Stefano Ponte

Who Gains and who pays the costs of environmental sustainability in global value chains?

The mainstreaming of sustainability management in business is providing new avenues of value creation, capture and (re)distribution, and new opportunities to transfer the costs of environmental compliance along Global Value Chains (GVCs). Suppliers, workers, and farmers – often based in the Global South – create new value through environmental improvements, which are showcased by lead firms to consumers, governments, and the general public. What remains hidden are the additional costs to create this value, incurred by suppliers. Based on a recent paper and book (Ponte 2019; 2020), this blog unveils the hidden costs of environmental upgrading in global value chains, especially for weaker actors, and highlights how economic and environmental upgrading processes facilitate green capital accumulation by lead firms in GVCs while the actual impact on environmental outcomes remains limited.

The hidden costs of upgrading in global value chains
Upgrading is a concept that has been used in GVC analysis to highlight paths for actors to ‘move up the value chain’ for economic gain. This body of work is often based on a typology defining four kinds of economic upgrading (Humphrey & Schmitz, 2002): product upgrading, process upgrading, functional upgrading, and inter-chain upgrading. Recent scholarship recognizes the need to move beyond economic upgrading to social and environmental upgrading, and the relations between them. In this context, environmental upgrading has been seen as a process by which actors modify or alter production systems and practices that result in positive (or reduce negative) environmental outcomes’ (Krishnan 2017: 117). Environmental upgrading can be driven either internally through strategic firm choices – e.g. to improve efficiency or reduce energy consumption – or externally from changing regulation or civil society and consumer pressure.

Examining environmental upgrading also entails distinguishing between the costs and benefits accruing to lead firms and those accruing to their suppliers – included in this are ‘hidden costs,’ which encompass ‘unintended consequences, perverse effects, and unacknowledged impact on workers, communities, and environment’ (LeBaron and Lister, 2021). I focus on the micro-level here, namely, direct costs to organizations occurring as a result of Corporate Social Responsibility, labor and/or environmental initiatives and strategies by individual companies, drawing from the case studies of wine in South Africa and coffee in East Africa.

The hidden costs of upgrading in the South African wine value chain
Since the formal end of apartheid in 1994, substantial environmental upgrading processes have taken place in the South African wine industry. Improvements include major growth of exports of certified organic and biodynamic certified wines, and the development of several initiatives by government, industry, and NGOs tackling environmental issues, such as Sustainable Wine South Africa – wines that follow specific guidelines on sustainability obtain an ‘integrity and sustainability seal that is affixed to the bottle. Yet, this value has been captured by South African exporters and UK retailers while the extra costs of sustainability have been to a large extent transferred upstream to primary wine producers and grape growers.

Some producers have functionally upgraded to become wine marketers and distributors. Capability transfers have likewise taken place by leveraging the scenic beauty of Western Cape wine farms to expand wine tourism – all the while advertising environmentally compliant production with certified organic and biodynamic wines. The economic outcomes, however, paint a grim picture. A 2005 Deloitte study shows that 36% of wineries with sub-R25 million revenue were making a loss; in 2016 (post-upgrades) only 13% of the 3,300 producers operating at sustainable income levels, 44% at break-even, and 40% at a loss (Veseth, 2017). Yet, for example, biodiversity provisions included in some of the existing sustainability initiatives are limited in scope – many farms have already cut down indigenous vegetation, such as fynbos, to establish vineyards planted with Vitis vinifera, an alien species.

The case study of the wine value chain in South Africa suggests that: (1) sustainability has been used opportunistically by lead firms for marketing, reputational enhancement, and risk management purposes; (2) South African value chain actors, regulators, and supporting institutions have invested heavily in portraying the industry and individual companies as caring for the environment and painted this portrait along with scenic and natural beauty of the Winelands in this country; (3) actors not directly involved in the wine value chain, such as government, conservation groups, and sustainability certification initiatives, have unwittingly facilitated a sustainability-driven supplier squeeze by lead firms; and (4) the hidden costs of environmental upgrading have been carried by primary grape and wine producers, with clearly deleterious impacts on their profitability.

The hidden costs of upgrading in East African coffee value chains
Coffee is a particularly interesting case study because almost all of its production takes place in the Global South, while a large proportion of consumption takes place in the Global North. The coffee value chain in some ways is becoming more similar to that of wine, with a multiplication of unique offerings and environmental content and the increasing importance of economies of scope as well as scale. Sustainability features have now become a central part of the demands placed by coffee roasters, which are then transmitted by international traders to domestic coffee operators and eventually to farmers in producing countries (see Grabs 2019; Millard 2017). This has led to the emergence of a sophisticated assemblage that provides environmental and social sustainability certification or verification options to coffee farmers and traders to deliver these demands. Coffee producers around the world used to supply a relatively homogenous product at volume, with their rewards propped up by the quota system of the International Coffee Agreement. This was a system run by the International Coffee Organization between the 1960s and the late 1980s – through the allocation of quotas and management of stocks in view of avoiding excessive price swings – to the benefit of producing countries. They now deliver coffee of many different physical, social and environmental quality specifications (Neilson et al., 2018), at different volumes (including micro-shipments), and sometimes through direct-trade relations (Vicol et al., 2018). In other words, there has been a clear improvement in upgrading, with important environmental components.

In relation to economic outcomes, however, much of recent research shows that indications of geographic origin (Neilson et al. 2018) and sustainability certification focused on environmental issues have not translated into improvements in farmers’ income and livelihoods (Akoyi & Maertens 2018, Chiputwa et al. 2015). Regarding environmental outcomes, research on private, individual supply chain sustainability systems suggests that coffee farmers included in these schemes achieve better environmental performance than control groups but are mainly limited to management systems, resource efficiency improvements, and recycling activities (Giuliani et al. 2017).

In sum, sustainability certification and verification systems are being used by mainstream roasters and international traders as marketing and reputation management tools (Soler et al. 2017), with only modest environmental outcomes at the farm level. Despite the good intentions of coffee sustainability initiatives and certifications and the support of bilateral donors in helping small producers to meet new and stringent environmental standards, the costs embedded in these processes are placed on the shoulders of farmers – who are also receiving small or no environmental premia. This means that the value produced by farmers through environmental upgrading is captured mostly by roasters.

Implications for orchestrating sustainability in global value chains
Researching environmental upgrading can help understand whether and how the (re)distribution of hidden costs can lead to increased North-South inequality under the guise of sustainability. Since business is leveraging sustainability mainly for its purposes, governments and international organizations need to consider appropriate forms of re-regulation and find ways of better orchestrating a variety of sustainability governance initiatives if they wish to achieve fair and just environmental protection. Existing research shows that governments should combine a variety of orchestration instruments in different GVCs – depending on their governance structures and the power dynamics that underpin them (Ponte, 2019). In general, successful orchestration is more likely to happen when a combination of directive and facilitative instruments is used, when sustainability issues have high visibility, and when there is interest alignment between private and public actors at key nodes of the GVC. What does it mean in practice?

Let’s take the example of coffee (see table). Given that the ICO regulatory role is unlikely to be restored, it is public authorities at the national level in producing and consuming countries that could play a sustainability orchestration role. In relation to combinatory efforts, both consuming and producing countries can further ramp up many of the facilitative efforts they are already carrying out to support producers, cooperatives, and exporters that are seeking voluntary certifications. Producing countries could also include sustainability considerations in national branding efforts. In terms of directive efforts, producing countries could set a minimum sustainability standard for export, charge a sustainability export tax at times of high international prices, and/or include sustainability standards in indications of geographic origin. Consuming countries could more forcefully enact demands for sustainable coffee certification for public procurement (e.g. in schools and hospitals) and/or require sustainability standards to clear imports – as the WTO has been relatively open in lenient in accepting the protection of the environment and health as legitimate policy objectives.

Improving environmental issue visibility in the coffee GVC is a more complex challenge. Coffee stories, labels, and certifications are already dotting the packaging landscape that speaks directly to consumers. However, orchestrators could promote efforts to pay a minimum price at the farmer level for coffee that meets certain environmental criteria. Initiatives in producing countries that seek to frame sustainability as part of geographic origin and/or national branding can act in this direction as well. Finally, in relation to interest alignment, orchestrators could charge a mandatory sustainability export tax to be returned to farmers. This would provide more direct sustainability incentives at the farm level, as well as better align public and private interests in producing countries – given that many producers perceive sustainability as an imposition placed by buyers and abetted by their governments.

Social movements and civil society organizations should also find new ways of advocating change that is cognizant of value chain dynamics and of the unexpected outcomes and inequalities that may arise from otherwise valuable initiatives to promote sustainability. Integral to this are strategies that include knowledge of the limitations of what business can achieve through self-regulation, and of the pressure points within value chains where orchestrators are most likely to stimulate positive change and tame inequalities.

References

Akoyi, K. T., & Maertens, M. (2018). Walk the Talk: Private Sustainability Standards in the Ugandan Coffee Sector. Journal of Development Studies, 54(10), 1792–1818.

Chiputwa, B., Spielman, D. J., & Qaim, M. (2015). Food standards, certification, and poverty among coffee farmers in Uganda. World Development, 66, 400–412.

Giuliani, E., Ciravegna, L., Vezzulli, A., & Kilian, B. (2017). Decoupling standards from practice: The impact of in-house certifications on coffee farms’ environmental and social conduct. World Development, 96, 294–314.

Grabs, J. (2019). The effectiveness of market-driven regulatory sustainability governance. Assessing the design of private sustainability standards and their impacts on Latin American coffee farmers’ production practices [Ph.D. thesis]. Westfälische Wilhelms-Universität Münster.

Humphrey, J., & Schmitz, H. (2002). How does insertion in global value chains affect upgrading in industrial clusters? Regional Studies, 36(9), 1017–1027.

Krishnan, A. (2017). Re-thinking the environmental dimensions of upgrading and embeddedness in production networks: The case of Kenyan horticulture farmers [Ph.D. thesis]. University of Manchester.

Millard, E. (2017). Still brewing: Fostering sustainable coffee production. World Development Perspectives, 7–8, 32–42.

Neilson, J., Wright, J., & Aklimawati, L. (2018). Geographical indications and value capture in the Indonesian coffee sector. Journal of Rural Studies, 59, 35–48.

Ponte, S. (2019) Business, power and sustainability in a World of Global Value Chains. London: Zed Books.

Ponte, S. (2020). The hidden costs of environmental upgrading in global value chains. Review of International Political Economy, DOI: 10.1080/09692290.2020.1816199

Soler, C., Sandstrom, C., & Skoog, H. (2017). How can high-biodiversity coffee make it to the mainstream market? The performativity of voluntary sustainability standards and outcomes for coffee diversification. Environmental Management, 59(2), 230–248.

Veseth, M. (2017). South Africa wine industry: Serious problems, lofty goals, progress update, wine. Economist, 14 February 2017. https://wineeconomist.com/category/south-africa

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Stefano Ponte

Stefano Ponte
Copenhagen Business School

Stefano Ponte is a Professor of International Political Economy and Director of the Centre for Business and Development Studies at Copenhagen Business School. His research focuses on governance dynamics, and economic and environmental upgrading trajectories in global value chains — especially in developing countries and in Africa. He is particularly interested in how sustainability standards, labels and certifications shape agro-food value chains, and in how different forms of partnerships affect sustainability outcomes.

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