Fairer deals for Fairtrade

The Fairtrade Mark is now recognised by around three out of four people in the UK. What was once a movement focused on the likes of coffee, tea and chocolate has moved into an increasing array of commodities and products, including rubber, charcoal and, most recently, gold.

But when one looks closer at some of the detail, there are reasons to be concerned as well as sceptical, and reasons why the fight is by no means over. Essentially, whilst some brands and retailers appear very genuine about addressing issues around ethics and sustainability throughout their organisations and supply chains, many others are seen as simply trying to ‘greenwash’ their organisations.

For example, one of the criteria for an organisation to be able to use the Fairtrade Mark in the UK is that they ‘partially pay in advance, when producers ask for it’. Spotted the loophole? That's right, no producer is likely to ask for an advance payment if they know a large important buyer is unwilling to give one. This is a loophole that some brands and retailers will exploit in the name of ‘business’. On the other hand businesses such as Fullwell Mill, which manufactures the popular Tropical Wholefoods brand's Fairtrade products, places ethics and sustainability right up there with making profit and does not seek to take advantage of such loopholes, making advance payments to all its producers.

Like many Fairtrade brands, Fullwell Mill supplies major retailers, as well as retailing directly through its website and ethical portals. It provides a pre-payment to a producer on day 1 of an order of, say, around 50 per cent of the total price agreed with the producer, and then pays the remaining balance on safe receipt of the produce. However, it may be up to a year before it receives any payment from a major retailer for the produce, leaving it with the problem of having to raise large amounts of money to cover advance payments and having to pay significant interest costs as a result.

Thankfully there is a financial institution in the UK called Shared Interest, which was set up to provide financial services for fair trade businesses and is a lifeline in terms of its accessibility to affordable and appropriate financial services. However, it has a limited capital base and global reach, so demand for its funds always exceeds supply. There are other sources of social/ethical finance, but many of these are not always as easy to access as one might imagine and hope.

It is the working capital gap and purchase guarantee issues that Adam Brett, Director of Fullwell Mill, and I have been working to solve since last autumn. We see these as critical issues to the growth and even survival of Fairtrade brands, as well as to the integrity of what Fairtrade stands for.

At present we are exploring a relatively new mechanism to the market which was recommended by the Association of Corporate Treasurers (ACT) in a report it produced last summer on supply chain financing (SCF). The report was commissioned by the Bank of England in response to growing concern that SMEs in the UK were struggling to access affordable financial services in the current climate. The mechanism recommended by the report is called a Buyer-Driven Receivables Programme (BDRP), and differs from traditional supply chain financing mechanisms such as invoice discounting and invoice factoring in that it uses a buyer’s credit standing rather than a supplier’s.

The report found that SCF can help ease lending constraints for small to mid-tier enterprises or those with a weaker credit standing, and that buyers in the form of larger companies can play a significant role by facilitating BDRPs that their supply chain can participate in. The benefits to suppliers in terms of lower cost finance can feed back as a benefit to buyers in terms of better relationships with suppliers and a reduction in the possible financial weakness/instability of suppliers. Moreover, we believe buyers could share the benefit in terms of lower-priced products, since the savings derived from lower cost finance could be shared with, or even passed on to, the buyer. For example, a major supermarket could facilitate a BDRP that a Fairtrade brand such as Fullwell Mill could use to access lower cost finance to meet its working capital needs, enabling the supplier to sell its product onto the supermarket at a lower unit price than it currently does.

SCF has traditionally worked well for products such as electronic goods, so the challenge is to take this experience and adapt it for different products. There are a number of perceived and actual challenges to the growth of SCF that the report details, and the banks providing SCF are relatively few. However, this number has been growing as has the volume of SCF transactions: in 2008 the market was in its early stages with about £100m outstanding; by 2009 this had grown to £700m, and it was anticipated that by end of 2010 this would be around £1bn. So there are some promising signs of uptake that combine well with the report’s recommendations.

We also feel that the present Fairtrade criteria should be tightened to include SCF, so that the issues around working capital and purchase guarantees can be addressed throughout the Fairtrade supply-chain. That means all the way from farmer to final consumer. This is a much bigger remit than the UK-focus of the ACT report, and we feel would require tapping into developments that are being made in the ‘majority world’ in the area of mobile banking.

We have been advised that our next step should be to talk to some potentially interested banks in the UK, and are looking for more people to join us on this journey, particularly in the financial, retail and mobile phone banking fields. So if there is anyone out there that thinks they may be able and willing to help us, or knows anyone else that might be, then please get in touch.

Ian Morris is moving from the charity sector to social enterprise and is working part-time with Tropical Wholefoods/Fullwell Mill. He can be emailed at eej_morris@hotmail.com

Adam Brett is co-founder of Tropical Wholefoods and director of Fullwell Mill. He can be emailed at adam@fullwellmill.co.uk.