How PEFC certification can help the rubber industry to meet the ESG goals of a shifting global economy

14 November 2022 News

Natural rubber is truly a wonderful resource - very few materials can match its unique utility and range of properties, and in some cases, even synthetic rubber can’t be used as a substitute (in aircraft tyres for example). It’s in the tyres of our cars and bicycles, the soles of our shoes, and is present in more than 40,000 products that we use everyday. On average, the annual consumption of rubber per person globally is estimated at 3.5 kg and it's one of the 30 materials on the EU’s critical raw materials list.

But there are signs that the supply of natural rubber is running out and may not meet future demand as a result of external forces, such as climate change and extreme weather events, diseases and highly volatile global rubber prices. Just in the last few years, we have witnessed new and existing rubber leaf diseases wipe out up to 25% of the latex yield in plantations in some of the world’s major rubber-growing areas, floods destroy tens of thousands of metric tonnes of rubber in Southern Thailand, and many rubber smallholders shifting to other cash crops, such as palm oil, to combat low rubber prices in an industry that is dominated by smallholder production. In addition, unsustainable practices in the rubber industry can cause a host of environmental and social issues, such as deforestation resulting from land conversion, a reduction in animal, plant, soil and water biodiversity and contributing to poverty, inequality and labour abuses amongst rubber-growing communities. 

While natural rubber production can have significant environmental and social impacts, it can be grown sustainably, providing a livelihood for tens of millions of people. Downstream actors in the chain - buyers, suppliers, rubber product manufacturers, national bodies and financial institutions - can play a part in improving the sustainability of commodities such as rubber by embracing the principles of ESG.

What is ESG?

ESG (Environmental and Social Governance) is a framework used by prospective external investors or stakeholders to assess how an organization manages risks and opportunities related to sustainability. Sometimes referred to as sustainable investing, impact investing or socially responsible investing, investors are increasingly considering non-financial ESG standards when deciding where to invest and aligning their own values with those of companies that are acting responsibly. Whilst ESG standards aren’t set in stone and vary depending on the organization, there are generally accepted values when considering investing or implementing ESG standards. These standards are;

• Environmental and the conservation of the natural world - Actions taken towards cutting carbon emissions and reducing the effects of climate change, air and water pollution, maintaining natural biodiversity and limiting deforestation.
• Social and the consideration of people and relationships - Policies regarding gender and diversity, human rights and labour standards.
• Governance and the standards for running a company - Internal responsibility taken to limit bribery and corruption and improve transparency within a company or organization.

Investing in stocks and companies that have embraced ESG principles has proven remarkably popular - and successful - in recent years. A report by the Forum for Sustainable and Responsible Investment (USIF) revealed that approximately 17 trillion dollars (US) were held in assets using sustainable investing strategies, an increase of 42 percent from 2018-2020. Sustainable investing now accounts for 33% of the total assets under professional management in the USA. ESG-based investments have also historically remained resilient through bear markets and companies with good ESG ratings often outperformed those without ESG stocks in their portfolio, even in the midst of the pandemic.

It’s clear that investors are putting their ‘money where their hearts are’ but what relevance does this have for rubber and PEFC certification?

How is PEFC certification relevant to ESG goals?  

Rubber has traditionally flown under the radar in contrast to other commodities when it comes to measuring and addressing its environmental and social impacts due to its small-scale, smallholder-based origins. However in the wake of the COVID pandemic, which exposed many investors to the frailty of global supply chains, and owing to its strategic importance to many industries, the spotlight has been cast on natural rubber and how to address the sustainability of the global rubber supply chain.

Larger organisations and financial institutions are increasingly incorporating forestry certification schemes into their ESG policies in order to enhance their brand and enterprise value and positively impact the risk profile of related assets. PEFC forest management and chain of custody certification provides a globally-recognised benchmark and assurance tool of sustainable practices that satisfies several ESG indicators. Certification sends a clear message to the market and assures downstream rubber actors and financial institutions that they are lending to, investing or buying from companies that engage in legal and sustainable environmental and forestry practices. 

PEFC certification can significantly mitigate risks for ESG investors

Mainstream financial institutions increasingly recognise that ESG opportunities and risks have the potential to create or diminish shareholder value and therefore need to be managed. PEFC certification provides transparent information on forest-product provenance and traceability, a clear commitment to protecting the rights of rubber smallholders and a verified means to prevent environmental damage. PEFC certification offers reassurances to investors and financial institutions that the companies they are investing in are respecting ESG goals in a number of key ways:

1. Ensures clear traceability of forest products throughout the supply chain.
2. Supports implementation of a Due Diligence System (DDS) for the restriction of forest-based products that come from controversial sources, taking into account factors such as tenure and land-use rights for indigenous peoples, local communities or other affected stakeholders; health, labour and safety issues; anticorruption and the payment of applicable royalties and taxes.
3. Limits deforestation and land conversion practices in surrounding and adjacent forests.
4. Supports and regulates the protective functions of forest ecosystems, particularly those performed by waterways and the soil, and the conservation of biological diversity within surrounding forest ecosystems.
5. PEFC provides rubber smallholders with administrative and technical assistance to apply environmental best practices and sustainably produce over the long term.
6. Protects the welfare and labour rights of rubber workers.

Before committing to funding, many asset owners may demand proof of certification as a prerequisite condition for investment, as this can be an effective tool when reporting their ESG credentials to external and internal stakeholders.

Certification is the solution for rubber and rubberwood

SPOTT is an independent, non-profit organization that assesses and evaluates commodity producers, processors and traders on their public disclosure regarding their policies and practices related to environmental, social and governance (ESG) issues. In a recent report assessing the ESG credentials of 15 rubber producers and processors, SPOTT concluded that traceability was one of the most challenging issues facing sustainability in the natural rubber supply chain. Only 57% of the companies surveyed had committed to tracing natural rubber throughout the supply chain and just 6% had certified their plantations or estates under forest management schemes. Furthermore, just over 1 in 10 rubber producers surveyed had implemented schemes to support smallholders throughout the supply chain.

There are significant gaps in the reporting of ESG standards for the world’s major rubber buyers, including leading tyre manufacturers.This is primarily due to the complex nature of the natural rubber supply chain where approximately 85% of the world’s rubber is produced by smallholders and then purchased by ‘middlemen’ rubber buyers who either process or sell it raw to larger companies. Indeed, just 5% of the manufacturers and traders publicly reported the percentage of their supply from third party processing facilities traceable to smallholders at the jurisdictional level. 

Whilst there are no industry-wide ESG standards for natural rubber, the Global Platform for Sustainable Natural Rubber (GPSNR) defined a set of reporting requirements at its annual congress last year in order for member companies to meet and comply with the GPSNR’s policy framework. Serving as a guide for members to prove the traceability of the rubber they supply and the conditions under which it is produced, the policy framework is perhaps the most complete set of ESG related standards solely for the natural rubber industry.

PEFC is a proud founding member of the GPSNR, and certification forms an effective mechanism to satisfy several of the key policy components and reporting requirements of the framework. Specifically, PEFC certification may help rubber companies with disclosing their commitment in regards to traceability throughout the supply chain, supporting the long-term protection of natural forest areas and preventing deforestation or degradation in high conservation value (HCV’s) areas, protecting soil and water quality and threatened/endangered species, and respecting the rights of indigenous peoples and the labour rights of workers. To become and remain a member of the rapidly growing GPSNR and attract international investors and buyers, rubber companies will need to satisfy these requirements and PEFC certification is the most effective means to do so. 

Rubberwood, a by-product of rubber plantations, may also play an important role for companies looking to transition to sustainable materials in order to satisfy ESG goals or shifting national policies. The European Green Deal is a good example of this, as the EU aims to become the first zero-carbon continent by 2050. European companies who deal in and work with timber may increasingly look towards renewable rubberwood as an alternative to wood sourced from forests, and will need to disclose the traceability of that rubberwood throughout the supply chain. 

ESG funding is on the rise: Can the rubber industry keep up?

ESG based investments are growing exponentially - by 2025 it is expected that around 33% of global assets under management will have ESG mandates, and between 2018 to 2036, the industry is expected to grow by 43% accounting for $160 trillion US dollars in total assets. Moreover, it is likely that we will see more cohesion on ESG amongst national governments as a response to climate change and a broad standardization of ESG goals, particularly with the implementation of the International Sustainability Standards Board (ISSB) at the UN Climate Change Conference in 2021. Along with the EU Green Deal and recent policy moves to transition towards sustainability in the United States, APEC - the intergovernmental body representing the biggest rubber supplying region in the world in Southeast Asia - has also signaled a move towards protecting millions of hectares of forests in the coming decade by promoting sustainable management plans.

The question is: will the natural rubber industry be able to keep up with the global shift towards sustainability and satisfy the appetites of investors and financial institutions looking to invest in responsible, sustainable supply chains? The answer is not clear, but what we do know is that PEFC certification can support rubber companies and smallholders to step up to the challenge.

About PEFC’s sustainable rubber campaign: ‘PEFC is Here’ is PEFC's awareness campaign to promote the use of sustainably sourced rubber and rubber wood. As part of the campaign, we highlight companies and brands that prioritize environmental conservation by offering PEFC-certified rubber and rubberwood through case stories and graphics. If you source and sell PEFC-certified rubber and rubberwood products, join us today!