From Beans to Forests: The EU’s Brewed Approach to Coffee Sourcing and Deforestation Combat

As a major global economic player, the European Union has always been at the forefront of implementing policies that promote sustainability and protect the environment. As such, they recently proposed an initiative that will ban coffee products lacking certification that proves they don’t originate from newly deforested areas:

“The EU’s landmark law, which comes into effect at end-2024, requires importers of commodities like coffee, cocoa, beef, soy, rubber and palm oil to produce a due diligence statement proving their goods are not contributing to the destruction of forests - a major source of climate change - or risk hefty fines.”

This new policy is already generating quite a bit of consternation. 

“According to the biennial Coffee Barometer, prepared by a group of NGOs, coffee firms’ lack of preparedness for the law might prompt them to shift sourcing to more developed regions like Brazil that have better traceability, leaving the millions of mostly small-scale, poverty stricken farmers in the lurch.”

Subsequently, roasters and traders will require producers to provide evidence of compliance with the new regulation as soon as possible, and just like with any other certification process, they will have to deal with the headache that such a requirement will create, both in terms of time and cost. This is more clearly illustrated in the following figure:

The reality is that many international coffee companies are unprepared for this new requirement.

Nevertheless, there are many questions surrounding the EU’s strict policy on deforestation. While deforestation is a crucial social responsibility, is it sufficient to solely focus on that?

Coffee has long been under the scrutiny of ESG and sustainability advocates, and historically, most policies have emphasized certification (whether third-party or self-enforced) and reporting of ESG and sustainability initiatives. So instead of outright bans on non-compliant firms, would it be more effective to mandate transparency on their compliance status without penalizing non-compliance? This approach might capture many of the benefits without the potential negative repercussions.

Furthermore, when considering the efficacy of certifications, how do they stack up against firms’ self-proclaimed sustainability efforts, especially when these certifications cover just a fraction of their offerings?

The Context of the Policy

The global coffee industry is vast, with millions of producers, intermediaries, and consumers involved. As the demand for coffee has surged, so has the pressure on agricultural lands, leading to increased deforestation, especially in countries with rich biodiversity. 

Long-time readers know my affinity (affinity, not addiction) for coffee. When you immerse yourself in the world of (good) coffee, you quickly realize that a coffee bean’s origin is pivotal. Not only does it define the unique flavor characteristics and tasting notes of a coffee type, but the specific region is intimately tied to the Environmental, Social, and Governance aspects of the bean’s production. By understanding the origin, one can grasp both the distinct taste and the broader implications that that origin holds within the coffee industry, reflecting its ecological, social, and governance impact.

Researchers Eric Lambin and Simon Bager in their paper Sustainability Strategies by Companies in the Global Coffee Sector, paint a picture of the coffee industry segmented into three categories based on their sustainability vows: the non-committal, the ambiguous, and the decisively committed. Drawing inspiration from their insights, Bager and Lambin made a compelling case for creating universal coffee sustainability markers that resonate with the UN’s Sustainable Development Goals. They also championed the cause of a transparent, mandatory reporting mechanism. Their vision seemed to echo the aspirations of groups like the Value Reporting Foundation and the International Sustainability Standards Board as they navigate the intricate maze of the ESG domain.

However, measuring is not enough. Ken Pucker, a Senior Lecturer at the Tufts Fletcher School, says, “measurement doesn’t guarantee management… reporting isn’t the same as disclosure, and disclosure doesn’t always result in action.”

This begs the question: Should we also evaluate the reporting methods we rely on as we aim for true sustainability? A key concern is the actual impact ESG ratings have. Does a high ESG rating actually reflect a positive change in the real world? And how should we understand the differences in these rating systems?

The Value of Certification and its Spillover Effects

Certification is tangible proof of adherence to certain standards. In the context of the EU’s policy, certification ensures that coffee products are sourced responsibly without contributing to deforestation. This is not just about environmental conservation; it’s also about corporate social responsibility (CSR). Companies that can provide such certifications position themselves as environmentally conscious, potentially gaining an edge in markets where consumers are increasingly eco-aware. Many larger coffee companies tend to offer product lines claiming ESG aspects, either backed by third-party certification or by their own reputation.

This brings me to the following research done by two of my favorite colleagues, Ken Moon (a co-author on several of my gig economy papers) and Hamsa Bastani. Together, they collaborated with a doctoral student, Pia Ramchandani, to publish the paper Responsible Sourcing: The First Step Is the Hardest, which discusses responsible sourcing extensively and highlights the importance of understanding the supply chain, particularly the origins of coffee beans. They note that most product lines from firms that offer consumable goods contain only a few targeted products certified by Fair Trade or other third-party certifiers. This suggests that CSR initiatives are limited. The question is: What’s the value of these limited certificates? 

The following image (taken from the paper) illustrates this point. Even for the same producer, some products carry the “fair trade” sign (given by a third-party organization), and as seen on the right, there are firms that have self-made claims about being sustainable. 

Using data from platforms like Panjiva, the researchers traced the coffee beans’ journey, ensuring the beans’ origin was not detrimental to the environment.

The most interesting aspect of the paper is that it provides evidence suggesting that certifications help companies learn the art of responsible sourcing. Companies can gain valuable insights that promote responsible sourcing across their entire product range, even by certifying just one product. 

Analyzing data from U.S. coffee companies (a $48B market) and their reported CSR violations, the authors observed that a company’s CSR violation rate decreases once they certify a product. Interestingly, this reduction is consistent regardless of how many of their products are certified, indicating that even initial certifications can lead to significant CSR improvements due to company-wide learning. 

As a result, companies new to certifications see a 46-fold greater decrease in violations compared to those that already have a significant number of certified products. On the other hand, companies that don’t pursue certifications but make their own CSR claims don’t show any improvement in violation rates. 

Another interesting result from the paper is the impact of dual sourcing — the practice of sourcing a component or product from two suppliers— which can be a strategic move for businesses, especially in the context of this new policy. By diversifying their supply chain, companies can ensure a more consistent supply, mitigate risks associated with a single supplier, and potentially adhere to the EU’s certification requirements more effectively. If one supplier fails to meet the certification standards, the other might still comply, ensuring a continuous flow of products to the market. However, dual sourcing can also increase complexity in supply chain management and might not be feasible for all businesses, especially ones with limited resources.

However, the paper shows that sourcing from multiple suppliers has a deeper implication. Companies that source from multiple places have notably lower CSR violation rates, even if they source from countries known for frequent violations. The findings indicate that widespread dual sourcing enhances responsible sourcing in supply chains and that certification plays a crucial role in fostering a network of responsible suppliers, especially in high-risk countries. In other words, certifications can have spillover effects beyond the immediate benefits. 

Bans vs. Fair Trade

But a ban is a ban. So, let’s understand the difference. The EU’s ban on coffee products that lack certification of deforestation and third-party certificates like Fair Trade, differ in their primary objectives, scope, and criteria. Here’s a breakdown of the differences:

Primary Objectives 

EU’s Ban on Deforestation Coffee: The primary objective of the EU’s potential ban or more strict regulations is to combat environmental degradation and ensure that imported coffee doesn’t contribute to deforestation, which has cascading effects on the environment as it leads to loss of biodiversity, disrupts natural habitats, and contributes to climate change. By ensuring this, the EU aims to mitigate these adverse effects. 

Fair Trade Certification: Fair Trade’s main goal is to ensure that producers in developing countries get a fair price for their products, which in turn promotes sustainable farming practices, better working conditions, and local sustainability.

Scope

EU’s Ban on Deforestation Coffee: This focuses specifically on preventing the import of coffee that contributes to deforestation. It’s an environmental measure aimed at preserving forests and combating climate change.

Fair Trade Certification: This has a broader scope that encompasses environmental sustainability and social and economic aspects. It addresses issues like fair wages, workers’ rights, community development, and sustainable farming practices.

Criteria

EU’s Ban on Deforestation Coffee: The criteria are centered around proving that the coffee hasn’t been sourced from areas that have been deforested. This might involve tracking the supply chain to ensure that coffee cultivation didn’t lead to forest clearance.

Fair Trade Certification: To achieve this certification, producers must meet a set of criteria that includes, among others, fair labor conditions, direct trade, democratic and transparent organizations, community development, and environmental sustainability.

Enforcement and Verification

EU’s Ban on Deforestation Coffee: Enforcement would likely be at the point of import into the EU, with importers possibly required to provide evidence or certification that their coffee meets the criteria.

Fair Trade Certification: This is managed by independent, third-party organizations that conduct regular audits and assessments of producers to ensure they adhere to Fair Trade standards.

Implications

EU’s Ban on Deforestation Coffee: This could shift sourcing practices, with importers seeking coffee from areas that can certify they don’t contribute to deforestation.

Fair Trade Certification: Producers who achieve this certification can often secure higher prices for their products and it can also be a selling point for consumers who want to make ethical purchases.

In summary, while both the EU’s potential regulations and Fair Trade certification aim to promote sustainability in the coffee industry, they focus on different aspects and have distinct criteria and implications. Again, we have to remember the risks associated with the ban. Smaller growers, who might lack the resources to obtain certifications, could be hurt disproportionately. These growers might not have the means to adapt quickly to the new requirements, potentially losing out on the EU market. This could lead to economic hardships for these small-scale farmers, exacerbating inequalities in the global coffee trade. 

Challenges and Considerations

As is obvious, any policy, however well-intentioned, comes with its own challenges to consider or overcome. In this case, one of the primary concerns is the authenticity of the certifications. As the research paper notes, different jurisdictions have different definitions of what constitutes a violation, so moving forward, it will be crucial to ensure that certifications are uniform, transparent, and verifiable.

Based on the paper’s findings, creating a certification platform can benefit suppliers in high-risk areas and offer them the opportunity to work with larger coffee producers. In turn, this will help promote sustainability and social responsibility on a wider scale. In contrast, a ban can potentially have the opposite effect, with suppliers either trying to find ways to avoid or override regulations or giving up altogether, which in turn, will have an entirely different economic impact for both the coffee industry and commerce in general. But no matter what happens and how things in the coffee industry progress, I will continue to buy, grind, and blend my own coffee beans and enjoy one of life’s simple (yet refined) pleasures!