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Chain of Custody Nonsense
Chain of Custody Nonsense
News 10/7/2013

Protecting income streams rather than the world’s forests.

As of January 2019, The Forest Trust has become Earthworm Foundation.

The FSC and PEFC released a joint statement on July 8th urging ISO members to vote against a new proposal for an ISO Chain of Custody certification.

I expected the statement to explain that the proposed standard was weak, that it would allow illegally logged timber into supply chains, that it would be bad for the world’s forests. Instead, the statement amounts to a call for no new competition, citing that together FSC and PEFC account for some 98% of the world’s certified forests and chain of custody certificates (is that a good thing?), noting the synergies between FSC and PEFC, their long experience of multi-stakeholder standard development and the concern that offering a chain of custody certificate disconnected from PEFC and FSC forest management certification would lead to uncertainty and sub-optimal results; whatever that means. There was no review of ISO’s proposal so we can’t be sure whether it’s a strong standard or not.

I’m no fan of Chain of Custody (COC) certification; indeed the FSC COC system’s failure to protect the world’s forests was the principle reason TFT let its FSC membership lapse at the end of 2011. Few certification “experts” spend time in wood factories – they’re not as attractive as forests – so few commentators have any sense that the acclaimed COC certification process has issues. It does; here’s why.

Some years ago, entrepreneurial Chinese factory managers realized that the FSC system provided them a useful tool to market their products. They could get FSC COC certified and green their image. Some factories had COC already and were processing FSC certified wood imported into China into products for export markets; good on them. But when it became clear that FSC accredited certification bodies (CBs) would COC certify your factory regardless of whether you were processing FSC wood and that you could promote your operations as “FSC certified”, factory managers raced to get it and a process has emerged that in my view promotes the use of illegal wood in abject contrast to the FSC’s stated goal.

Here is how the system has evolved and works today.

There are thousands of small, medium sized enterprises (SMEs) in China processing wood. They buy their wood – generally – on the open market, typically from ports where traders bring it in from all around the world, usually untraceable and with dubious “legal” origins. As the demand for COC certification started to grow, FSC CBs formed partnerships with local “consulting” companies because the CBs cannot audit companies they have trained themselves, they need an “arm’s length” partner. The consulting companies went to the SMEs and told them how COC would help them win business from discerning European customers. They offered to “train” them to implement a COC system – for a fee – and to introduce them to their CB partner, who would come in after a 45-day period, audit them (for a second fee) and give them their COC certificate. Too easy.

And that’s what’s happened. The number of FSC COC certificates in China has exploded. “Consulting” companies run around training SMEs in COC, CB auditors fly about issuing and annually reassessing certificates. In February 2010, there were some 1,100 FSC COC certificates issued to factories in China, already a “great leap forward” from the handful that existed only a few years back. Today, the FSC reports that there are 2,966, up significantly from the 2,356 that existed in January 2013 – perhaps an impact of the EU Timber Regulation (EUTR)?

This matters.

There is no data as to how many of these SMEs actually process FSC wood. The FSC itself doesn’t know but industry whispers suggest it would be lucky to be more than 10% across mainland China. The FSC guesses that in Hong Kong it would be as high as 70% because many of the COC holders there are paper factories buying their fiber from FSC sources. Who knows?

The bulk of these FSC COC certified factories buy their wood from the same place they always have – down the road, from the local trader, who buys it from the port where other traders bring it in from the “open” market all over the world. SE Asia, Brazil, Russia, Africa are the sources of this wood and few have any idea whatsoever as to its legal status. We know that illegal logging and poor forest management are issues in these source countries. We also know that the COC companies push their “green” credentials based solely on their FSC certificate, not on the legality or heaven forbid the sustainability of the wood they’re using.

Buyers buy it. They’re not stupid. They know the wood is the same as they’ve always bought, that’s one of the whole COC deal’s attractions. They don’t have to spend time, money or effort investigating the technical performance of “lesser known species”. Rather, they can keep placing orders for the same wood, from the same factories they’ve always done; it’s good business. Their supplier’s FSC COC certificate gives them an answer to the question – where does your wood come from? They can answer – from this FSC certified factory in China; it’s great risk management. Those asking the question – NGOs or perhaps increasingly EUTR controllers – probably support FSC or at least have strong empathy for its goals but don’t understand that a COC certificate doesn’t mean the factory is running a traceability system, that wood in the end product is traceable back to a legally verified or sustainably certified source forest. Factories generally only run their COC system for a few days a year, just in advance of the annual surveillance audit when the CB and trainers visit, announced well in advance, to check all is in order. The audit is done, the system passes and the factory gets back to normal, untraceable production with no system at all operating the next day and for the next 12 months. Even so, a COC system, even when it is running and the factory is being diligent, does not confer legality to logs. It does not confer sustainability to logs; it merely identifies logs. A COC system – when running – only allows you to say that the wood in this product has come from that batch of logs. Still, the association of FSC’s name to the buyer’s product is good news, isn’t it? Let’s say that at best it becomes a stamp of environmental and social approval and a way of showing due diligence under the EUTR and Lacey Act and at least it creates doubt in the mind of the person raising the question – FSC are the good guys right so this must be OK?

Buyers send a clear signal to factories without COC that if they want orders, they need to get COC too. Non-COC certified factories call in the consultants who do their 45-day training contract and then call in their FSC accredited CB partner to audit their work and issue the COC certificate. There is no suggestion that a certificate will not be issued. If a CB starts issuing corrective actions requiring a further visit, it adds cost. They can try, but word quickly spreads throughout the extremely cost-sensitive wood industry that XXX or YY is not the CB you want – too strict and thus too expensive. The SMEs want a green stamp, quickly, and they don’t want to have to pay too much to get it.

Meanwhile the FSC and its partners rejoice. Why wouldn’t they? Each has much to gain from the issuance of COC certificates.

Blog published on Mongabay, 10 July 2013 The FSC’s income depends predominantly on accreditation fees charged by CBs every time they issue a certificate and the annual accreditation fees paid by certificate holders. The more certificates, the more accreditation fees. FSC’s 2011 Annual Report shows that US$13.4 million or 74% of its income came from accreditation fees, down from 86% in 2010.

There is a range of fees based on company turnover but with close to 3,000 factories COC certified in China, we could guess that Chinese SMEs contribute well over US$1 million to the FSC’s coffers each year; no wonder that the FSC has ignored TFT’s calls to stop this process. PEFC, which only recently started allowing its accredited CBs to certify factories in China for COC, already has 188 COC certificates registered there.

Then there are the consultants. They typically charge around US$1,200 for their “training” though there must be downward pressure on those fees too as competition is fierce for the business. The lower the fee, the more likely the consultant will win business and profit from it but that means fewer “training” visits so now factories routinely get a start-up visit and the consultant comes back 45 days later, just before the audit to check everything is in place.

Then there are the CBs. Their audit fee is typically around $1,600 for each an annual visit. Again though, competition is fierce so requiring another visit to close out corrective actions disadvantages your prospects to win work. No wonder factories tell us that they’re guaranteed to be COC certified by a certain date, no questions asked.

Finally, NGOs benefit as well. Some NGOs run workshops to educate Chinese SMEs. They urge them to get FSC COC because the number of COC certificates is one of the few metrics the NGOs can use to show impact and thus justify further funding from concerned public donors. Other NGOs who double as CBs urge similarly – get FSC COC, transform your industry.

The problem is that it doesn’t transform the industry. It merely provides a mechanism for many organizations to profit from business as usual; business that sucks in and uses illegal wood from the world’s dwindling forests.

The good news – from the FSC’s, consultants’, CBs’ and the NGOs’ perspective at least – is that the whole magical money-making process is finding root elsewhere. A TFT visit to India in October 2011 revealed that SMEs there were being forced onto the bandwagon too. NGO workshops urging them to get COC were attended by consultants and CBs ready to oblige. Agents – some of whom were doubling as COC consultants – were telling the SMEs that they needed COC to secure orders from their European customers. There are already more than 250 FSC COC certificate holders in India though again, no one knows how many actually process FSC wood. The sense is that it’s probably even less than the guessed at 10% for China.

This is a racket.

All in all, with fees, flights, hotels, entertainment costs, we’re talking about an industry worth tens of millions of dollars and growing in China and India alone, every year, going into a system that promotes business as usual with respect to wood use. Could the SMEs spend that money in a more productive way? They might consider investing it back into their businesses, perhaps in better equipment and safer working conditions for their employees. They might invest it – if they were wise – upstream to improve stewardship of the forests that supply their raw materials.

FSC’s website notes that globally there are 26,349 FSC COC certificates and every month we receive newsletters announcing the wonder as the number continues to grow. PEFC has 15,069 COC certificates globally. All those factories being audited and all paying the annual accreditation fees that underpin certification scheme finances; that underpin their very existence in fact. I’m left wondering how many of those certificates, particularly in countries with challenging governance contexts, are issued like those in China and now in India. The EUTR and the Lacey Act in the US have presumably given a boost to the industry – everyone’s happy, except the forests.

The reality is that an inherently unsuitable financing model corrupts the whole system. The FSC and PEFC, the auditors, the consultants must all issue certificates to safeguard their income streams. NGOs who carry out COC training to “transform the wood industry” must point to the growing numbers of certificates to safeguard their budgets too. We really shouldn’t ever celebrate new COC certificates, rather we should rue the continued evolution of a corrupted system that sucks in more of the same old wood from more and more of the world’s precious and disappearing forests.

I have no idea how the proposed new ISO COC would overcome the problems that FSC and PEFC have in their COC. Indeed, I doubt that it can; the whole concept of “independent, third party” certification is a myth perpetuating the destruction of the world’s forests and many of our other natural resources unfortunate enough to have a roundtable certification scheme devised for their management but that’s a topic for another time.

Right now, I can suggest a very simple step that both the FSC and PEFC could make to start to fix this COC issue. It’s one that I’ve shared with both organizations in the past with no success. More needs to be done to ensure proper due diligence and traceability but a good start would be if both FSC and PEFC could stop worrying about ISO or any other new certification scheme. Instead, they can do much more to prevent “uncertainty” and “suboptimal results” for the world’s forests by changing their own system to demand that only those SMEs actually using FSC or PEFC wood be allowed to hold and promote a COC certificate. If FSC and PEFC took this step, the number of COC certificates globally would collapse and their income would tank alongside it. Many will argue this is folly and a very stupid suggestion – how could the organizations survive financially without this critical income and continue their good work to protect the world’s forests? My counter is that it seems nonsensical to rely on income that destroys forests to fund work to protect forests.

Both the FSC and PEFC need a new funding model, one that is disconnected from the incentive to issue certificates. They can start with changing the rules around who can have a COC certificate. In the FSC’s case, they have their Policy of Association as a good vehicle to push this through. Both organizations clearly need funds but the scourge of COC taints their current budget and for those few in the know, their whole credibility. If they changed, they could safeguard a credible budget that acted in line with their stated mission. Their credibility and their positive impact on the world’s forests would jump dramatically. Right now, sadly, their opposition to the new ISO COC standard merely sounds like an exercise in gross self-interest. I always thought they were for the forests?

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