Sustainability standards in trade and development

3 July 2013
ITC News
Striking the right balance to find standards schemes that benefit small producers and link them to global markets

The rapid expansion of voluntary sustainability standards has had a significant impact on developing countries in recent years. This is partly because of the emerging role of standards in supply chain management, but also because of their possible impact on policymaking.

Today’s increased demand for sustainability standards has had a direct influence on issues such as environmental and social costs, and the promotion of sustainable production and consumption methods – but also on the competitiveness of growing markets. Still, developingcountry producers and exporters are concerned about the often strict requirements attached to such standards. More often than not, complying with such standards demands detailed knowhow and skills, equipment and investments, potentially creating market-entry barriers for goods. In addition, the lack of harmonization between voluntary sustainability standards often results in a single product having to meet multiple standards instead of just one.

Historically, voluntary sustainability standards were put in place to connect sustainable farming activities with consumers in developed countries demanding sustainable products. But recently such standards have gained importance in the domestic markets of developing countries, too.

This is in part because supermarkets in developing countries have started to set up their own sustainability standards or are demanding that their suppliers comply with international standards. But consumers in developing countries, too, have become more conscious about the way the products they purchase are grown, processed and transported.

In agriculture, for example, standards were initially aimed at technical functions such as reducing transaction costs and streamlining the coordination and communication between the various actors in the supply chain. Nowadays, the use of standards in most sectors also involves product differentiation, market penetration and the co-branding of a sustainability standard and a consumer brand. But other, less tangible elements are increasingly being associated with voluntary sustainability standards as well, such as progressive empowerment among producers and improved organizational capabilities.

Standards to benefit the big and powerful?

Do standards set barriers too high for smallholders and prevent them from entering the market? Or do they do actually link them into global value chains?

A May 2013 report by the Overseas Development Institute, Leaping and Learning: Linking smallholders to markets in Africa, confirms previous findings that strict requirements on product quality and safety actually limit smallholder participation in global value chains. For multinationals, sourcing from a large number of smallholders is also more complicated than if they rely on one or a few larger suppliers.

Still, other research suggests that voluntary sustainability standards have the potential to benefit small-scale producers by increasing their income, productivity and product quality, and providing guaranteed prices and sales. They can also gain better access to capital. Assistance programmes, for example, can provide farmers with the necessary capabilities to reduce transaction costs when they apply sustainability standards. In fact, in labour-intensive production with small economies of scale, smallholders might also gain a cost advantage.

While a goal of sustainability standards is to improve the situation of disadvantaged producers, several researchers argue that the opposite may in fact be the case, and that such standards favour those who are already better off rather than those who need the most help. For example, a forthcoming Food and Agriculture Organization of the United Nations literature review found that there were positive correlations between initial assets, farm size and certification status. This suggests a self-selection bias in the participation in standards schemes. The study also points to the unequal conditions producers face when deciding whether to participate in a scheme, which is based on their level of preparedness when facing the conditions imposed by voluntary sustainability standards.

Better off in a standards scheme

The effects on farm profitability from compliance with voluntary sustainability standards are difficult to attribute to standard adoption as profitability depends on a number of factors, such as yield, quality, volume and efficiency. According to Toward sustainability: The roles and limitations of certification, a 2012 study by the Steering Committee of the State-of-Knowledge Assessment of Standards and Certification, participation in standard schemes can increase prices and boost producers’ profits. But any positive impact remains moderate when the increased earnings hardly compensate for the additional costs and increased labour involved in complying with standards provisions.

Still, since other business conditions – such as better business relationships or guaranteed sales for certified produce – can be significantly enhanced as a result of voluntary sustainability standards, these can possibly outweigh the immediate monetary benefits.

Standards and regulations

While the regulatory framework for standards schemes is established by governments or intergovernmental bodies, dynamic relationships between voluntary sustainability standards and regulations are growing. Regulation increasingly includes principles and provisions developed by sustainability standards, which again require compliance with local, national or international laws and regulations, for example labour and environmental laws.

The development of a common, efficient system for regulations and standards is more advanced for food safety and quality, whereas progress is lacking for social and environmental standards.

Private-sector organizations, meanwhile, have developed collective standards in response to the high transaction costs involved if they were to have their own supply chain standards. Both national and international organizations have been set up by firms to deal with standards issues related to their industry, including the Global Food Safety Initiative, Global GAP and the British Retail Consortium.

Governments continue to be important stakeholders that influence the legitimacy of voluntary sustainability standards. But granting legitimacy can be done in varying degrees based on the roles of public authorities.

This multitude of standards, however, creates inefficiencies across the trading system. Numerous and often strict standards on sustainability, safety and quality might discourage producers from exporting in the first place. Inefficiencies occur when market participants need to comply with several standards, resulting in the duplication of compliance and administration costs. It is therefore crucial to work towards greater harmonization between regulations and standards, as well as between the various standards schemes.

When do standards schemes work?

It is important to understand the circumstances in which voluntary sustainability standards can be an effective tool in fostering sustainable development. For example, how does compliance with a certain standard (or several standards) benefit all actors in the supply chain? And if these groups do not benefit from implementing a standard, what factors can bring about positive effects? And how can support be provided to make standards schemes work towards sustainable production and development?

In response to this, recent ITC research suggests that the effects of voluntary sustainability standards need to be analysed in a broader system that looks at context, instruments and mechanisms with each set of standards or with each scheme.

It is also clear that the adoption of standards is usually favoured in the following contexts: products with high traceability requirements; in extractive businesses; end products where commodities or raw materials are identifiable; or shorter supply chains with fewer actors.

ITC has found that standards schemes tend to be more viable in contexts with higher levels of producer and institutional preparedness. Such institutional preparedness is often linked to public or donor support for services and national food-control systems.

Voluntary sustainability standards also need to be recognized as legitimate by their stakeholders, especially the inclusiveness and transparency of the standard-setting process. In addition, stakeholders need to agree on the effectiveness of the standard-setting initiative and its enforcement mechanisms.

While the successful implementation of standard schemes requires a balance between a global scope and adaptation to local conditions, their implementation is enhanced when there are clear and visible incentives for valuechain actors to adopt them.

But it is the end buyer who holds to key to successful standards schemes in forming close partnerships with suppliers, providing pre-finance opportunities, and supporting suppliers in fulfilling quality demands.

This article is based on a four-part literature review series published by ITC.

  • The Impacts of Private Standards on Global Value Chains.
  • The Interplay of Public and Private Standards.
  • When and How do Private Standards Work?
  • The Impacts of Private Standards on Producers in Developing Countries.