The clash of certification: mainstreaming sustainability through product labeling is ripe for disruption

I’ve been critical on this blog on certification as a means to mainstream sustainability in production systems. And I can’t help myself: there are just so many naive and downright idealistic assumptions driving the uptake of certification at the moment, that it has lost much of its’ business sense. In this post I will show how the system of certification as we know it is ripe for disruption, and I will end with some alternatives from which I can see that they are working on upending the system of certificaiton as we know it.

Let me start off by running through the checklist of what product certification is at the moment and what the main assumptions on market mainstreaming are:

  1. Certification is a means for producers and product brands alike to verify claims they make of their product being responsibly produced. Third party auditing is used to independently verify the claims
  2. Certification is the mark you stick on the producer, the corresponding label is stuck on the product that comes from that producer. The consumer perceives the label, not the certificate
  3. The metrics behind certification are credible. They are mostly backed by scientific research. Scientific backing is more rigorous regarding environmental impact, because environmental metrics are more readily amenable to measurement than complex and fuzzy social processes
  4. There is a jungle of product labels out there, claiming to represent sustainably produced products. Each has its own focal interest, expressed through the issues which are incorporated in the label (like biodiversity, water use, carbon emissions, etc). Also, each has its own approach to raising the quality level of production in the market (some labeling schemes promote gradual progress on indicators like The Better Cotton Initiative, some set the bar high in an all or nothing approach like Organic certification)
  5. There are two methods currently applied to convincing producers to stick to sustainability standards. One is by sheer market power, by making standards a prerequisite for supplying. Competing firms downstream collude and impose a standard on the supplying market. The other is through what is called market development: you align big companies on a voluntary basis to voice demand for a certain voluntary sustainability scheme, and then on the other side of the market sponsor as many producers as you can to adopt the certificate, praying that this will be sufficient to reach a systems tipping point where everything is responsibly produced.

Now all these points above are variables to an equation, and that equation must solve the puzzle of mainstreaming sustainability. But the number of combinations and permutations an entrepreneur can make amongst these variables for organizing a sustainability mainstreaming trajectory are mind boggling, and downright confusing. As if running a business wasn’t hard enough in itself, now the entrepreneur needs to find some kind of meaningful balance between these variables to show to customers that a product is responsibly produced.

What sustainability message does this product communicate? Why do you need three labels? And why these three labels and not some other label?

Certification’s disruption ripeness
In view of this over complex problem, I propose that the main problem or barrier even to obtain any meaningful perspecitve on mainstreaming sustainability, is that certification has currently lost its focus on the job it needs to be doing. In its innovation trajectory so far, certification has been on the pathway of what Harvard professor Clay Christensen calls sustained innovation. Certification has been continuously extending its’ offer to the market by adding on new features like measurement methods, issues coverage, ways of obtaining and combining certificates, and levels of metrics applied.  We are even moving into a sphere of standardization in comparisson between certification schemes, where product life cycle methodologies are defined and actual products are metered on sustainability impact. This is most notably done at large scale through the work of the WalMart driven initiative called The Sustainabily Consortium. But, despite all the valiant intents and purposes, this road on sustained innovation has led the certification framework astray form the 2  main jobs it needs to be doing, namely to:

  1. help brands clearly communicate to customers that their products are responsibly produced
  2. help producers to compile new value propositions to their buyers, which can potentially command a premium in the market.

Certification as it currently is, does neither. In their competition amongst each other for consumer recognition and attention, product labeling organizations are at the same time competing with brand identity. I even heard Unilever’s CEO Paul Polman slip out during a seminar organized by the Guardian, that there is at some level a conflict between brands and certification, because there is a limit to what certification can communicate on sustainability and what the brand can communicate itself. This is particularly so for smaller and medium sized enterprises, who because of their size, operate on the basis of more close relations with their suppliers and buyers. They therefore know more about what needs to be done to achieve sustainability in their business system, than any certification scheme could possibly par.

As for producers, the value proposition of certification is very blurry and highly circumstantial. There are many opaque projections on the value of certification as for instance the one compiled by KPMG on certification in cocoa production in Ghana.

What will arise from the disruption rubble?
Of course the question is then what the alternatives would be that could disrupt the industry of certification. I see two trends that will achieve this, the first is simplicity of the mechanisms of certification. The second is refined market-based mechanisms that create a basis of consumer market adoption of sustainably produced products.

Regarding simplicity, the trend is best conveyed through pole and line fishing certification. This is a very concise way to communicate that fisherman are not depleting the ocean’s fauna with industrial fishing trawlers that scoop every living thing out of the ocean. The pole and line fishing certificate parsiminously communicates about the the probem and the purpose of the certificate, namely to counter over fishing by huge trawlers with individual fisherman holding poles with lines on them, lifting out their catch, one by one. This is easy for the consumer to understand, easy for the fishermen to adopt and (importantly) easy to inspect for the auditing agency. It is contrary to the more complex certificates, like organic, where a recent New York Times article explains that organic certification does not tell anything about conduct of the producer regarding sustainability.

Any questions on this product?

The point of consumer market adoption of a sustainability brings me to the Tip4Change venture, which I’m advising at the moment in seed phase. Tip4Change is a venture that does not impose a single standard on producers. Rather “Tip” attempts to create a market for the most responsible product, between consumers of sustainabe products and the producers behind the product. The idea is that consumers can reward what is in their opinion the best and most clear sustainability proposition by tipping the producers’ initiative (eg. community development programs, wildlife conservation, etc) at the till. This market intends to provide a clear selection mechanism for determining the stronger from the weaker sustainability propositions. At the same time producers can learn from the best initiatives, and take their shot a trumping the leaders. Brands can also leverage this, by actively profiling themselves with those producers whom they consider to be sailing the sustainability flagship.

In all, Tip4Change could provide a more simple, transparent, and less costly alternative to certification as we know it, with market uptake as a clear indicator of what works and what doesn’t. The “Tip” system intends to reveal those standards that are right at the level of what consumers can grasp regarding sustainable consumption. And “Tip” is not the only venture out there which is working on possible business models that can bind producers and consumers in this way; it has a couple of competitors! All an indication that certification’s disruption process is currently taking place.

So, what are the take-away points of this lengthy post on disruption of certification:
– certification as it is, is ready for disruption, because it is not doing the job that needs to be doing in mainstreaming sustainability, namely 1) communicating product responsibility and 2) providing producers with an option to substantiate their value proposition
– There are two driving factors that will create this disruption; 1) The market demands simplicity in the logic behind a sustainable product 2) Producers will be more supportive of and creative with a sustainability mainstreaming initiative which allows them to create and capture more value, opening up the window for mainstreaming

Tipping points, sustainability overhaul, and business model design

When grand visions are presented on how business could develop sustainability into the mainstream, often the metaphor of Malcom Gladwell’s Tipping Point is used. The World Wildlife Fund’s (WWF) vice president of market transformation, Jason Clay, has worked out the most famous application of this theory to the domain of food and agriculture in relation biodiversity conservation. In short this work argues that there are 15 key commodities which impact biodiversity and that 70% of those key commodities are under influence of a limited group of 300-500 corporations. This fact underlies the foundation of the WWF’s theory of change for business enagement, where the WWF has selected to work on mainstreaming sustainability with the top 100 influential branding companies that control 25% of trade in key commodities. Through working with reputable brands, which have a high level of public exposure, WWF hopes to push the system to a tipping point in environmentally responsible global commodity production and trade by 2020.

In order to transform production practices for these commodities to be environmentally responsible, the WWF strategy proposes to work with product labeling backed by independent third party certification. The idea is that labeling will allow branding firms to profile themselves as responsible companies, and distinguish their value proposition from the conventional product. For farmers, the hypothesis is that environmentally responsible production practices, prescribed by certification schemes, entail lowering the use of costly pesticides and artificial fertilizers which burden the environment. In short, certification’s proposition is that the tipping point to mainstreaming sustainability will be reached by creating value for brands, and by reducing production costs for farmers.

Constraints in market transformation
This is certification’s promise, but the true effect is currently under much discussion. Research is working very hard on conducting impact evaluations on certification. Despite the fact that there is no convincing evidence yet of whether certification works or not, there are two tell-tale signs that certification alone won’t drive the system to its tipping point:

  1. certification is costly and the rate of return to producers is low. Certification entails making investments, changing management practices, and paying for auditing activities by expensive consultants. These are all costly activities. To stimulate producers to change their ways, the rewards of certification should be crystal clear, but the figures I’ve seen (unfortunately always off the record…) indicate towards a zero-to-no returns*.
  2. certification has to overcome this business model design flaw that currently contains most value capturing with the downstream corporations in the value chain. However, certification does not promote business model innovation to overcome this constraint in value distribution. To the contrary, certification schemes are designed in such a way that they can be used as a plug-in in existing business models.

Currently there is a very limited group of top tier producers for whom the value proposition of certification works through the existing business models of the top 500 companies. Consequently, these companies are competing amongst each other for sourcing from this top tier of producers, because they produce the highest quality, and are most productive.  Yet the value proposition of these existing business models is least attractive for the bulk of the producer population (generally consisting of smallholder farmers), which produces the lion’s share of the world’s food. We thus face the contradictory situation that the group which can contribute most to environmentally responsible production is excluded from the market under current business models, and that certification schemes have no power to reach out to these groups.

Business Model Design and experimentation
The WWF sustainability mainstreaming strategy is a valid one to follow. However it is confronted with operational constraints due to design flaws in the adoption of responsible practices by the agricultural population under operations of current agribusiness models.  It is evident that new agribusiness models need to be developed, which effectively integrate lower tiers of producers, and encourage them to up their game by allowing them to capture more of the value which is generated. Companies should be encouraged to purposefully experiment with business model innovations which could make certification practices work, rather than stick to their existing business models. Business model design should be employed to pivot new ideas, and validate what works and what doesn’t.

Business Model Innovation = Substantial Rewards
Just as in the oil and gas industry, where more difficult to capture oil and gas wells are becoming feasible to exploit in the wake of scarcity, it will also become rewarding to find ways of tapping into the productive resource of smallholder producers. Companies that succeed in innovating in profitable new business models that include lower tiers of producers will create a first mover advantage for themselves in the wake of the battle for agricultural commodities under a continuously growing world population.

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* In some cases producers are forced to stick to certification standards by making trade conditional on compliance, even is there are no returns. Under these conditions it is often more rewarding for producers to find creative ways of tricking the auditor into believing that they are complying to more responsible practices, rather than actually adopting them.

Acknowledgement: The farmer population pyramid and competition for the top tier farmers was shown to me by David Croft, sustainability director at Kraft Foods, during a business modeling workshop in 2011 on firm strategies and labor impact.

More on the WWF’s strategy of supporting big brands as presented by Jason Clay at this TED conference in 2010: