1. Warwick Business School

2. Emergence of a “Market” for Sustainability Standards

3. Warwick Business School Rapidly growing demand for certified cocoa Source: TCC, 2012

4. Warwick Business School Growing share of cocoa certification  Rainforest: 405,608 MT (146,852 MT sold) 2012, 10% of world harvest  UTZ Certified: 534,614 MT (118,641 MT sold), 13% of all cocoa produced worldwide; aim to certify 50% of total coffee, cocoa and tea production by 2020  In 2009: 15% is double certified (TCC)

5. Warwick Business School Trends in the Standards Market 5

6. Warwick Business School What is driving proliferation of standards?  Governance gap  NGOs step in as ‘institutional entrepreneurs’ creating new quality conventions: social justice; sustainability; biodiversity  ethical labels  Dynamics between NGO/Civil society-driven pioneer and industry-driven follower standards  Multiple standards that compete for adopters and market share Ex.: Cocoa Organic Utz Certified Rainforest Alliance Fairtrade Other sustainable/speciality cocoa ( Cocoa

7. Warwick Business School 7 Multiplicity of standards? Civil society driven standards  Organic/IFOAM (1972)  Fairtrade (1988/9)  Rainforest Alliance Certified (1995)  SMBC “Bird friendly” (1999) Corporate driven programmes Starbucks C.A.F.E. Practices (1995) UTZ Certified (1997) Nespresso AAA Sustainable Quality™ (2004) Sector initiatives 4C (2004/07): Baseline standard / global industry self-regulation

8. Warwick Business School 8 Why do multiple standards persist? Dynamics of technical standards Purpose of a technical standard: Co-ordination / compatibility Drivers towards convergence to a dominant standard: Increasing returns to learning (e.g. QWERTY keyboard) & network externalities Dynamics of sustainability standards Purpose of a sustainability standard: Change behaviour Ambiguity of objectives (e.g. ethics, social justice, sustainability) Political and normative dimension Standards as an extension of brand competition Power asymmetries (Coordination costs largely paid by adopters of standards = farmers)

9. Warwick Business School 9 Convergence on common practices “On paper, most standards actually look quite identical” 1. A common vocabulary Increasing convergence over time: Three pillars of economic, social & environmental sustainability needed to be a legitimate standard Quality, productivity & traceability part of a sustainability standard 2. Shared certification platforms Joint certifications and step-up certification 3. Adoption of industry-level codes of good practice Legitimating agencies that certify standards as legitimate players: ‘Standardizing standard setting’ (ISEAL) and ‘certifying certification’ (ISO 65)

10. Warwick Business School Differentiating mechanisms leading to standards divergence “All these certification schemes have a kind of common ground, 60, 70, 80%... but they have these other 20% that is different.” 1. Emphasis on distinctive features of sustainability E.g. fair prices versus conservation & biodiversity 1. Different target groups (type of producers) Smallholder cooperatives vs non-organized vs large-scale producers 3. Different ‘levels’ of stringency E.g. certification versus verification  Market partitioning: Filling different niches

11. Warwick Business School Filling different niches: “Premium” versus “Baseline” PPP (GIZ + Kraft Foods & Other roasters) B2B & verification Baseline standard 4C Code of Conduct for the mainstream coffee sector focusing on the elimination of worst practices Enable pre-competitive collaboration 152,000 MT (2011/2012) Civil society base / 50% co-owned by producer networks B2C Ethical label & certification Standards also producers & traders: Minimum price & premium, pre- financing, long-term trading partnerships Focus on empowering small farmers 98,073 MT (2011)

12. Warwick Business School The firm perspective: Benefits of multiple standards  Retain autonomy  Reluctance to become dependent on one NGO  Set the rules of the game, rather than play by the rules  Maintain ownership over their supply chain governance  Risk management  Uncertainty about NGO’s ability to professionally monitor standard  Dual strategy – Code of conduct +  Benefit from NGO expertise and civil society credibility, while reducing switching costs (‘exit’ option)

13. Warwick Business School 13 Two Countervailing Mechanisms ConvergenceDifferentiation Formation of shared core criteria Increasing alignment of standards over time Emergence of a common vocabulary Creation of shared ‘certification platforms’ Adoption of industry-level codes of good practice Distinctive positioning of standards Emphasis on distinctive features Targeting different groups of adopters Offering base or premium level Sustenance of multiple standards Reciprocal positioning Mutual observation Meta-standardization

14. Warwick Business School Emerging trend: Shift from ethical brands to strategic procurement Macro-trend: Growing world demand Implications for companies: Strategic need to secure supply of quality produce Results of Nespresso (2012) study  Farmers are generally unprofitable.  Buyers of Arabica coffee could expect large-scale exit of coffee producers  Need to address the “bottom line” impacts on farmer’s income to be transformative Productivity of Arabica Plant  Public-Private partnership to train farmers in sustainability and productivity best practices (AAA program/Rainforest Alliance Standards)

15. Warwick Business School Effects of competitive regulation  Increased diffusion of sustainability standards: Sustainability standards become accepted business practice  Standards behave as competitors No ‘monopoly’ standard: competitive dynamics allow for newcomers Promotes innovation and experimentation: Debate on sustainability continues ‘Quasi-consolidation’ creates a baseline for sustainability standards Inefficient solution for producers (Admin, Compliance, Cert. costs) Inefficient allocation of resources for the promotion of sustainability Lack of coordination, transaction costs +−

16. Warwick Business School Quo Vadis?  Certification is growing and likely to persist  certification necessary to access certain markets  Multiplicity is likely to persist (as in competitive product markets)  How can certification be shaped in ways beneficial to cocoa farmers & producing countries? Is there a space for new standards? ○ Legitimacy to create certification is shaped by meta- standards(ISEAL’s credibility principles 2013, ISO, funding bodies) Shaping existing standards? ○ The definition of impact ○ Reducing certification/compliance costs

17. Warwick Business School Coopetition = Cooperative competition  Need for collaboration  Downstream (Consumer level): Competition for market share  Upstream (Producer level): Cooperation in sharing components, costs, knowledge, platforms, networks for mutual benefits  Examples of coopetition Apple and Samsung Pre-competitive collaboration to combat ‘audit fatigue’ in textile Supply chain collaboration to collect data on impacts Certification platforms & joint trainings as a way to collaborate and reduce costs of multiple standards

18. Warwick Business School Further reading  Reinecke, J., S. Manning, O. Von Hagen. 2012. The Emergence of a Standards Market: Multiplicity of Sustainability Standards in the Global Coffee Industry. Organization Studies 33(5-6) 791–814.  Manning, S., F. Boons, O. von Hagen, J. Reinecke. 2012. National Contexts Matter: The Co-Evolution of Sustainability Standards in Global Value Chains. Ecological Economics (83) 197–209.