How the EU Corporate Sustainability Reporting Directive (CSRD) influences the relationship between chocolate manufacturers and smallholder cocoa farmers
In his master’s thesis, Paul Eichhorn, a recent MSc graduate in Sustainability Science, Policy, & Society, explored how the EU's Corporate Sustainability Reporting Directive (CSRD) may influence the relationship between chocolate manufacturers and smallholder cocoa farmers. In this blog post, he shares the key findings from his research.
The vast network of intermediaries within the cocoa supply chain is a significant driver of environmental and human rights violations across the cocoa sector. (Bai et al., 2022; Thorlakson, 2018). My master’s thesis linked the difficulties arising from these complex structures with the stricter and more far-reaching reporting requirements triggered by the Corporate Sustainability Reporting Directive (CSRD). Specifically, I investigated how the CSRD affects the relationship between chocolate manufacturers and smallholder cocoa farmers.
Challenges in the Chocolate Industry and New EU Reporting Regulations
The chocolate industry represents a large global market, securing the livelihoods of around 50 million people along its supply chain. (Ahoa et al., 2020; Fair & Smart Data, 2024). This network can be described as a North-South supply chain, with European and American chocolate manufacturers at the top and around 5 million smallholder cocoa farmers at the lower end. (Fair & Smart Data, 2024; Glavee-Geo et al., 2020; Martins et al., 2023). Considering the additional layers of intermediaries, the chocolate industry severely lacks transparency and traceability. (Bai et al., 2022).
Simultaneously, non-financial reporting is gaining importance with the ever-increasing relevance of sustainability issues for a broad spectrum of interest groups and shareholders. Accordingly, in January 2023, the EU CSRD was introduced as the successor to the Non-Financial Reporting Directive (NFRD), aiming to modernise and strengthen the previous regulation. (European Commission, 2024). Thereby, the improved comparability of sustainability reports, driven by the increasing standardisation of disclosure requirements, can be seen as one of the biggest differences between the CSRD and the NFRD. (European Commission, 2024; Spinaci, 2022).
Another key difference is the extended scope of reporting requirements. (Allgeier & Feldmann, 2023). Companies must now report on the most significant actual or potential adverse impacts related to their business activities and across their value chain, including their products and services, business relationships, and supply chain. (EUR-Lex, 2024).
To answer the central research question of how the CSRD influences the relationship between chocolate manufacturers and smallholder cocoa farmers, I conducted semi-structured interviews with seven experts from various organisations. The findings from these interviews are summarised below.
Key Findings: Limited Impact of the CSRD on Manufacturer-Farmer Relationships
Firstly, the study revealed that most chocolate manufacturers do not communicate with cocoa farmers during the current introduction phase of the CSRD. Secondly, the lack of communication between chocolate manufacturers and cocoa farmers is also reflected in the reporting companies’ data collection for CSRD purposes. Hence, the study showed that the data currently available to chocolate manufacturers mostly does not originate from cocoa farmers. Instead, manufacturers rely heavily on cocoa traders, exporters, and importers as the primary data source for chocolate manufacturers. Thirdly, this research highlighted several data verification processes for CSRD compliance, including, amongst others, a sound risk assessment and due diligence system, a higher demand for certification among suppliers and onsite audits.
Based on the insights, the central research question of this study was answered as follows: At present, the introduction of the CSRD has not influenced the relationship between chocolate manufacturers and smallholder cocoa farmers, which must be considered almost entirely absent.
Root Causes of the Communication Gap
In addition, my thesis provided a variety of interconnected causes and explanations for the missing relationship between chocolate manufacturers and cocoa farmers, as well as the corresponding lack of data collection at the farm level. The figure below illustrates the complexity of these interlinkages. Most causes relate to the deeply rooted challenges in the cocoa sector, such as the lack of transparency and traceability. However, the study also highlighted opportunities to improve these relationships in the future.
Conclusion: Limited Short-Term Impact but Potential Long-Term Influence
The interviews conducted for this thesis raised concerns regarding possible loopholes for reporting companies and their suppliers in the recently introduced CSRD. While the CSRD, as part of the Green Deal package, is considered a milestone for European sustainability reporting (European Commission, 2022), most interviewees stated that the short-term effects on the chocolate industry and the relationship between chocolate manufacturers and cocoa farmers will be limited.
However, the interviews suggested that other regulations under the European Green Deal, such as the EU Deforestation Regulation (EUDR), hold more immediate potential for impact, as it actively prohibits importing products associated with deforestation into the European market.
Therefore, even though the CSRD was analysed as a single regulation during my thesis, it should not be considered a mere reporting directive. Rather, it could be seen as an underlying basis and necessity for the development of other regulations on the European level, which in turn can have a more direct influence on the chocolate industry and the relationship between chocolate manufacturers and cocoa farmers.
Lastly, given that CSRD reports will not be published until 2025 (European Commission, 2024), it will be interesting to observe how these regulations evolve, how they might affect the chocolate industry, and the relationship of chocolate manufacturers with smallholder farmers over time.
If you want to read Paul’s thesis, you can download it here, and you can contact him via LinkedIn.
References:
Ahoa, E., Kassahun, A., & Tekinerdogan, B. (2020). Business processes and information systems in the Ghana cocoa supply chain: A survey study. NJAS-Wageningen Journal of Life Sciences, 92, 100323.
Allgeier, S., & Feldmann, R. (2023). CSRD Sustainability Reporting For Non-listed SMEs: European Regulators Remain Challenged. European Company and Financial Law Review, 20(3), 438-446.
Bai, C., Quayson, M., & Sarkis, J. (2022). Analysis of Blockchain's enablers for improving sustainable supply chain transparency in Africa cocoa industry. Journal of Cleaner Production, 358, 131896. https://doi.org/https://doi.org/10.1016/j.jclepro.2022.131896
EUR-Lex. (2024). Directive (EU) 2022/2464 of the European Parliament and of the Council of 14 December 2022 amending Regulation (EU) No 537/2014, Directive 2004/109/EC, Directive 2006/43/EC and Directive 2013/34/EU, as regards corporate sustainability reporting (Text with EEA relevance). European Union. Retrieved 26.01.2024 from https://eur-lex.europa.eu/legal-content/EN/TXT/?uri=CELEX%3A32022L2464
European Commission. (2024). Corporate sustainability reporting. European Commission. Retrieved 23.04.2024 from https://finance.ec.europa.eu/capital-markets-union-and-financial-markets/company-reporting-and-auditing/company-reporting/corporate-sustainability-reporting_en
Fair & Smart Data. (2024). Transparency and Traceability in the Supply Chains of Coffee and Cocoa: Towards Better Living Conditions for Smallholder Farmers. F. S. D. (FSD). https://www.maastrichtuniversity.nl/news/transparency-and-traceability-supply-chains-coffee-and-cocoa-fsd’s-new-report-unveils
Glavee-Geo, R., Burki, U., & Buvik, A. (2020). Building trustworthy relationships with smallholder (small-scale) agro-commodity suppliers: Insights from the Ghana cocoa industry. Journal of Macromarketing, 40(1), 110-127.
Martins, F. P., Batalhão, A. C., Ahokas, M., Liboni Amui, L. B., & Cezarino, L. O. (2023). Rethinking sustainability in the cocoa supply chain in light of SDG disclosure. Sustainability Accounting, Management and Policy Journal, 14(7), 258-286.
Spinaci, S. (2022). Corporate sustainability reporting directive. E.-E. P. R. Service. https://www.europarl.europa.eu/RegData/etudes/ATAG/2022/738177/EPRS_ATA(2022)738177_EN.pdf
Thorlakson, T. (2018). A move beyond sustainability certification: The evolution of the chocolate industry's sustainable sourcing practices. Business Strategy and the Environment, 27(8), 1653-1665.
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