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The Banking Environment Initiative (BEI) and Consumer Goods Forum (CGF)’s 'Soft Commodities' Compact

The 'Soft Commodities' Compact is a unique, company-led initiative that works with the banking industry to help transform soft commodity supply chains and help the banks’ clients (companies) achieve zero net deforestation by 2020.

 

Jointly launched by the Consumer Goods Forum and the Banking Environment Initiative in 2014, the Soft Commodities Compact focuses upon the four food and timber commodities that have the largest impact upon deforestation and biodiversity.

Since its launch a dozen major global banks have championed the Soft Commodities Compact to help achieve net zero deforestation in the four commodities of soy, palm oil, beef and PP&T (paper, pulp and timber).

 

How the Compact works – the Compact Implementation Group


Soft Commodities Compact InfographicThe Compact complies with competition law and therefore cannot be prescriptive. Rather, the intention is to lead the banking industry to identify and implement measures that support practices that reduce deforestation in the supply chains of their client-base. The Compact aligns bank practice with the Consumer Goods Forum Board’s resolution on deforestation, which supports global efforts to reach Sustainable Development Goal 15.

The Compact has two overarching strategies to achieve its net zero deforestation goals for four soft commodities:

  1. Develop banking practices that support finance for initiatives that shift commodity production to sustainable practices.
  2. Raise standards used by the banking industry in their relationships with clients that are involved in these commodities.

The Compact Implementation Group (CIG) is made up of representatives of the Compact banks. The purpose of the CIG is to develop a framework for new policies and services for the banking industry. Individual Compact Banks can then make their own decisions on if and how to incorporate the Compact’s solutions into their own business practice. This flexible approach is pragmatic given that all banks are different in terms of their mixture of banking services, markets and client base. The flexibility allows banks to prioritise the actions most relevant to their own particular business context. Importantly, this also takes into account the various regulatory requirements of Competition Law.

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Progress


A recent seminar on deforestation led to the conclusion that the Soft Commodities Compact between the Consumer Goods Forum and global banks needs to be restructured. In order for the Compact to be effective, more effort needs to be put into connecting global banks with local level producers, buyers and financiers in producer countries. Further, at the global level, the Compact needs to align deeper with leading initiatives such as the Forest 500, the Soft Commodities Forum and the Cerrado Manifesto. Finally, the Compact needs to recalibrate the guidance and examples it offers to the banking sector, be they Compact banks or others.

The seminar was attended by stakeholders in soft commodities markets. The group consisted of production-, trading-, processing- and financing professionals, as well as a select group of representatives from NGOs and academia. It covered the current state of global deforestation and the actions against it by the consumer goods sector and banking sector. In addition, it identified several issues that need to be tackled for finance to contribute effectively to the countering of deforestation. The issues that need tackling are land rights, poverty of rural populations, lack of demand globally for sustainable produce, ‘silo-isation’ within and between functions, firms and sectors, adverse effects of top-down/ centralised strategies, supply chain intransparency and access to finance. The participants identified several imperatives that finance needs to abide by to become more effective in helping to counter deforestation. These consisted of imperatives that have a more commercial character and imperatives that have a more political character. Suggestions were shared for what banks need to do to help the financial sector move. This included the scale of financing required, the type of new financial toolkit that could deliver such scale and the types of stakeholders that would need to be involved to reach scale effectively. Two leading examples of banks’ financing were discussed, both of which entailed some form of off-take guarantee by a buyer. There were also presentations of various solutions that could support banks and other financial institutions with their efforts to counter deforestation. Participants suggested a number of next steps to the banks of the Soft Commodities Compact and the three above priorities were distilled from these suggested next steps. 

 

Whilst progress has been made, practical experience gained in the implementation of the Compact has revealed that this is a complex challenge. To take one example of this complexity, consider the number of people and organisations involved in the supply chain for palm oil – from the tens of thousands of smallholders in the forests of Malaysia, to the thousands of major food manufacturers and then the hundreds of major retailers. Each of these bodies is involved in their own system of relationships – financial and personal – with many other businesses. Changing just one part of that system can cause unintended outcomes. Consequently, implementing changes to achieve a positive outcome has to be carefully managed and monitored so that it matches intentions.

 

Good intentions, poor outcomes – change in a complex system 

One difference between ‘complicated systems’ and a ‘complex system’ is, respectively, the presence or absence of predictable cause and effect. In a complicated system, like a car engine, actions tend to lead to expected results. For example, turning the key or pushing a button starts the car engine. If something does not work then it is relatively easy to track the cause because the parts of the system, and how they relate to one another, are known and predictable. 

On the other hand, the numerous moving parts of complex systems are, in addition, part of complex networks of relationships. These relationships are not all known or understood. How the parts of the network interact with one another, and the results of those interactions and reactions, are also often unknown. This means that complex systems can descend into chaos if something new is introduced. Shifting the way things work in such intricate systems introduces the risk of creating unintended consequences. Strategies to facilitate positive change therefore need to be cautious, controlled and gradual and utilise “test-review-improve” methodologies. This makes managing or creating positive change in a complex system hard to achieve, but not impossible. Each step taken deserves careful assessment to ensure it is producing the intended positive outcome.  

Such a stepped approach is reflected in the key performance indicators of the Compact’s Technical Guidance.

 

 

 

 

 

 

 

 

 

 

 

BEI member Compact adopters

BEI signatories

Non-member banks that have adopted the Compact

Non BEI signatories

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