Step 2 of the OECD-FAO Guidance is about examining the supply chain and mapping the risks of deforestation within it, to enable enterprises to determine their priorities for action. Under the OECD-FAO Guidance, enterprises are expected to identify general areas where the risk of adverse impacts is most significant and to prioritise due diligence accordingly. High-risk suppliers or suppliers operating in high-risk areas will warrant more scrutiny.
OECD-FAO Business Handbook on Deforestation and Due Diligence in Agricultural Supply Chains
Step 2: Identify, assess and prioritise deforestation risks in the supply chain
Abstract
Figure 5. Identify, assess and prioritise deforestation risks in the supply chain
Strategic questions for enterprises
Mapping the supply chain:
Which departments within our company are responsible for supply chain mapping and prioritisation? Do they have the capacity and budget to meet company commitments on deforestation?
What systems or processes do we currently have in place to map our operations and supply chains to identify deforestation risks (e.g. desk-based research, heat maps, supplier questionnaires, satellite data, field visits)?
How far upstream from our enterprise have we mapped the supply chain?
Do we have a plan to map the key control or “choke” points within those supply chains that are associated with high risks of deforestation? (See the Glossary)
Do we use a risk-based approach to prioritise which entities in the supply chain and which parts of the supply chain should be mapped in detail?
Are we ensuring that our identification efforts extend upstream to agricultural production?
Are there parts of the supply chain where mapping is impeded by a lack of transparency (e.g. purchases from the spot market)?
What can we do to increase transparency (e.g. engage with suppliers, stop buying from the spot market, etc.)?
What level of traceability or chain of custody can we have in place for our products?
Where does our information come from (e.g. internal systems/tracking, supplier feedback, external data; collaboration with industry groups, open-source deforestation satellite data)?
Do we have up-to-date maps on forest cover and deforestation frontiers in the areas from which we source our products and raw materials?
Which departments/individuals have responsibility for mapping deforestation risks and maintaining quality information? Do we rely on external public information for this or on a contract with a specific provider?
How reliable is this information, and how can we verify it?
How traceable are our commodities and products?
What are our partners doing to identify deforestation risks? How can that information be strengthened, co‑ordinated and streamlined in our approach?
Assess and prioritise the supply chain:
What do we consider and define as the most salient or priority deforestation risks? Which are our highest risk suppliers or other business partners?
What steps do we take to verify our supply chain data and ensure that it is current? Do we triangulate data, conduct supplier or site visits, conduct audits, use real-time data/tech, collaborate or exchange information with industry groups, etc.?
Against which benchmarks and standards do we assess risks?
How do we assess and prioritise the risks of deforestation? Do we use a system of “red flags” (see below)? Do we provide support to local farmers and enterprises, and what form does this take (i.e. training, resources, equipment)?
Map the supply chain by identifying the various actors involved, including immediate suppliers and business partners, and the sites of operation
Mapping and prioritizing should start with a high-level overview of company products, services and suppliers. This stage in the process involves establishing the sources of all the commodities and products covered by the enterprise’s policy on deforestation, in order to understand at a high level the risks associated with their production and sourcing. The extent of information collected on suppliers and business partners depends on the severity of the deforestation risk and how closely they are linked to the identified risk.
Mapping the supply chain includes identifying:
The source of the commodities or products derived from these commodities, including the country of production, source area and, where appropriate, the plot of land of production. This can help to identify the countries or areas most at risk of deforestation and enable the enterprise to focus on high-risk areas or suppliers in more detail. The legal and political context of the source area can be as important as trends in deforestation or agricultural production. Enterprises should carry out due diligence in locations which feature one or a combination of the following “red flags”:
Areas defined or known as protected areas, collectively managed areas (under tenure rights of local communities or Indigenous Peoples), high conservation value areas, or high carbon stock areas (e.g. peat forests).
Areas with high levels of rural poverty and a reliance on agriculture as a main form of income.
Areas where local communities and Indigenous Peoples are present
Areas which are considered as at high risk of conflict
Weak protection of human rights, Indigenous Peoples’ rights or poorly defined or contested land tenure rights (see Box 1)
Weak governance and implementation of the rule of law, and corruption
Weak levels of forest protection by national or local governments.
Box 1. Land tenure issues
Issues of land tenure (including the implied bundle of rights – from access to ownership) are central to the debates around halting deforestation. A significant portion of the world’s remaining tropical forests are customarily owned by Indigenous Peoples and traditional communities and other customary rights-holders. Enterprises seeking to access land for commodity production must respect the rights of those who already own, occupy or otherwise use it. They may only acquire access to such land through a process that first recognises these rights. Sometimes this may also include national or local public authorities.
The rights of those without formal property rights to the lands should also be recognised; this includes those of tenants, sharecroppers, farm-workers, or those with informal rights to access and use land and natural resources. These informal rights can include women’s tenure rights, which are commonly subsumed under those of the male head of household.
The tenure rights recognition process frequently poses challenges. It may not always be clear who has legal title to the land, customary rights may sometimes conflict with statutory rights, and statutory rights may sometimes not align with international human rights obligations. Many certification schemes and other tools (for example, the High Carbon Stock Approach), set out standards for respecting land tenure and processes for determining it, including, for example, participatory mapping carried out jointly by the enterprise and communities, although certification by itself does not always guarantee compliance with these standards.
Free, prior and informed consent (FPIC) can be an important element in this process. As set out in Annex B of the OECD-FAO Guidance, FPIC involves agreeing a consultation process with affected Indigenous Peoples; consulting and agreeing on what constitutes appropriate consent (taking into account representation of women and other marginalised groups); and engaging in the process of seeking consent before activities commence (if consent is given). This is an iterative and ongoing process rather than a one‑off discussion; continuous dialogue will generate trust and a balanced agreement, or non-agreement, that will benefit the investment across all phases of the project, or provide a clear indication that it should not go ahead (FAO, 2014[19]; FAO, 2016[20])
More detail on responsible tenure governance is available in the Voluntary Guidelines on the Responsible Governance of Tenure of Land, Fisheries and Forests in the Context of National Food Security officially endorsed by the Committee on World Food Security in 2012.
In addition to red flag locations, companies can use a system of “red flags” for:
Sectors or products – commodities known often to be linked to deforestation or forest degradation);
Business partners – suppliers known to trade in commodities or source from forests; suppliers
Known to have a poor track record vis-a-vis deforestation
Known to have sourced commodities from red flag locations (see above)
Known to operate in red flag locations (see above)
Known not to have observed internationally agreed standards such as those contained in the OECD-FAO Guidance.
Companies can also prioritise certain products, geographies and suppliers to conduct further, more in-depth assessments. This approach helps companies to build transparency over the supply chain in those prioritised areas, products and suppliers.
Identifying the various actors involved in the supply chain, including suppliers and business partners and prioritizing using a risk-based approach. Such activities may be challenging if products are supplied through local traders or on spot markets. Mapping the supply chain will require dialogue with traders and suppliers, in particular those operating at the control or choke points of the supply chain. Enterprises can identify control points such as processing points where there are relatively few enterprises that handle a majority of inputs. Examples include commodity processors, commodity traders, wholesalers, exporters and/or commodity exchanges.
Repeating this process before making any new investments or pursuing business activities that result in changes in the supply chain.
Establishing a system of controls and transparency throughout the supply chain includes:
Assessing the type and quality of supply-chain traceability or chain of custody offered by suppliers, and any complaints or grievances lodged against any of the actors in the supply chain, including suppliers and business partners.
Approaches to traceability include tracing to origin; tracing to a supplier that has a robust traceability and due diligence system of its own (with the downstream company responsible for assessing the robustness of this system); tracing to a jurisdiction that can demonstrate a negligible risk of commodity-linked deforestation across the entire jurisdiction; and using a credible certification or chain of custody system.
The extent of information collected on suppliers and business partners depends on the severity of the deforestation risk and how closely linked to the identified risk they are. For areas at high risk of deforestation, a higher degree of traceability or chain of custody to the farm level will be needed; in some areas this will be challenging. The potential gap between the level of deforestation risk and the granularity of the information on the production area will need to be taken into account when defining the risk mitigation strategy.
Different traceability systems exist, including those used in many certification schemes (see Annex A for further information on Certification Schemes). Depending on the granularity of the information they monitor, they offer diverse levels of confidence regarding the link between the commodities and the place of production and hence the risk of deforestation:
Under the identity preserved model, products from a single identifiable certified source are kept separate from uncertified products, and from certified products from other sources, throughout the supply chain. The plot of land of production is known.
Under the segregated model, certified products from different certified sources are mixed together but kept separate from uncertified products.
Under the mass balance model, certified products are mixed with uncertified products but the proportions are monitored administratively; users can advertise their product as partially certified (or mixed), usually with a specific percentage figure.
Under the book-and-claim model, certified products are not kept apart, but suppliers of certified products sell credits to users; while the user may not actually be using any certified products, they do contribute to the costs of responsible production.
Box 2 lists the types and some potential sources of information needed by enterprises for these purposes.
Box 2. Types and potential sources of information to map the supply chain and assess deforestation risks
Types of information:
Names and locations of farmers, local traders, processors and any other enterprises in the supply chain that a company further downstream wants to trace to
Average production volumes of farms or jurisdictional area supplying the commodities, to detect possible leakages between production areas with different deforestation risks
National production and trade data for the commodity in question; this may help in detecting possible leakages such as hidden imports from a third country in supply areas close to the borders
Processing facility information (e.g. palm oil mill, soybean crusher sourcing areas)
Where appropriate, geolocation data (geographic co‑ordinates) of the plot of land on which the commodities are grown, by point co‑ordinates or polygon mapping of the plot of production, farm boundaries or larger area, such as village or landscape or jurisdiction
Farm mapping and registration databases
Legal frameworks for the production of commodities and products purchased by the company and for forest conversion in the countries of production, levels of governance and law enforcement, legality compliance, respect for human rights and land rights, and corruption
Certification scheme data, including, for example, volumes of products fully certified, and of products certified to more limited criteria
Visual, isotopic or DNA analyses of samples (these can help distinguish between species, e.g. for timber, and, for some commodities, between different geographic origins)
Potential sources:
Purchase orders and invoices, batch numbers of commodities and products
Supplier questionnaires, including their sub-suppliers
On-site visits to production, transformation and storage areas
Company and industry association programmes, public summaries of audit reports and product claims or labels, including voluntary certification and legality verification schemes
Information generated through jurisdictional or landscape approaches
Private or public remote sensing providers
Supply chain mapping and transparency tools, e.g. TRASE, SPOTT, FLEGT IMM, Open Timber Portal, commercial providers, sectoral initiatives, co‑operation projects
Traceability systems, e.g. commercial or national traceability systems, Independent Forest Monitoring, Timber Legality Assurance Systems
Specific tools monitoring and assessing deforestation risk, e.g. Global Forest Watch
Agriculture and trade statistics from national or international databases, e.g. FAOSTAT, UN Comtrade; land registries, and other sources of land data such as Land Matrix or Open Land Contracts.
FAOLEX (a comprehensive legislative and policy database)
Note: All of the initiatives listed above approach deforestation according to different models or approaches; efforts should always be made to verify their reliability.
Assess risks of deforestation associated with the products, goods, services, suppliers and sourcing areas
Once the sources of the commodities and products covered by the enterprise’s deforestation policy are identified, and the sourcing area is known, it becomes possible to assess the risk that their production has been associated with deforestation.
Likelihood and severity. The significance of an adverse impact is a function of its likelihood and its severity. The severity of impacts can be analysed according to their scale, scope and irremediable character:
The scale of the adverse impact characterises the gravity of the impact on forests as a whole, or on particular types of forests (e.g. protected areas, high conservation value areas, high carbon stock areas) or the extent of changes in tree species composition.
Scope concerns the reach of the impact, for example the extent of damage to the forest by total area or by impacts on specific areas or species.
Irremediable character means any limits on the ability to restore the forest, or forest-dependent species, or the people living, working or depending on it, to a situation equivalent to their situation before the adverse impact. Special attention should be paid to the substantial challenges of restoring the social and environmental values and functions of a forest.
The process of prioritisation is ongoing, and in some instances new or emerging adverse impacts may arise and be prioritised before moving on to less significant impacts.
The risk assessment should combine information on:
Extent and type of forest cover in the sourcing area
Trends of deforestation in this area (in general, not just for specific products)
Information on direct drivers of deforestation
Information on indirect drivers of deforestation
Levels of traceability
Complexity of the supply chain
The higher the extent and risk of deforestation, the greater the level of detail that will be needed. Where the risk is very low, an assessment at the country or regional level may be adequate; where it is higher, the assessment will need to focus on smaller areas, and may require detailed geolocation information to the farm level. Addressing any information gaps for high-risk source areas should be a high priority.
Forest cover. This should include assessments of the proximity of suppliers to remaining forest land within the supply area (including within the farms themselves) and adjacent to it, which should help the enterprise to assess the risk of future deforestation. For example, a region with low rates of deforestation but with a significant amount of standing forest is a higher risk compared to a region with previously high rates of deforestation but no forest left.
Deforestation trends. An increasing range of sources of information on deforestation rates and incidences are now available (see Box 3 and the Glossary). Deforestation fronts move over time and their dynamics are not linear. The risk of deforestation in supply areas (which may themselves often change) should therefore be updated on a regular basis, and the use of deforestation alert services should be considered.
Direct drivers. A direct driver of deforestation is the direct cause of the forest loss and associated land use change. Estimating the likelihood of the conversion of forests to cropland or grassland being caused by the extension of production of the commodity used by the enterprise is a key element of the risk assessment.
Underlying/Indirect drivers. Indirect drivers, sometimes called underlying drivers, include the policy, legal, economic, social or contextual causes that induced the land use change. For instance, if the evidence shows that an increased demand and/or increased prices for a specific commodity have driven deforestation, and commercial forecasts indicate that this trend will remain, then the risk of deforestation will remain high. For another example, where standards of forest and land use governance and law enforcement are weak, the risk of deforestation will be higher than where they are stronger.
The complexity of the supply chain, including the number of intermediate steps within it, and the risk of mixing of products from unknown or potentially high-risk sources. This includes identifying the various actors involved in the supply chain, including suppliers and business partners. This is important: the greater the number of links in the chain, the higher is the risk, since every link potentially increases the chance of products associated with deforestation entering supplies. The type of links – e.g. intermediary traders sourcing directly from farms and selling the commodities on to the next link in the supply chain – are also important, particularly where the commodity is obtained from a large number of sources such as smallholder farmers, who may need support in complying with the enterprise’s policy.
Where it is not feasible to address all identified impacts, an enterprise should prioritise action based on the severity and likelihood of the adverse impact. Once the most significant impacts are identified and dealt with, the enterprise should move on to address less significant impacts.
Box 3. Potential sources of information on deforestation and deforestation drivers
Remote sensing through satellite or radar data, e.g. Global Forest Watch, Terra‑i, Earth Resources Observation and Science (EROS) Center; national systems (e.g. PRODES, Brazil; Mapbiomas; IDEAM, Colombia; Geobosques, Peru)
Assessments of the status of governance and law enforcement in the source country, e.g. World Bank Worldwide Governance Indicators, Transparency International Corruption Perceptions Index or Freedom House Index
Deforestation alerts, e.g. Global Forest Watch GLAD alerts, RADD Forest Disturbance Alert
FAO Forest Resources Assessment series
Local communities, Indigenous Peoples and civil society organisations; Independent or community forest monitors (empowering community members to act as forest monitors can be an effective way to collect data and raise the alarm on deforestation)
Country or landscape risk assessments, e.g. those conducted by LandScale
Information collected through early warning and grievance mechanisms
Studies of deforestation drivers, Measuring Reporting and Verification (MRV) reports, e.g. in national REDD+ strategies
Tools provided by civil society, e.g. the Cocoa Accountability Map by Mighty Earth
For further resources please see Annex A.
Risk assessments: what types are there and who does what?
Several types and levels of risk assessments are possible.
Context risk assessments: At country or regional level, by assessing the regulatory framework, political context, civil liberties and socio‑economic environments.
Site‑level risk assessments aim to understand the factual circumstances of the operations of business partners in order to assess the scope, severity and likelihood of risks at the site level. Assessments can include checking volumes of commodities produced in particular areas against allowable volumes, undertaking stakeholder consultations, monitoring by third parties such as civil society organisations, and organising visits to the farms and/or processing facilities.
Upstream enterprises (such as farms and plantations) may establish on-the‑ground assessment teams for generating and sharing verifiable, reliable and up-to-date information on the extent of deforestation. These enterprises also need to ensure that they respect legitimate land tenure right holders (see Box 1). They should provide the results of their risk assessments to downstream enterprises.
Downstream enterprises should not only identify risks in their own operations but also, to the best of their efforts, assess the risks faced by their suppliers and sub-suppliers. They can evaluate the latter by assessing the due diligence carried out by their suppliers or by directly assessing the operations of their suppliers, for instance by conducting visits to farms and local communities. Tools such as deforestation alerts can help to spot-check suppliers’ operations for potential association with deforestation. Information should be sought both on the suppliers’ systems and the volumes of products they are supplying. Participating in industry-wide schemes that assess the compliance of business partners with deforestation policies and provide relevant information can support these assessments.
Financial enterprises should carry out due diligence with regard to their clients and investments. The nature and extent of the due diligence will depend on the size and nature of the enterprise’s investment portfolio and its relationship to specific clients and investments (e.g. the ownership share in the company, tenure of investment, access to relevant information and the likelihood that meaningful influence may be exercised). Where financial enterprises have large numbers of clients and investee companies, they are encouraged to prioritise efforts based on risk assessments. Financial enterprises should seek to prioritise the most severe deforestation-related impacts for due diligence while continuing to monitor risks, evaluate prioritisation decisions and build on their actions to the extent possible and necessary over time, to cover a broader range of clients and investee companies and actions.
Suggestions for SMEs
All SMEs:
Identify your commodity focus and prioritise your mapping efforts accordingly.
Create a list of your direct and indirect (outsourced) suppliers and identify which ones may require greater scrutiny/due diligence actions in terms of deforestation (by geography/location, type of commodity, parts of supply chain, company size).
Information on direct and indirect suppliers can be collected in a variety of different ways to minimise costs, including desk-based research using existing publicly disclosed information online, working with third-party initiatives or certification schemes, working collectively as part of industry associations. Some industry collaborations allow SMEs to share risk assessment, traceability and sometimes monitoring information.
Ask your direct suppliers to send you information on their due diligence practices, sourcing practices and deforestation policies; assess those approaches to better understand which suppliers may not have effective measures to consider deforestation risks.
Consider having regular calls, or check-ins with upstream suppliers operating at control points of the supply chain to better understand how they are identifying, preventing and mitigating deforestation impacts in the commodities that you have prioritised.
In addition, upstream SMEs can:
Know where your product comes from, and how it is grown and sourced; it may be more feasible to focus on particular source landscapes rather than wider areas.
Hold meetings with cooperatives, farmers or other producers, and Indigenous Peoples and local communities, who are at the front lines of production and deforestation risks.
Build your leverage: collaborate with other SMEs that source from the same producers to identify and prioritise deforestation risks in the sector.
Seek advice and information from business associations, certification schemes (private or national), international organisations (e.g. OECD, FAO, UNEP), government entities, NGOs, trade unions and relevant multi-stakeholder initiatives.