The Sustainability Conundrum of Living Income in Agriculture

Investors are wise to review companies’ investments in supply chain resilience

There is a healthy race to the top with momentum towards tangible action on the ground to raise income levels globally. Small-scale farmers who can make necessary operational investments and still afford family living costs are better prepared to survive business-impacting adverse events such as crop diseases, temporary price fluctuations, and climate impacts. Apart from being essential for smallholder farmers, enabling a living income is a cornerstone for companies of any size looking to achieve a stable and resilient supply chain. Companies that manage ESG risk in their supply chains, making targeted investments to improve their resilience, are better positioned to build investor confidence.

Living income: from dialogue to action

Just seven years ago, the Living Income Community of Practice gathered companies, civil society organizations, and certifiers to discuss corporate responses to smallholder poor income levels in agricultural supply chains. I personally attended an in-person workshop, where enthusiastic conveners and civil society representatives introduced the topic of Living Income. At the time, the business community considered Living Income a relatively progressive topic. Companies were present and alertly listening, but few had started any meaningful work to enable producers in their supply chains to earn a living income.

Today, Living Income is a crucial consideration among leading companies across some sectors and their supplier companies throughout the agricultural and food supply chain:

• Several companies have issued corporate commitments or positions to living income and living wages, including Olam, Hershey, Tesco, and Unilever. 
• Beyond Chocolate—a multi-stakeholder collaboration committed to farmers earning a living income by 2030—has been established. 
• Several living income benchmarks are in place for cocoa-growing areas in Ivory Coast and Ghana, and several studies have been conducted on how to raise income levels, authored by, for example Mondelez and Mars.¹ 

Discussions between corporates, governments, civil society, and investors have matured alongside such developments. Leading companies have made concerted efforts to raise income and wages in their supply chains. The latest example comes from Nestlé’s ‘income accelerator program’—where Nestlé will pay a cash incentive to cocoa-farming households for certain activities such as enrolling children in school, diversified income activities, and good agricultural and agroforestry practices. Nestlé plans to reach all cocoa-farming families in its global supply chain by 2030 with the program.

Likely drivers behind these positive developments include human rights due diligence legislation, investor pressure, and reputational impacts from increased media coverage about child labour in cocoa. We also hope that there are intrinsic company drivers to advocate for closer collaboration to build supply chain resilience for involved actors.

A smart mix of measures to overcome challenges

Enabling smallholder farmers to reach a living income is not without challenges. In Ivory Coast and Ghana, the average cocoa-growing farmer earns less than 40% of a living income. Governments in these leading cocoa-producing countries introduced the Living Income Differential (LID) initiative--a mandatory higher price on produce from cocoa-growing farmers. The cocoa and chocolate industry fast followed with a declaration of support for the LID. However, when it was time to test it in the first cocoa harvest season starting in late 2020, production exceeded the demand, and they failed to sell all their produce to the new higher price, leading to a price decrease in the Ivory Coast. Early indications from the 2021 season look more positive so far.

Determining what measures companies can employ to meaningfully increase smallholder farmers’ income levels remains a challenge. Price is a factor, but differences in farm sizes make it difficult to substantially improve income levels for the smallest cocoa producers. Increasing productivity is often the industry’s go-to action to increase income for workers, but market demand is variable and may not be able to support higher production. What’s more, overproduction in some cases may produce an unsustainable surplus, which tends to drive price decreases—creating a cyclical challenge that has not proven to be a sustainable solution. Companies, market participants and other key stakeholders generally agree that income diversification is important, but in practice, income opportunities available to smallholder farmers do not alone close living income gaps. The industry could benefit from a mix of several solutions to achieve living income more broadly. Regardless, income-enabling interventions must be scaled up.

Sustainalytics’ Thematic Engagement is leading collaborative investor activities towards corporate actions on living income

Sustainalytics is advancing corporate action on living income by maintaining dialogues with companies, speaking at events, sharing best practices, and collaborating with stakeholders.

Most recently, we collaborated with IDH, The Sustainable Trade Initiative–a foundation working with business, financiers, governments, and civil society to realize sustainable trade in global value chains, to coordinate an investor endorsement of the organization’s living income and living wage roadmaps. Sustainalytics brought together 45 global Investors representing more than 6.3 trillion euros in AUM to publicly disclose their support of the IDH roadmaps. The roadmaps demonstrate concrete actions companies can take to address the issue of living income and living wages in their supply chains. To date, approximately 30 companies are working with IDH to build their roadmaps. We would like to see more companies join forces.

Sustainalytics’ Thematic Engagement on Child Labour in Cocoa, where living income is a focus area, has enabled meaningful dialogues with cocoa and chocolate companies on living income for cocoa-growing farmers. Our team reviews their progress biannually and encourages action through corporate commitments, strategies, and implementation. Our 2022 review showed an improvement from our baseline in 2019. Companies in the engagement also indicate a scale-up in implementing living income targeted actions in cocoa-growing communities.

Sustainalytics will continue to recognize the work leading companies are doing to address living income and living wages over the final months of our Child Labour in Cocoa engagement. In our recently launched Thematic Engagement - Human Rights Accelerator, we continue to engage with issuers on livelihood and fair remuneration, including sectors and supply chains beyond cocoa.

For more information on how Sustainalytics engages companies on living income and living wages, please get in touch with me at [email protected]. 

_Sources:

_{[1] https://www.cocoalife.org/~/media/CocoaLife/en/download//article/wur-mdlz-cocoa-life-balancing-the-living-income-challenge-november-2021.pdf; https://www.farmerincomelab.com/sites/g/files/jydpyr621/files/2022-02/Agri-Transformation-2021-DIGITAL-2.pdf}