Impact Incentives are a market mechanism for brands to deliver their expectations back to the start of the supply chain and provide financial rewards to encourage best practices.
Impact Incentives refer to the certificates that are traded in support of a sustainability claim. The certificates are issued when a set of criteria have been confirmed to have been met, and the physical goods and the Impact Incentives are traded separately from each other. The Impact Incentive certificates represent a specified quantity of verified material that has been produced but has not been physically traded as verified goods.
The way they work is quite simple; farms that meet a chosen standard or benchmark will be able to sell incentives for their volume of output, and brands can purchase these incentives to balance out their use of these output materials. The farms selling the incentives may or may not be in the supply chain of the brands, as the incentives trading system does not address any traceability. While this means that brands cannot make any content claims on their products, they can by-pass the cost and complexity of long or opaque supply chains in order to deliver impact quickly and efficiently. And they can still make claims about their support for best practices.
Impact Incentives are a powerful tool to bypass long and complex supply chains, and to address the price conundrum that often inhibits the widescale adoption of full traceability standards.
Long and complex supply chains
If we look at leather, there are many players involved from the cow/calf farm through to the final product. A calf may be born on one farm, move to a ‘backgrounder’ for a period of time, then go to a ‘direct’ farm or feedlot before going to slaughter. There may fewer steps involved, or even sometimes more. To date there are few countries in the world where the animals will be traceable between the different farms; even the United States does not mandate that animals are tracked as they move from farm to farm.
At the slaughterhouse, the animals are killed for their meat, and the skins are treated as a by-product. Even if there was a willingness to manage the chain of custody from animals to skins, the systems are not yet developed to do so efficiently.
The conversion from raw skins to fully processed leather hides involves many steps – in some supply chains these may be fairly consolidated, but in others they can involve multiple changes in ownership. The hides go through some very intense processing stages, and end up being split into layers, then ultimately cut into pieces to make everything from car seats to belts.
The characteristics of this supply chain mean that traceability can be expensive or even impossible in most cases.
In addition to the traceability issues, a long supply chain means that each owner will apply their own mark-up. Typically, that mark-up will be applied to the full cost of their input materials. If that input cost includes the premium that was initially paid to the farmer, then that premium will be inflated as well.
With the Incentives system, almost all of the money that a brand pays for the “sustainability impacts” would go to the farmer. A small amount would be held back to cover the costs of the trading platform and the Partner Program supporting the program.
By avoiding the time and energy needed to address traceability, and by creating a more efficient transfer of value back to the farmers, we can address the biggest roadblocks to adoption. Brands can support many more farms for the same amounts of money, and farmers can receive greater Incentives to follow best practices. An excellent example of how this has worked can be seen with the history of the Roundtable for Sustainable Palm Oil.
Impact Partnerships are a tool for brands and retailers to support farmers to make the changes needed to meet “best practices” as defined by standards or benchmarks.
Impact partnerships are a tool to help brands work with on-the-ground program partners to support farmers to meet the LIA benchmarks and set themselves up for Incentives trading and/or physical trading. The program partners can deliver support and training, provide verification, and collect data with the farmers, while offering stories, data and credibility back to the brands. Although the programs can go on indefinitely, the individual farms will only count for Incentives for three years, so that we constantly moving them to improve practices, and making room for new ones to be involved. After three years, or ideally less, the farms can trade Incentives directly with the brands, and get the money into their own pockets. All of this will drive up the supply of the preferred material, creating that scale of change we need to address the issues facing our planet, as well as the scale of supply that brands can ultimately bring into their supply chains.
In addition to the benefits that will come through Impact Incentives, Impact Partnerships offer additional opportunities:
Addressing core issues
As much as everyone in the industry says that they want to drive sustainability, until we find ways to give support where it is needed the most, we will never achieve the scale that is needed to truly address the issues this planet is facing. The standards and benchmarks that define best practices are powerful tools, but if all of the costs of meeting them is put onto the farmers, then we will never see a fast-enough rate of adoption. The Impact Partnerships are a means for the brands and retailers at one end of the supply chain to help address those implementation costs at the other end.
By creating a tool for brands to support farmers investing in best practices, we can accelerate the amount of preferred, sustainable, or responsible materials that are available, allowing companies to meet their own targets and to contribute to meaningful change at a global level.
A positive outcome for everyone will be the relationships that develop by working together through the Impact Partnerships. Beyond the exchange of financial support and information, having deeper levels of engagement between brands and program partners should enrich the understanding and experience of both sides.
The Impact Partnerships will be part of a set of tools that brands can use to support best practices; they will sit alongside Impact Incentives as well as the physical trading of goods through mass balance or identity protected programs. Having the different options that all have their different levels of cost and complexity will allow brands to set and meet meaningful targets.
The Impact Alliance is a voluntary collaboration between sustainability standards owners to support the development of an Impact Incentives trading platform. Impact Alliance members work together to define, promote, and oversee the trading of Impact Incentives and Impact Partnership Incentives.
The founding members of the Impact Alliance are Textile Exchange (leather and cotton), the Global Roundtable for Sustainable Beef (beef) and Proterra (soy and sugar). There is further interest from other NGOs that are working with credible standards or benchmarks that share the mission and goals of the Alliance.
The Alliance’s first work will be to enter into an agreement with the Incentives trade platform, define the core principles behind Impact Incentives and Impact Partnership Incentives, and set up the rules for the registration and sale of Incentives. Much of this work has already been done by Textile Exchange.
Beyond this, the Alliance will work to protect and promote the value of the Incentives, drive their overall trade, and collect and report on the collective impact of all of the Impact Incentives activity. Of key importance will be to define the data points that are collected across all of the commodities and determine which global goals to map them to.
The Incentives Trade Platform is a generic IT Platform that manages the registrations and transfers of Incentives for voluntary sustainability initiatives. “Impact Incentives” and “Impact Partnerships Incentives” are included and will be traded according the trading rules set out by the Impact Alliance. ChainPoint and ACT Commodities will be partnering to develop the platform for trading Impact Incentives.
One-stop shop for brands: Companies that buy cotton, leather, beef and soy can use a single platform to buy Incentives separately for the different commodities they use.
Increased value for brands: Companies can also report out on their overall impact across the commodities through the data collected by the Alliance.
Easier for farmers: Farmers that have multiple outputs (eg: beef, leather and soy) will only have one system to work with.
Bigger numbers: By reporting out with data on the collective impacts of the Alliance members, we can show more significant progress towards global goals than each member could individually. This, in turn, will increase the relevance of the Impact Incentives.
Better PR: There is a huge marketing and PR opportunity by using the combined data, the collective voice of the Alliance members and the stories of individual farmers. The more that people talk about Impact Incentives, the greater value they will have.
Leveraged efforts: By forming an Alliance we leverage the skills, efforts and voices of the individual members. Together we can accelerate impact where it is needed most.
We welcome you to contact us with any questions you may have about LIA. If you would like to play a role in the development and review of LIA, we invite you to join the International Working Group.
Piloting will soon begin for LIA benchmarking and Impact Incentives. For more information on participating in a pilot, please get in touch.