The timber trade has always been a risky business; the supply chain is long, suppliers and markets can be fickle and difficult to predict, and each load of timber bears a non-financial sourcing risk, particularly if it comes from uncertified forests without chain of custody.
In the past 10 years this sourcing risk has become significant, to such an extent that many UK timber traders are having to adopt responsible purchasing policies to help them minimise exposure. To become an acceptable sector for socially responsible investors, the trade must improve its corporate social responsibility (CSR) through the purchasing decision.
Corporate social responsibility aims to maximise the positive impact of business on society. It recognises that the primary purpose of business is to make profits for shareholders and there is growing evidence that adopting responsible business practices actually leads to healthier profit margins and is good for business.
A recent study by Innovest Strategic Value Analysts compared the environmental performance of 29 international paper and forest product companies with their financial performance over the past four years. Companies that scored above average for the environment had 43% higher predicted stock values; other financial parameters agreed providing strong evidence of the financial merits of sustainability leadership. Recent research by the Institute of Business Ethics looked at the financial performance of FTSE 350 companies with and without CSR policies; those with CSR policies consistently outperformed those without.
Admittedly, cast iron causality between CSR and profit remains elusive, yet the TTF‘s study provides much anecdotal but real evidence of the downside of being exposed for purchasing illegal and unsustainable timber. Contracts have been lost, reputations besmirched, and much management time is spent finding out what went wrong – and once again the timber trade gets a black mark.
Blacklist
Such non-financial risks have put the timber industry on the blacklist for many important stakeholders; NGOs have long attacked the trade and given it bad press, customers switch to other materials, the EU considers legislation to regulate illegal timber imports, shareholders grumble, and employees lose enthusiasm.
Commitments such as the TTF’s Code of Conduct are beginning to turn the tide and public confidence in the trade is returning. But currently ethical and socially responsible investors won’t touch the timber industry with a barge pole, and insurance companies are beginning to get nervous at underwriting timber contracts and shipments that might turn out to be illegal. There is even the distant threat that prosecutors can indict traders under the Proceeds of Crime Act for shipments of illegal timber.
The timber trade has tried to respond; 10 years ago the TTF launched the Environmental Timber Purchasing Policy for its Forest Forever members, just after WWF set up the 1995 Buyers’ Group. Both initiatives helped adherents set policy commitments and begin to check the origin of their timber but neither really provided credible proof to stakeholders that companies meant what they said about sourcing sustainable timber. More importantly, neither scheme helped companies integrate supplier assessments into their purchasing decision.
Purchasing policies
Both purchasing policies are now being tightened. The big driver? UK government purchasing policy, which should offer preferred market access to legal and sustainable timber – and with this market access comes an effective premium for legal and sustainable timber. Government procurement agents will have to accept legal and sustainable timber supplies over non-certified, regardless of price. Now we are moving from the woolly, hard-to-measure benefits of CSR, to tangible bottom line issues. Corporate customers and local authorities are likely to follow the government’s lead.
The TTF’s new purchasing policy is due to be finalised at end of the year and will be piloted early next year, with a full launch planned for mid-2004. Apart from meshing with UK government procurement policy, it will provide various business benefits, including risk assessment and continuous performance measurement, and reporting and benchmarking. The whole policy will be subject to third party auditing.
In future, shareholder value is likely to be based more on the quality of the relationship between a company and its stakeholders than the quality of the products. Once products fulfil their basic performance criteria, customers will start to make buying decisions based on the emotional value they attach to the product.
The issue, ultimately, is trust. The timber trade faces a crisis of trust. Trust depends on relationships. Trust is not restored by ritual compliance but by integrity. If the UK timber trade is to move from negligence to diligence, and become truly sustainable, we must perform better and do so in a transparent and accountable way. Wouldn’t it be great to get back on to the list of eligible sectors for socially responsible investment? This would be the ultimate recognition of a responsible industry practising sustainable development.
