Ceres’ new Investor Brief on Cocoa identifies three key challenges posed to the cocoa industry by shifting social and environmental conditions, and the actions companies can take today to mitigate the material financial risks embedded in cocoa supply chains.
With Halloween just around the corner, store shelves across the US are filling up on one of the country’s favorite sweet treats — chocolate. As an industry that uses 40 percent of all cocoa produced worldwide, the chocolate industry relies on a robust supply chain for its success. But increasingly, consumers and investors alike are recognizing the social and environmental issues involved with producing cocoa — creating more business risks for companies whose supply chains have already suffered from COVID-19 disruptions.
Ceres’ new Investor Brief on Cocoa identifies three key challenges posed to the cocoa industry by shifting social and environmental conditions, and the concrete actions companies can take today to mitigate the material financial risks embedded in cocoa supply chains.
Challenge 1: Stabilize cocoa supply in a changing climate.
Areas highly suitable for cocoa production are expected to decrease by 9 percent by 2050, due to changes in weather conditions associated with climate change. These physical risks — caused by changing weather patterns — can result in operational and market risks for companies, as prices and supply volume will become even more volatile.
Companies that source cocoa can no longer ignore the realities of a changing climate. They will increasingly need to invest in technologies that support climate-smart production practices. These practices can include intercropping, soil fertility management, and drought-resistant plants, some of which have the added benefits of weed control, water regulation, and biodiversity.
Several chocolate companies, traders, and cocoa processors — including Barry Callebaut, Cargill, Hershey’s, Lindt & Sprüngli, Mars, Nestlé, Olam International and Touton — have partnered with the World Cocoa Foundation to implement sustainable agroforestry systems in their supply chains, all improving environments where cocoa is grown using sustainable practices.
Challenge 2: Ensure cocoa supply is decoupled from the destruction of natural ecosystems.
Farmer displacement due to poverty and civil war has led to an increase in deforestation in West Africa, with 90 percent of primary forests destroyed to allow for the expansion of farming operations. Cote d’Ivoire alone has lost 80 percent of its forests since 1970. 70 percent of this deforestation in West Africa is in protected areas, and much of this is cocoa-driven. In July 2019, the European Commission introduced the “2019 EU Communication on Stepping up EU Action to Protect and Restore the World’s Forests” — outlining potential increased reporting and due diligence requirements for companies to guard against deforestation in their cocoa supply chains.
If preemptive action is not taken, company supply chains could be penalized by the new regulations the EU will consider moving forward. These guidelines, which are expected to kick off in 2022, are likely to be welcomed by big-name chocolate companies such as Barry Callebaut, Mars, and Mondelez — all of whom have signed a separate joint statement calling on the EU to pass due diligence legislation. Companies can expect the potential loss of contracts and market access if they fail to measure up to the new regulations, especially if other chocolate companies in the space are able to meet the requirements.
Challenge 3: Demonstrate cocoa supply chain contributes to a more just and equitable society.
The extreme poverty among the smallholders that own the world’s roughly 6 million cocoa farms can lead some to depend on the use of child labor and expansion of cocoa production into dwindling protected forest reserves. Last year’s Washington Post exposé about child labor on cocoa plantations sparked outrage from customers. And as climate change continues to accelerate, cocoa companies cannot leave their smallholders behind. In response to this, there is now an increased demand for ethically produced cocoa.
While companies such as Hershey’s have stepped up their commitment to and investigation of child labor in their supply chains, reputational damage can outlast any policy changes and even increase if implementation of the policies are lagging. To address this, chocolate companies will have to monitor and verify the lack of child labor in their supply chains.
Considering the risks posed by climate and human rights issues, chocolate companies must adapt swiftly to avoid even more negative impacts to their business than those caused by the pandemic. And they are not alone: The cocoa industry is a case study for how industries must change in response to the climate crisis. The challenges faced by the industry are all too common — in fact, they are the backbone of the Ceres Roadmap to 2030, which guides how companies should set targets and act in response to climate change.