Assessing the Sustainability of Commodity Supply Chain through the Green Commodity Supply Chain Index
As a country that wields significant influence in the Asian region, China has recently offered a new paradigm of development by promoting a shift towards a greener economy. One of its efforts is embodied in the Belt and Road Initiative International Green Development Coalition (BRIGC), which was initiated by the Ministry of Ecology and Environment (MEE) of the People's Republic of China, along with several international partners, in 2019.
The aim of BRIGC is to address the urgent need to accelerate the implementation of the Sustainable Development Goals (SDGs) by 2030, while also advancing progress towards the Paris Agreement targets for participating countries in the Belt and Road Initiative (BRI). Its strategy involves opening a policy dialogue platform, sharing knowledge, and transferring green technologies that can be utilized by BRI participating countries.
Indonesia is also a participating country in the BRI through the signing of a Memorandum of Understanding (MoU) with China since 2018. At the same time, China is Indonesia's trading partner that holds the first position as the destination for non-oil and gas exports. Therefore, the BRIGC initiative will have an impact on Indonesia's strategic position in the global supply chain, particularly in relation to China.
Introducing GCSCI, the China Sustainable Development Index
BRIGC has six research projects, one of them is the Green Commodity Supply Chain Index (GCSCI). The first stage of the index has been completed, which involved developing indicators and a methodology for constructing the index. In the second stage, feedback and suggestions will be gathered to refine the methodology and a pilot test of the index will be conducted on selected areas, commodities, and users. Then, in 2023, GCSCI will be proposed to the Chinese government.
GCSCI was formulated to address the long-term security and instability issues in the global commodity supply chain caused by supply disruptions and price fluctuations. Moreover, unsustainable economic and business development practices have also created risks to the supply chain.
There are five areas in which risks can occur, (1) operational, such as high commodity costs, (2) regulation and legal, (3) reputation, including campaigns highlighting business practices that neglect sustainability aspects, (4) markets, particularly related to the inability of businesses to meet the demand for sustainable products, and (5) finance, such as sustainability credential requirements from banking institutions.
Furthermore, GCSCI currently focuses on soft commodities, such as agricultural and forestry products. However, it may potentially broaden its scope to incorporate hard commodities from the mining and processing industry in the future.
GCSCI As a User-Friendly Index
To gain a deeper understanding, this index is designed with a number of user-friendly principles. First, the implementation of GCSCI should be simple, easy to tabulate, understand, and apply. Second, it should focus on environmental and social indicators. Third, it should be applicable in the present and use current data. Fourth, it should produce differences between the entities being evaluated.
Fifth, it should be based on values that are grounded in objective results from the field. Sixth, the index is expected to send accurate signals to governments, businesses, and financial actors.
Additionally, to measure the level of risk, GCSCI categorizes it into three classifications. These are low risk (green), moderate risk (yellow), and high risk (red). This categorization focuses on assessing environmental performance based on jurisdiction - the geographical or political area where decisions are made, and serve as the main source of commodities.
If one jurisdiction is classified as low-risk, it increases the possibility of becoming a supply area or investment destination, as well as other forms of trade cooperation for BRI participants. Conversely, if the measurement results are classified as moderate or high-risk, it is important to conduct a more comprehensive review to analyse the factors that have led to these assessment results.
Greening Commodity Supply Chain through Five Indicators
The GCSCI index comprises five indicators that consider political, business, environmental, and social aspects. Each indicator is used to evaluate the environmental performance of the jurisdiction and they cover the following areas:
1. Forest loss: Refers to the loss of forest area due to conversion to agricultural land or logging for wood and paper production.
The importance of this indicator can be seen in four different risks. In terms of political risk, reducing forest degradation and conversion can support the primary goals of the Paris Agreement on climate change and the Convention on Biological Diversity.
From a business perspective, companies have committed to more ambitious goals of eliminating deforestation. From a social and environmental perspective, this indicator can prevent communities living around forests from experiencing forest conversion and deforestation.
2. Water stress: Measures the ratio of freshwater withdrawals to the level of freshwater availability in a jurisdiction. If water stress is low, the availability of freshwater significantly exceeds the level of usage in a particular jurisdiction, and vice versa. This calculation is important to ensure that freshwater withdrawal is not too high compared to the available supply.
From a social and political perspective, access to clean water is crucial for the health and hygiene of communities. From a business perspective, companies need to recognize their operational risks related to water stress to ensure freshwater availability in a jurisdiction. From an environmental aspect, the high level of water stress in a jurisdiction will adversely affect the water ecosystem.
3. Yield growth: Focuses on comparing the growth of commodities, including the agriculture, livestock, and forestry sectors, with annual demand growth. This calculation is performed per jurisdiction to ensure the main harvest, livestock, and wood that form the basis of soft commodities continue to increase over time.
From a political perspective, yield growth will show the efficiency of products that can support the well-being of the country. From a business perspective, the growth of a commodity's productivity will increase a company's profits. From an environmental perspective, it will be beneficial unless yield growth equals or exceeds demand growth.
4. Risk of illegality: Assesses the impact of illegal activities on the soft commodity supply chain, including illegal land clearing, forced labour, and bribery. This calculation can be used as a proxy for the relative risk of corruption and its linkages to illegality in supplier countries.
From a business perspective, this indicator can help companies avoid adverse impacts on legal, reputational, operational, financial, and market risks. From an environmental and social aspect, illegal activities indicate poor governance and can negatively affect the well-being, security, and livelihoods of local communities.
5. Human Development Index: Emphasizes the importance of income and well-being of workers involved in the entire process of producing soft commodities.
From a political perspective, political instability can have both positive and negative impacts on the well-being of a group of people. From a social perspective, increasing income, education, and health in a commodity-producing area clearly benefits the local population. From a business perspective, improving farmer well-being can increase the stability and productivity of the supply chain, which is advantageous from a business perspective. From an environmental perspective, improving community well-being at the provincial level has the potential to reduce environmental impacts, such as deforestation.
Apart from GCSCI, stakeholders in the green business sector can also adopt several other sustainability indices that cover commodity supply chain. These include the FECO Industry Sector Green Supply Chain Index, the Food Sustainability Index, the CDP Corporate Sustainability Index, and the other indices.
While other indices refer to criteria set by UNDP and the needs of the European market, GCSCI reflects the preferences of Asian countries, particularly China, for sustainable soft commodities, including palm oil. This preference should be noted by Indonesia as the main exporter of palm oil to China and ensure alignment to support the transition towards a more sustainable soft commodities industry.