conversion would count as deforestation in assessing progress against the target.

Approaches to implementing a “zero net deforestation” policy should prioritise avoiding the conversion of forests with a High Conservation Value (HCV)1 or that are considered to be High Carbon Stocks (HCS)2.

1 Please see http://www.hcvnetwork.org/ for a working definition of HCV

2 While efforts to agree one methodology, with multi-stakeholder backing, for identifying HCS forests continue, this is aspirational. As an example, please see http://www.greenpeace.org/international/global/international/briefings/forests/2013/HCS-Briefing-2013.pdf for a working definition of HCS 

What does the ‘Soft Commodities’ Compact mean for banks?

Banks adopting the ‘Soft Commodities’ Compact commit to helping to achieve zero net deforestation by 2020 through their financing of soft commodity supply chains.

Compact banks commit to:

  1. Work on the supply chains with companies who are members of the Consumer Goods Forum to find appropriate ways to finance the growth of markets producing palm oil, timber products, soy or beef without contributing to deforestation.
  2. Confirming that their corporate and investment banking customers whose operations include significant production or processing of palm oil, timber products or soy in markets at high risk of tropical deforestation can verify that these operations are consistent with zero net deforestation by 2020.

These strategies are designed to facilitate the soft commodity industry to transition at scale to sustainable production practices which are decoupled from deforestation.

How will banks’ commitments to the Compact help CGF companies deliver their deforestation goal?

Producers wishing to adopt more sustainable practices often cite a lack of access to appropriate forms of finance as a barrier to making the transition. The commitments of the banks supporting the Compact can help address this.

  1. New solutions - The provision of finance to producers is not straightforward, and may require the creation of new financing solutions, including the involvement of buyers or off-takers to reduce the risks involved, to be commercially viable.
  2. Acceleration - By working with CGF member-company supply chains to find supply chain finance solutions, Compact banks hope to accelerate this transition. Without this active collaboration, proactive efforts to finance the transition will not meet the scale of demand.

How are CGF members helping to transition to net zero deforestation supply chains?

Consumer Goods Forum companies are trying to lead supply chain transformation by making public commitments to procure commodities produced to defined standards. This is intended to create a clear demand signal for greater sustainability standards from their suppliers.

The Compact banks’ commitment to raise industry-wide banking standards is intended to reinforce and support this demand signal by committing banks to work with their customers to confirm that they meet the CGF’s standards.

What will change as a result of this Compact?

The ‘Soft Commodities’ Compact is a unique attempt by the banking industry to address collectively the issue of deforestation, building on the existing efforts of a range of leading individual banks.

Since 2012, the members of the Banking Environment Initiative have been leading the way for other banks to help reach the Sustainable Development Goal impacting deforestation. Their experience, however, has shown that creating change in these complicated structures is hard, but not impossible.

The end game remains to shift the market to one where sustainable practices are the norm throughout the supply chain for these four important commodities.

Will Compact banks stop doing business with customers who cannot prove their operations are consistent with zero net deforestation and report on their progress?

The ‘Soft Commodities’ Compact is intended to align banking services with the CGF’s strategy to deliver its deforestation goal, so that banks help to achieve zero net deforestation by 2020 through their financing of soft commodity supply chains.

To ensure compliance with Competition Law, the ‘Soft Commodities’ Compact is not intended to result in Compact banks taking collective decisions beyond their commitment to align banking industry services with the CGF’s resolution to help achieve zero net deforestation by 2020. Compact banks will therefore continue to assess business opportunities and decisions individually and unilaterally and this will include decisions about who they will and will not do business with.

The work of the group has produced Technical Guidance that banks have used successfully to develop their own policies and processes that deal with existing and new corporate clients consistent with the goals of the Soft Commodities Compact.

Will CGF members stop doing business with banks that have not adopted the ‘Soft Commodities’ Compact?

It will be for individual CGF members to decide on this.

Achievements and moving forward

Are there challenges facing the work of the Soft Commodities Compact?

The work takes place within a complex, inter-woven system of growers, manufacturers and retailers under varied jurisdictions and regulatory regimes. A challenge has been that top down change imposed by a small number of banks runs the risk of creating unexpected and unwelcome outcomes.

The strategy of the Compact, both by the banks and the CGF members, remains focused upon collective action and the use of market dynamics to effect lasting and large scale change.

Adopting the stepwise approach has allowed the banks to experiment, discover what works and what does not work, and scale up successful solutions whilst seeking alternatives to those that are unsuccessful.

What has been achieved?

Each of the compact banks has published the steps taken to implement the Compact. These are different for each bank and reflect the fact that different banks are involved differently, as reflected in their client base, in each of the commodity supply chains.

A common challenge faced by all banks is to manage their relationship with a client that may be engaged in activities that are not in line with the net zero deforestation goal. Rather than automatically withdraw from such a relationship – leaving a gap that might simply be filled by another entity that has not committed to the Compact or that may have negative unintended consequences for the wider local economy or smallholders – Compact banks tend to put in place a way to manage the relationship for a positive outcome.

Will the 2020 target be achieved?

The members of the Banking Environment Initiative have been leading the way for other banks to help reach the Sustainable Development Goal impacting deforestation.

Creating lasting change in these complicated structures has proven hard, but not impossible.

Progress has been made but the reality is that the goal of the Soft Commodities Compact is not likely to be achieved by the 2020 deadline. This is also true of the work in other sectors by governments, international bodies and civil society toward achieving SDG15.

Nonetheless, the banks in the Banking Environment Initiative and those supporting the Soft Commodities Compact remain dedicated to achieving net zero deforestation across the soft commodity sectors.

They will continue to work beyond 2020, building upon what has been learnt and achieved to date. Their work in the Soft Commodities Compact is helping to shape a financial system that incentivises and rewards practices to achieve net zero deforestation.

What next for banks not yet involved in this initiative?

Clients are facing increasing calls from civil society and consumers to adopt increasingly sustainable sourcing practices. Banks can be a part of the solution to provide the financial mechanisms to accelerate this transition and service this emerging market need.

The challenges for the environment remain. Deforestation poses an immediate threat to the local forests and their biodiversity, which can have significant knock-on effects to local and regional markets. In addition, deforestation contributes to global trends in climate change and resultant habitat degradation (e.g. desertification and weather extremes that impact agricultural capacity and other business activities). The World Economic Forum* recognises that climate change and environmental degradation are significant factors contributing to social and economic risk in the immediate future. Subsequently, there remains a strong risk management argument for supporting the Soft Commodities Compact.

 

Governance

How is the ‘Soft Commodities’ Compact governed?

The ‘Soft Commodities’ Compact is the product of the alliance between the BEI and the CGF, so its governance draws on the procedures of these two groups.

For the CGF, changes to the ‘Soft Commodities’ Compact are overseen by the CGF’s Sustainability Steering Group and, as required, approved by the CGF Board. This process is managed by the CGF Secretariat in Paris.

For the BEI, non-BEI member views will be taken actively into consideration and any changes to the ‘Soft Commodities’ Compact are overseen by the BEI Working Group. As required, such decisions will be approved by the BEI Chief Executive panel. This process is managed by the BEI Secretariat at CISL.

Will all BEI members adopt the ‘Soft Commodities’ Compact?

Not necessarily; the BEI has a number of different work streams and not all BEI members have material commercial interaction with soft commodity supply chains.

Does the 'Soft Commodities Compact' represent a position by CISL or the wider University of Cambridge?

The ‘Soft Commodities’ Compact is the result of extensive collaboration between the BEI and the CGF, with advice from the WWF. CISL has the role of secretariat. Decisions and positions stemming from this collaboration do not represent the policies or positions of CISL or the wider University of Cambridge.

Is the ‘Soft Commodities’ Compact linked to any other commodity or sustainability initiatives?

The BEI and CGF are not aiming to set their own, new sustainability standards.

The ‘Soft Commodities’ Compact prioritises and aims to build on existing initiatives and standards that have been, or are being, developed by players within these industry sectors.

Examples being used as the starting points are the Roundtable on Sustainable Palm Oil (RSPO), Forest Stewardship Council (FSC), Programme for the Endorsement of Forest Certification (PEFC) and the Roundtable on Responsible Soy (RTRS).

Why should banks adopt the ‘Soft Commodities’ Compact?

The challenge of achieving zero net deforestation is not one that any individual bank can overcome. Together, Compact banks are better placed to showcase practice that has the capacity to facilitate change – to lead the banking industry to identify and implement measures that support practices that reduce deforestation in supply chains.

Adopting the Compact also provides banks with the opportunity to:

Connect risk management practices with client approaches to drive market transformation – As the global population continues to multiply, driving further growth in consumer demand, reconciling the competing human and environmental demands on agricultural value chains will only become more critical. The CGF is a progressive group of globally influential buyers, already working with suppliers and governments from around the world to raise standards on the journey to 2020.

For banks seeking to track changing market expectations and manage their own business risks, while strengthening client relationships, the ‘Soft Commodities’ Compact offers a mechanism for efficient collective engagement with the buyers raising sustainability standards in corporate value chains.

Develop financing solutions at a scale that offers material commercial rewards – In order to achieve their goal, CGF companies require nothing less than a complete transformation of the supply chains on which they depend. Bilateral financing solutions alone will not achieve this.

Enhance client relationships by catalysing a truly industry-wide approach – Some banks have already adopted individual policies which address deforestation. On occasion, acting alone has created challenges in engaging with clients and ensuring adherence to these policies, especially while alternative sources of finance have been readily available. The ‘Soft Commodities’ Compact seeks to address this challenge directly; it is client-led and aims to secure the support of a critical mass of the banking industry. This reduces implementation risks and offers the opportunity to strengthen client relationships, while also preparing banks should CGF companies seek to favour relationships with banks whose policies are aligned with their sustainability objectives.

What should international or regional banks interested in adopting the ‘Soft Commodities’ Compact do next?

Once banks have understood the ‘Soft Commodities’ Compact’s objectives and specific commitments, they should , Senior Programme Manager, to discuss their participation.

 

BEI member Compact adopters

BEI signatories

Non-member banks that have adopted the Compact

Non BEI signatories

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