Investment in soft commodity trading ‘problematic’ says reportApril 2014
The most recent quarterly ‘Amity Insight’ report from Ecclesiastical Investment Management, which has been at the forefront of socially responsible ethical investments since 1988, argues that investment in soft commodity trading is “problematic” owing to a “fundamental model that disconnects the raw material from the wider beneficiary - growers and customers.”
The 16-page report titled ‘The Hard Truth About Soft Commodities’ contends it is “beneficial to closely scrutinise companies’ supply chain and better business practices before committing to financial investment.”
Soft commodities, which include coffee, cocoa, palm oil and sugar, represent one of the key components of the global economy. And, while such commodities dominate global trade today - accounting for around 25% of all trade and 65% of global traffic - Ecclesiastical notes that commodity trading “remains opaque and elusive.”
Neville White, Senior Socially Responsible Investment Analyst at Ecclesiastical in London, commenting says: “Criticism of trading companies is not just about their size or lack of transparency. Most have been dogged by charges of poor environmental management, pollution, deforestation, and complicity in human rights violations as a result of their high impact. In particular, traders tend, by their nature, to do business in countries with very poor human rights records.”
The majority of commodities trading is controlled by a handful of giant global companies wielding great power. For example, Vitol Group, a Swiss-based, Dutch-owned private energy and commodity trading company, produced 2012 revenues of $303 billion (bn) surpassing Malaysia’s gross domestic product (GDP) of $300.6bn.
And, Cargill, a private U.S. company that would rank ninth in the Fortune 500 if listed, generated revenues of $136.7bn in 2013 - a figure exceeding Hungary’s GDP.
White noted: “Many of these companies are unlisted and therefore not subject to normal corporate transparency, which means that trading can be highly speculative and potentially manipulative given the lack of regulatory oversight.” Indeed, of the top 20 global players in the sector today eleven are unlisted.
A further issue is the “complex and extensive” commodity supply chains, which put a barrier between the grower and customer. That said, the report remarked that manufacturers are beginning to address this issue by taking more control and buying direct.
Coffee, for instance, has one of the “most complex” supply chains of any commodity. Around 90% of coffee production is in the developing world and grown largely by small farmers, where “labour practices may be poor and poverty remains an issue” according to White. Typically the supply chain here involves producers, middlemen, exporters, importers, roasters and retailers. Green coffee is purchased by importers from exporters, 75% of which is handled from Switzerland, a jurisdiction with a favourable tax regime. Roasters like Nestlé rely on importers holding
large inventories, ‘drizzling’ the commodity into the market to maintain the price.
Sugar, which trades in contract sizes of 50 long tonnes (112,000lbs) and faces enormous competition from synthetic and artificial sweeteners like corn syrup, is labelled in the report as “one of three agricultural commodities most responsible for driving competition for land in developing countries” and blamed by Oxfam for ‘land grabs’.
White points out that: “Ecclesiastical Investment Management would always look to engage with industries to encourage greater transparency over practices and to make investing in this area easier for the ethical investor.”
Ecclesiastical offers eight investment funds including their Amity range of six ethically screened funds. None of the Amity funds are invested in any listed commodity traders.
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