Lecture 5: The Benefits and Costs of Certification

1.1 The Benefits and Costs of Certification

1.2 Introduction

Notes:

In Lecture 4, we learnt that:

Becoming certified in a voluntary sustainability standard is a long-term process, not a one-time commitment;

The certification process can be divided into a series of steps. Click on each of the buttons below to view the steps in the
implementation of sustainability requirements.

Before beginning the certification process, companies should assess their readiness to becoming certified as well as
analyse, learn and understand the voluntary sustainability standard(s) (VSS) applicable to their business or business
transactions.
1.3 Focus of the lecture

Notes:

This lecture expands on the topics discussed in lectures 1 - 4, and focuses on the two following questions.
Click on each of the icons to learn more.

1. What are the implications and impacts (benefits and costs) associated with compliance with VSS for a business ?

2. What are the best practices to help businesses maximize the benefits associated with certification and standard
compliance?

The goal of this lecture is to help producers, suppliers, exporters, and businesses make decisions on whether or not to
engage in becoming certified in one or more VSS.
1.4 Certification, or no certification? That is the question!

Notes:

Business as usual…

Many national or international business transactions require compliance with mandatory regulations. Compliance with
additional sustainability or quality-oriented standards, and therefore additional certification, may not be required.
Business “as usual” can continue.

…or additional layer of certification?

Increasingly, however, VSS certification may be required in order to complete business
transactions with certain buyers. This may apply to both domestic and international transactions.
In the latter case, companies that are “export-ready” most often engage in additional certification.

Remember:

As discussed in lecture 2, deciding whether or not to become certified depends on the strategy which is being adopted:
whether it is reactive, proactive or predictive.
1.5 What are standards?

Notes:

Reviewing the benefits and costs

1.6 Reviewing the benefits and costs of engaging in the certification process
One of the ways of better understanding the implications and potential impacts of engaging in VSS certification is to
review the “benefits” and “costs” of the process. This can be done by examining them along the following four
categories.

NOTE:

The potential benefits and costs of engaging in VSS certification depend to a large extent on the local context, challenges,
and initial conditions.
Each of the four categories, as well as their impacts, will be discussed in greater detail in the following slides.
1.7 Financial benefits - Premiums, access to financing

Notes:

Higher profitability:
Premium prices for certified products

 Products and/or services that are certified may be sold for higher prices and thus generate higher profits and net
income for certified producers. Such products are often more expensive due to the higher effort which has gone into
producing and processing them in a sustainable way .

 Higher profitability is also directly connected with the increased yields and higher quality of certified produce.

Enhanced access to credit

As compliance to voluntary standards requires good organizational and management skills, businesses whose products
or services are certified increase their credibility vis-à-vis investors, thus enjoying better access to credit.
In addition, depending on the voluntary standard, some producers may receive technical and financial support from the
standard organization to assist them in implementing the standard requirements and ensure full compliance.
1.8 Financial costs - Certification, audit and investment costs

Notes:

The potential financial benefits of certification need to be weighed against the actual monetary costs connected to
VSS adoption. Click on each of the boxes to learn more.

Cost breakdown:
The following are the various costs associated with becoming certified in a VSS
Certification and consultation fees
Costs of covering both the fees of membership in a VSS, as well as consultancy services for cases in which the producer’s
capacity to implement the requirements is not sufficient.

Inspection/audit costs
Costs of implementing inspections and audits in order to verify compliance, and which must be calculated in addition to
the standard membership fees.
Investments needed to meet the compliance requirements
Compliance with VSS requirements often entails investments to improve business operations, and therefore requires
additional financial resources.

Additional labour costs

Depending on the standard adopted, minimum requirements with regards to employee conditions may be imposed,
including provisions for fair wages. In addition, new employees with certain specialized skill sets may need to be hired.

1.9 What are standards?

Notes:

Financial impact
1.10 Financial impact - Evidence on the ground

Notes:

Research conducted by ITC on the impact of VSS adoption with regards to business opportunities and
producer profitability found that VSS compliance brought predominantly positive financial effects.

At the same time, the results of the survey also pointed out that:

 Increased earnings do not necessarily compensate for the additional costs entailed in VSS compliance.

 Premiums are not necessarily distributed equally among the actors in the chain.
1.11 Management benefits - Business and market opportunities

Notes:

VSS certification has the potential to open new markets, strengthen business relationships and enable businesses to reposition
themselves in global markets. The management benefits associated with certification include.

Access to new and growing markets, moving beyond “niche” categories

In the past several years, several sectors of VSS-certified markets have displayed double-digit growth rates, often surpassing the
growth rates of conventional markets.

VSS-certified products are moving from being niche products to being the mainstream. Growing portions of various global
commodity markets are now produced as VSS-certified, creating potential disadvantages for those companies that do not yet have
any certification.

New clients, or improved relationships with existing clients

More and more buyers follow the path of “sustainable sourcing”, including high-value/high-volume buyers in both the public and the
private sector:

Public sector: new sustainable public procurement policies. EXAMPLE: The European Commission’s “green public procurement”
(GPP) strategy. Between 2009 and 2010, 38% of the total value procured by the EU (EU, national, regional or local level). included a
GPP criterion.

Private sector: global corporations’ sustainability commitments are gaining in strength. EXAMPLE: Unilever has pledged that 100% of
its agricultural materials will be sustainably sourced by 2020.
Repositioning in global value chains
Compliance with voluntary sustainability standards can translate into gaining the status of preferred supplier, thus giving companies
access to a greater market and income security.

1.12 Management costs - Uncertainty linked to initial investments

Notes:

Despite the possible benefits, one of the biggest pitfalls of certification is linked to the potentially uncertain returns
which stem from it. The management costs associated with certification include:

Obtaining VSS certification does not guarantee that a market will be found for the product

If a company cannot find a buyer for its certified products, it will have to sell them on the conventional market, without
benefiting from the price premium normally associated with certification.

The oversupply of some certified products is also a persistent phenomenon in certified markets (in which sales represent
a smaller portion of global markets than production).

As a result, it is often only part of standard-compliant production which is sold as such.

EXAMPLE: in 2012, only 44% of standard-compliant commodities were sold as such (SSI Review, 2014, p.91)
Most voluntary standards offer only modest premiums for certified products

The premiums or (minimum prices) for certified products are not always guaranteed, can potentially be quite small, and
vary across different VSS.
EXAMPLE: Over the past several years, premiums for standard-compliant cocoa have ranged from around 5% for UTZ-
certified cocoa to 18% or more for organic cocoa (SSI Review, 2014, p. 151).
1.13 What are standards?

Notes:

Management impact
1.14 Management impact - Evidence on the ground

Notes:

According to research done by ITC, the improvements in buyer-seller relationships that result from VSS adoption can be
more beneficial for businesses than the immediate monetary benefits.
1.15 Quality Management benefits - Better quality, productivity and processes

Notes:

VSS certification requirements are often targeted towards improving management and production skills which, in turn,
improve the efficiency and productivity of businesses. The quality management benefits associated with certification
include:
Better quality and greater yields: The business process improvements usually required as part of complying with VSS
often result in higher quality products and higher production yields.

Better management and production skills: Certified producers often gain comparably better management and
production skills as a result of the upgrading process involved in adopting a VSS, including through taking part in training,
implementing continuous improvement requirements, etc.

Improved efficiency and productivity: Adopting better practices and investing in new equipment often contributes to
greater efficiency and productivity, especially for farmers or producers who face resource constraints. This potentially
results in higher yields/production with the same amount of inputs. As a result, competitiveness improves.
1.16 Quality Management costs - Certification, audit and investment costs

Notes:

The “better practice” adjustments involved in the process of adopting a VSS often affect everyday business practices,
separate from the VSS’s particular focus on specific production process or product specifications. The quality
management costs associated with certification include:
Large number of standards: As the number of available VSS increases, increasing numbers of buyers may require
compliance with various VSS. This results in both confusion, as well as in greater transaction costs for producers. In
addition, some standards may lack transparency with regards to their certification criteria and procedures.

Management time: dealing with difficult requirements: Becoming certified in a VSS entails additional time required for
producers and managers to effectively implement new mechanisms and concepts.
While some VSS may impose maximum working hours for employees, buyers do not necessarily relax their delivery
requirements. Coping with such conflicting priorities requires managers to develop additional skills
Additional organizational units: In order to implement better business practices, companies often need to set up
management and monitoring systems as well as record keeping mechanisms, including

(basic) traceability systems , which might require whole new organizational units.

Potentially difficult software and hardware improvements: Some businesses, especially smallholder farmers located in
remote areas, may find it difficult to obtain the infrastructure necessary to upgrade their production facilities. This
infrastructure can be divided into two types:
 “hardware”: production equipment, information technology and communication systems, warehouses, sanitation
 infrastructure, etc.

 “software”: implementing rigorous health and safety measures, deliver staff training, etc.

1. 17 Quality Management effects – evidence on the ground (case study)

This exercise is not available in the offline PDF version of this lecture.
1.18 Sustainability benefits - Positive Worker/Community / Environmental effects

Notes:

The benefits which result from certification in a VSS can positively impact the working environment of a company, the
well-being of its community, as well as help protect the environment. The sustainability benefits associated with
certification include:

Better working environment: Improved employee welfare and motivation (lower absenteeism, lower number of
work-related accidents).
Improvement of basic working conditions for employees, including job security, medical and hospital treatment.

Increase in the use of labor contracts, safety equipment, the availability of first-aid kits.

Higher satisfaction of workers due to higher technical assistance and lower trade risk.

Developments in the community and livelihoods of producers :

Some voluntary standards aim to extend their impact beyond individual producers, generating positive change at the
local community level.
Higher incomes associated with producer certification may also improve the overall living conditions of producers.
Environmental protection: VSS can fill a gap in addressing issues which are not, or cannot, be tackled by public
regulation, or where such regulation is insufficient. Typical example includes the conservation of forests.
VSS often include specific requirements, often associated with production processes or methods, which aim to
substantially improve environmental management practices.
1.19 Sustainability costs - Limited Worker/Community/Environment effects

Notes:

While the overarching goal of VSS is to address wider sustainability issues, the benefits associated with compliance do
not always necessarily translate into a wide positive impact.

The additional resources

Created through better practices are not used towards community development

The increased net income of VSS-compliant producers is not necessarily used to improve the livelihood of the whole
community, thus leading the scalability of positive results stemming from VSS adoption to be put into question.

Limited effects
On the livelihood of producers compared to other initiatives

In order to implement better business practices, companies often need to set up management and monitoring systems
as well as record keeping mechanisms, including (basic) traceability systems , which might require whole new
organizational units.
1.20 Sustainability impacts - Social, environmental and ethical management evidence on the
ground

Notes:

Despite positive overall results, research shows that voluntary standards can only be part of the solution in
systemic challenges related to environmental and social issues!

Available research also provides important insights into the assessments of VSS performance:

Voluntary sustainability standards are only one tool in the broad set of regulatory options to achieve
sustainable outcomes!

Research results greatly vary across countries and communities, and producer groups!
1.21 Quiz: The benefits and costs of VSS certification

Notes:

Oguz, an orange producer, is considering the possible costs and benefits of seeking certification in a VSS for
his business.

Each of the statements below are either a benefit/advantage or an investment/cost of VSS certification for
companies. To complete this exercise, click and drag the benefit/advantage tab (green) or the
investment/cost tab (orange) to the statements to which they apply. Statements which have been correctly
labelled in this way will become either green or orange, depending on whether they are a benefit/advantage
or an investment/cost. Once you have correctly identified all of the statements below, click on the Next
button.
1.22 Guidance to help businesses get the most out of certification and to be the best
prepared

Notes:

As we have seen in the previous slides, whether or not becoming certified in a VSS is right for producers, suppliers, and
exporters depends on several factors. Before beginning the certification process, consider whether the following apply
to your business:
1.23 Key points

Notes:

Whether or not the benefits of voluntary standard certification outweigh its costs depends on the producer’s goals,
context and current capabilities.

Major benefits and potential advantages:

 Business opportunities: connection with markets, new clients, price premiums

 Positive effects on production: better general quality, productivity and processes

 Positive effects on workers, the community and the environment

Costs and potential disadvantages:

 Requirements may be difficult to comply with in certain contexts

 There are many standards, and they are not always connected to each other

 The costs of investments can be high

 There are also additional certification and auditing costs

1.24 Thank you for completing the lecture