Investors should ‘limit reliance on third-party due diligence’

An FAO/OECD report warns that over-reliance on third parties risks missing ‘red flags’ determined by agricultural operations and suggests companies integrate field-based staff and producers on the ground in developing countries to mitigate this.

Investors should retain individual responsibility for managing due diligence on agricultural supply chains to avoid over-reliance on third-party certification schemes, according to a senior economist at the UN Food and Agriculture Organization.

Last month, the FAO released a Guidance for Responsible Agricultural Supply Chains report based on a joint effort with the Organization for Economic Cooperation and Development to assess current practices through a survey of 34 ag-related organizations including Rabobank, Syngenta and Aquila Capital.

Carried out between April and June 2018, the study found that, while most companies have strong policy commitments to responsible business conduct and have taken significant steps to implement them, such plans often run into challenges given very long supply chains of sometimes hundreds of suppliers.

In addition, the study found that many companies still fall short of meeting the OECD-FAO recommendations in full.

“Areas where the differences were notable relate to consultation with communities affected by business activities and engagement with holders of tenure or access rights over natural resources,” the report’s authors wrote.

Additionally, according to the report, over-reliance on third parties risks a situation where ‘red flags’ are determined by the third party’s objectives rather than the specific circumstances of agricultural operations; where risk-related information is not shared beyond a single pass/fail determination and few steps are taken by companies to verify third parties’ due diligence.

In response, the report suggests that companies take steps to integrate responsible business conduct practices into existing commercial integration between field-based staff and producers on the ground in developing countries.

“An example would be field technicians who visit smallholder farmers to advise on crop production and assess the quality of a farmer’s production, also assessing whether human rights abuses were occurring on the farm,” the report’s authors wrote.

The survey asked respondents to describe what role a set of specific issue areas plays in their policy commitments, assessment of relevant risks and actual management of risk. The sharing of benefits derived from agricultural operations was the only issue area for which respondents reported greater attention in practice than in their assessment of relevant business risk, according to the survey.

The gap between stated policies and practice was largest surrounding transparency and disclosure of information, according to the survey, which found that, although more than three-quarters of respondents include commitments to transparency in their stated policies, just 26 percent reported that disclosure of information formed part of their actual management of risk.

Difficult business

Speaking to Agri Investor soon after publication of the report, FAO senior economist Pascal Liu said the guidance is the result of a cooperative effort by the FAO and the OECD started four years ago. He said the pair has worked with policy makers, civil society leaders, unions, businesses and others to help companies observe standards of responsible business conduct and inform the way companies carry out due diligence around agricultural supply chains.

“Agriculture is a difficult business,” Liu said. “We have to admit the fact that investing in agriculture is risky, so investors need some kind of support to feel more encouraged to invest in countries with weak governance.”

Liu said there were investment funds among those participants that insisted on not being identified publicly.

“Some other investors we asked said: ‘We, as a company, would not mind disclosing, but we feel that our clients, the ones we manage the capital of, could feel a bit uncomfortable if we disclosed that we are participating’,” Liu said.

Investors already have relatively close interaction with certification teams, Liu said, but the study found room for improvement in terms of getting more information on challenges surrounding issues such as land tenure rights, labor rights and the implications of foreign investment for local food security.

Because there have been instances in which investors were told a property was for sale only to learn afterwards there had been some dispute surrounding the ownership of that land, Liu said the suggestion regarding ensuring access to grievance mechanisms was particularly relevant for investors.

“Especially if it’s an investment in land, local communities should have access to a grievance mechanism in case there are abuses or lack of respect for legitimate holders of tenure rights over land or over water resources,” said Liu. “This would be more specific to investors than for all companies.”