The sustainability paradox of West African cocoa

What are the structural shifts that need to take place to combat child labour across West Africa in terms of COCO production? 1.56 million children work in COCO and I think it's very important to distinguish between child labour and child work. I'm the House of Muz, a reporter at Trade Finance Global. I'm Dr. Ted George, my background is very much in Africa and in soft commodities particularly COCO and increasingly ESG. Welcome to Trade Finance Talks. I'm joined today by Dr. Ted George, CEO of Cleo's Advisory, who is here to discuss a sustainable production across West Africa. Welcome to Trade Finance Talks, Ted. Thanks for having me, Doug, looking forward to it. Ted, could you please introduce yourself and tell me a bit about your background? Yes, so I'm Dr. Ted George. My background is very much in Africa and in soft commodities particularly COCO and increasingly ESG. I was a linguist to start out with Spanish and Portuguese and that's all gone me first interested actually in Africa via Angola. I worked at the Economist Intelligence Unit as an economist in the Africa teams but also in commodities, which is where I rebuilt the expertise in COCO. And then for eight years I was head of research at the Pan-African Bank Echo Bank, which is all across Sub-Saharan Africa. I had a team looking at the FICC space, I very much covered COCO very closely there and trade finance. I was also head of the Rep Representative Office in London. And then about 70 years ago I set out my own advisory, Cleo's Advisory, I am the Chief Narrative Officer, as I self-style myself, with a large focus on strategic advisory and thought leadership, particularly working with banks, international organizations, corporates, inter-ex, very much in the African space, commodity space, but also a fair amount of ESG and Fintech as well. And where they all come together, for example the project, the Africa COCO exchange, that's where I can excel. So quite varied what I do, but I think Africa and COCO are very much in my blood. We will be talking about sustainable COCO production across West Africa. I wanted to kick off by asking you, so when we talk about ESG we always talk about the environment and biodiversity climate change, things like that. The S actually gets forgotten a lot of times. I wanted to ask, how does the SNESG contribute to unsustainable production, especially in emerging markets like in West Africa? Yeah, well you're so right, the SNESG is often overlooked, and I think part of the reason is because the environmental concerns are so huge, particularly if you're thinking of carbon emissions, as soon as you have agriculture, you're chopping down forests, you're massively increasing emissions, and also the ability of the planet to suck them up, but through the trees. But also there's huge issues to do with climate change as well, and we're seeing this affecting all of the agri sector. Given that, it makes sense there's been so much focus on this, but of course it's over the most important part of the supply chain or the value chain, which is the people. Agriculture still employs the majority of the population in emerging markets, even when they do have these huge cities. And so you know, agri business is everyone's business, and the social impact is critical. And I think it's so important for sustainable production because the simple point is that the root cause of all unsustainable activity is poverty. If a farmer cannot get the inputs, cannot get the supporting needs, he's going to shop down for us to try and produce more cocoa. If the nearest school is 20 miles away, he's not going to send his kids to school. So a lot of these unsustainable things come from the fact that there's just no other choice economically. And so I think the important thing is recognizing the hundreds of millions of people in the supply chain, the multiple SMEs, making sure that they're visible and therefore trying to get a good socioeconomic impact. That will support sustainability on the environmental fund. How do you think not upholding social sustainability standards just affects the supply chain in general does it disrupt the supply chain? Well, I think the point is it's just very often it's to do with people trying to make a fast buck. If you do shop down forest, you know, you can get the land straight away, you can actually do two or three crops in a row, but then the soil is exhausted and you've got to move on. So, apparently when it's unsustainable, you have a small group of people who are making a killing, if you like, and then there's a lot of other people who deal with the after effects and the consequences. So I think basically that it's sustainable, when we talk about sustainable production, it's not just that it's ethically sustainable or socially or environmentally, it's financially stable as well. And that's actually weird enough what is driving the unsustainable activity in the first place. That's interesting, because you unpacked that a bit? Well, yeah, I think the whole point is you've got to have a proper economic incentive. So if I give you one example, like you have a farmer or a cooperative you say we want to certify, let's say rainforest on ice or fair trade, they go through a very complicated process and they really are more certified and they're much more careful the way they treat the environment, use the pesticides, child labor. But then when they come to go to market, they find that they don't already have enough take or agreement in place for sustainable cocoa, they don't know how to market it and in the end they have to sell the cocoa at the normal price. So then they see their neighbor who chopped down some forests and they're getting exact the same price about why should I do this? So there has to be aligned socio or economic incentives in there. That's usually done through some kind of premium, but currently farmers and cooperatives are very much dislocated from the international market. Getting them involved, making sure that the financial incentives are aligned with the environmental and social ones, that's what brings to sustainable production. Otherwise you're just asking farmers to be more ethical and sustainable for nothing in return. Why would you say that cocoa as an industry is so exposed to unsustainable production in particular, is it to do with geography and economy like you mentioned or does it also have some sort of scientific environmental background to it? Well I think the thing with cocoa is like if you look at West Africa, cocoa is an indigenous to West Africa. It's from South America, probably from the Venezuela region and it was really actually under who fought whiney and Cody vying in the 1980s that he decided he want Cody vying to become the number one producer at the time it was more like Nigerian Ghana. So in fact, it's a crop which is well suited to West Africa, but it's not native. And so the problem is we have climate change, which is underway. Coco is a very delicate crop. You need exactly the right kind of rain and the right kind of sunshine, other right times. Otherwise the flowers get washed off or you get outbreaks of disease like black pod and those things like that. So it's a very delicate crop. So the balance ecologically, particularly with the deforestation, has led to this problem in West Africa. I think that's why there's essentially a problem with cocoa because it's so dependent on rainfall and the climate. And yet there's definitely a huge problem. So in the last four seasons, cocoa production in the Ivory Coast and Ghana has decreased by 15.3 percent and 4.8 percent respectively. How do you think that unsustainable production has driven this structural decline? Yeah, well I think there's a number of various here. I mean one is the deforestation and the producing of cocoa on land which isn't suitable for it. If you take code devour, I think they have 76 protected forest areas. Every single one of them has been degraded and some of them was totally destroyed. And we've actually seen production shift in Cotevois from the eastern region to the west. And the trouble is in the northwest of the country, you have Bacchino Bay immigrants who are coming in, cutting down the forest, growing cocoa and sustainability for a few seasons and that is entering the supply chain. So the impacts of that environmentally, that's one of the things that came out where we saw the drop in production in Cotevois. In the case of Ghana, it's the economic crisis that cocoa has been going through for years. They weren't able to replace the trees. They're very aging trees. Also swollen shoot diseases in Demick now essentially. So it needs to be treated every single season. And so if you have these things in ultimately unsustainable production in deforestation, things like Galamse as well in Ghana, that is illegal gold mining. And if you think about it, it's the worst thing you could do to land. You go in and basically with a hose blast away all the soil until you get down to the rock. You add mercury and all these other really dirty elements in there to get the gold out. Who is when you leave, the land is completely unusable. The bounce back hasn't occurred either in Cotevois or Ghana and they're the two largest producers. Yeah, we're talking about illegal mining and I'm just wondering we're going to touch on sustainability regulation in a bit. I'm wondering how do these suppliers enter the global supply chain in the first place if it's done through illegal practices? Oh, what are you talking about? How do you do with how gold enters? I mean, the thing is that gold and cocoa have one thing in common, which is considering what they are as commodities, they're very high value for their weight. A ton of cocoa is worth probably 20 tons of wheat or maybe more. It's very, very valuable and simply for gold. I mean, even just a kilogram of it is extremely valuable, extremely easy to smuggle. And so it may be that actually the gold is actually being mined in Ghana, but it's actually being sold in Guinea or in Togo or it's going up to Marley or who knows where else. There's a lot of smuggling networks about that. And there is insatiable demand for gold. Essentially from India, but via Dubai, just to give you one example, a lot of it actually makes its way up through Central Africa, but every day on the plane from Camp Palo to Dubai, they reckon there's something like 50 kilos of gold. It's just a constant stream going. It's crazy. So yes, it's very easy to smuggle that out to market. As mentioned, I want to ask about sustainability regulation. So how do international regulatory standards like the EU's carbon border adjustment mechanism and the regulation on the forestation free product? How are they impacting West African smallholder farmers who are entering the global supply chains? It's pretty intense this impact is going to have, but we have had a number of delays in implementation. EUDR, the D4C regulation, that's been delayed a number of times. They say it is going to come into effect in December this year for the largest companies and by the middle of next year for all companies. And the delay is because of it's going to impact these suppliers, right? And they can't afford to eliminate them. There's a lot of difficult, let's say, technicality is about it. How do you define what is forested land? Do you include land that was forest five years ago or two years ago? This is one of the tricky issues. The big issue here is to understand that a lot of the big cocoa regulators have actually made good progress. Certainly, when I was in CODE Void, they insisted they were ready for EUDR because they do have most farmers who are registered with their biometric card. You can actually use visualizations to see where the polygons of their crops are and therefore you can see that it's not in forested areas as well. So there's been a lot of progress on that front. The impact will be that any cocoa that goes into the supply chain has to be EUDR compliant because it's going to Europe and the Europeans are very clear about this one. But when it comes to the carbon border adjustment mechanism, which is essentially the carbon tax in the EU, EU saying, look, we're outsourcing a lot of our emissions to other countries. So if the stuff comes in, you're going to pay a carbon tax. That doesn't cover cocoa at the moment. doesn't cover any agri products, but it could cover chocolate, for example. Chocolate is, as the highest carbon footprint of any food, other than meat. And that's because if you think of the whole supply chain, it's not just the production, the deforestation, which can go with the production of cocoa. You've got the refrigeration, the transport, you've got the processing, everything about the distribution in Europe as well. I did a couple years ago a calculation back at the envelope for Barry Kiber. We reckon they were making a profit of about 450 million euros in Europe for a year of chocolate production. But if you apply the sea-bam to the chocolate, then they would end up making a loss of 350 million euros. Essentially have to pay the European Union in 350 euros for the privilege of making chocolate. If they do bring in sea-bam for chocolate, it will blow the model completely out of the water. So it's a big concern, and obviously everyone's pushing back on that. But I think the bottom line is that all farmers who really need to be going through an organisation which can show that they're compliant with the UDR, because in the future they just will not be able to export to you. Hey, enjoying the episode? Tap Follow for more. Done? Let's get back to it. I think in terms of sea-bam, I also know that they have default rates if you fail to measure the emissions, and the default rates are quite high. Do you think that in West Africa at least, these smallholder farmers are in a position where they would be able to measure emissions on their own? Because I think a lot of places don't have the resources to do this. Sure, well, I think the basic point is that a smallholder farmer isn't going to be selling to an international importer in Europe. The importer will be importing either from one of the big trading houses or from a local exporter or producer. So it's all about where the traceability starts, and it will start with the first aggregators. So in the case of Kojiwai, you have local buyers, and you have what they call the tretaugh who aggregates it. It's similar in Nigeria, though it's a much more liberalised system. In Ghana, everything goes through Cocoa Baud. So the point of entry is where they would need to show their compliance. There's a lot of ways to do this, but essentially it would then the compliance would make it swear through the supply chain. Okay, thank you. I want to go back to the SNES cheaper a bit now. So around 1.56 million children are in child labour in Diary Coast and Ghana with 45% of them living in households involved in cocoa production. What are the structural shifts that need to take place to combat child labour across West Africa in terms of cocoa production? Yeah, I think we need to be careful using the term child labour. 1.56 million children work in cocoa. And I think it's very important to distinguish between child labour and child work because it's understandable in Europe some people say we don't want any products that involve children working on them. Well, you're not going to get anything from the agri sector. Anyone who's the child of a farmer is going to work on the farm. That goes for the UK, USA as well as Africa. The question here is what are the conditions of the work? So the difference between child labour and child labour, number one, are the children actually the children of the farmer, including their natural kids. In other words, they haven't been trafficked in from somewhere else. That's happened with kids from Marley, Guinea, Buccino, Faso. So that's number one. Number two, are we sure they're not doing inappropriate work for a child? So for example, using a machete, okay, younger than the age of 14, younger than 16, not doing anything like pesticides or machinery, things like that, right? If that's happening, that's wrong. But third and most importantly, are they going to school? Now, the thing is, all farmers want their kids to get an education. And in fact, a few years ago when I was doing a project for fair trade, we were going up to Agboville, north of Abyshanda, cocoa area. And we left very early in the morning to avoid the traffic. And at about seven in the morning, driving down those huge roads through the cocoa plantation, they were literally thousands of children walking on the side in school uniforms going to school. They all want to go to school. But if the nearest school is 20 miles away, it's not going to happen. So I think the important thing to understand is as long as those key conditions are met, that the work is appropriate, then the children are a necessary part of the household and they contribute to it. And if you bear in mind the average age of the farmer is 56 at the moment. That's the average as well. There are farmers in their 60s even in their 70s. We need young people coming in and learning the skills. So it's all about making sure that the worst of the practices child labor doesn't happen, but child work is acceptable if it's appropriate. And that's important for the farmers, their livelihoods and for production. Do you think when social sustainability standards are being upheld by Western regulators, are they considering this distinction between child labor and child work? Is it being applied? Certainly for the regulators. I say the regulators are aware of it, people working sustainability, but I say the general public not at all. And the thing is I do understand people standing up and saying, I do not want slave labor. I do not want child labor. They're absolutely right, but distinguish the difference because in fact it's a little paternalistic, it's a little patronizing and also actually massively ignorant to say you can't have children working on farms. It suggests they know nothing about the reality of Africa, but it's about it being appropriate work. And the fact is all farmers would support that if they could. It's about this whole point that if you are in poverty and you've got the back to the wall, you've got no choices, that's when you do unsustainable activity. So let's make sure the socioeconomic is supported and then we can have child work and not child labor. That's a great point. Thank you so much. I'd like to ask what are ways to uphold social and environmental sustainability standards across cocoa supply chains without compromising these markets access to global trade and subsequently the livelihoods of smaller farmers? Yeah, well, I'd sort of turn that on its head and I'd just say basically the only way that farmers and corporatives again have access to global markets is if they can show their production is sustainable in the future. So the only way because for example, production has been falling in West Africa, it's actually rising in Latin America now. There's going to be other sources of supply as well. And most of the cocoa from West Africa goes into the EU. But what will help this okay is obviously huge engagement from the regulators, from the governments, international organizations, particularly with capacity building, enabling farmers to be much more efficient, much more sustainable in their approaches as well. But I think the big thing is access to market, giving them access to market. If ultimately a farmer is the only time he reaches the market is the farm gate. He has to rely on some local trader who might be ripping him off at the farm gate. They don't really have any marketing power. I think the ability to leverage fintech and digital so that farmers are visible in the supply chain. It changes it, right? If you have a big company and they say we're buying from 50,000 farmers, if they knew the farmers are, they're going to look after them, right? If they're just like we bought it from an aggregator, we've no idea where this cocoa has come from. How are they going to help the farm? So I think that's the important thing is making them visible and that's when the S will appear very clearly in the ESG. What does the Africa cocoa exchange and how can a boost West African cocoa trade? Yeah, if this is a big one, this is a project I've been working on as part of a team for the last four years. The project is under the guise of the international cocoa organization with funding from the German development agency and also from our Freaksim Bank. And the idea is to create an Africa cocoa exchange. Currently, cocoa is traded and is priced essentially on the London market or New York and it's ridiculous. That's about 3 or 4% of global cocoa volumes moved through these exchanges but determines the price. So the idea is to bring pricing out back to Africa. So the model is what we would call a hub and a spoke. So there are four spokes which are four national exchanges. CoTVW, Ghana, Nigeria, Cameroon, each run according to their own regulation under the regulators and laws and that means you're going to have a national price for cocoa right where it's produced. Then once they're set up, we would have a virtual, you know, the hub, a virtual exchange where it would enable for example a West Africa price which is something that we don't have at the moment. But also would enable the interchange of cocoa between the different countries. If you take the case of let's say in Eastern Nigeria, there are grinders there who can't get enough beans. In Western Cameroon over the border, there are a lot of beans produced but there's no grinders. But currently together beans across the border probably the only way to smuggle them because it's so complicated. There are many times there's a surplus in one country and there's a need for processing and the other. That could really help. So the broad idea is to create this exchange and there will be loads of benefits just to give you a couple. One will be for farmers and cooperatives. They very often go through this period known as the months of hunger. When you get to the end of the main crop, let's say April May and you're waiting for the new crop to start which would be in October, very often farmers hold on to their beans because they expect prices to go up and very often they deteriorate and then they don't have the money for example beginning of September, school fees. You have to pay to them but the season starts in October. Well, if you had an exchange, you could go in, deposit your cocoa, get a warehouse receipt and immediately a bank will lend you money against that. So that is hugely helpful in terms of financing etc. it gives a lot of power to the farmers. Then the local processes they very often can't get the beans because the big trading houses, the barricaybows, cargills, OFI, they have it sewn up but if you can go to the exchange you can get beans you can basically run your operations throughout the year. It can definitely embed sustainability. There is a sustainability standard for West Africa called ARS1000 created by the governments that could become the standard but I think the main thing is it can just really increase value addition, cross-border investment, all that sort of stuff. More than anything is just about enabling Africa to get back control of its cocoa. Once you can start setting the price again, it can really get that power and everyone can benefit from it and certainly all of the existing value chain actors can be incorporated in the exchange. It's not about putting people out of business. What does the process of implementing it look like? Well this is the complicated one. We started with a pre-fisability study. A couple of years ago we had a workshop in Ghana with all the stakeholders to approve the model. We then did the full feasibility study. We visited the four countries and there was a huge amount of engagement by a very large team. There's about 15 of us in total and then finally at the end of April we presented our findings to the four governments. We got a very good feedback but the next step and this is the most tricky one is we need a policy statement from each government to say yes that they want to support the African Cocoa Exchange. Once we've done that we're then going to look for funding to set up the exchange. There's already a number of partners we've thought about and there's already a number of pilots that we're thinking about doing as well but essentially it not as going to depend on political will and that's why from now on the ICCO is engaging very heavily with the four countries to get them on board. Hopefully it works. Thank you so much for joining. Thank you for having us. It's really nice to be here on Tradefiners' talks. Thank you.