Cocoa

Cocoa is the key ingredient in one of the world’s most popular sweets – chocolate. The most salient issues in cocoa supply chains include the use of child labor and expansion of cocoa production into protected forest reserves. Climate change also threatens the future viability of cocoa production due to the predicted increase in prevalence of droughts, pests and disease. This brief provides a summary of the main environmental and social factors that affect cocoa production worldwide; however, it spotlights key players in the U.S. and European value chain and provides examples of actions being taken by companies operating or headquartered in the United States.

KEY TAKEAWAYS

Cocoa production has grown by more than 50% since 2000, driven by rising demand in the food and beverage industries. A wide range of consumer products are made from cocoa and its derivatives, including processed foods, beverages, pharmaceuticals and cosmetics.
Climate change is expected to threaten the future viability of current cocoa-growing areas, exposing cocoa supply chains to substantial physical climate risk.
Millions of cocoa farmers operate roughly 6 million cocoa farms around the world. 4 The majority are smallholders who depend on cocoa production as their main source of income. Low average yields of cocoa produced in these regions, the resulting low incomes of cocoa farmers, and weak governance exacerbate poverty and a variety of environmental and social issues.
In response to increasing media coverage and advocacy efforts, many companies have set public deadlines to eradicate child labor from cocoa supply chains. However, implementation of these commitments continues to lag behind, exposing companies to additional reputation risk.
Around two-thirds of all cocoa is produced in Côte d'Ivoire and Ghana, in West Africa, where cocoa has historically been a large driver of deforestation. Despite industry-led attempts to mitigate risks by improving transparency and accountability, some cocoa is still linked to deforestation in protected forest areas, most notably in these two countries.
Investors should address business risks in the cocoa supply chain through: directly engaging with their portfolio companies and their suppliers, supporting relevant policies, and joining multi-stakeholder collaborations. Effective implementation of corporate sustainability policies requires portfolio companies to promote commodity traceability and demonstrate a clear approach to supplier engagement, verify compliance with these policies throughout their supplier chain, and disclose progress on implementation.

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Environmental and Social Factors that Drive Risks

Climate Change
Deforestation and Land Use Change
Soil Health and Biodiversity
Land Rights
Water Use and Pollution
Working Conditions

Climate Change

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Climate change poses significant material risk to global cocoa supply chains. The increase in global temperatures will lead – and, to some extent, has already led – to shifts in global precipitation patterns and greater moisture loss in soil and plants. Climate-related changes in areas currently suitable for cocoa production, and the resulting increased volatility in cocoa supplies and prices, pose operational and market risk for both upstream and downstream supply-chain actors. In many cocoa-growing areas, the effects of climate change are already manifesting. Changes in temperature and rainfall have led to an increased prevalence of agricultural diseases, negatively impacting cocoa production in recent years. Climate change is likely to increase the prevalence of droughts, pests and disease, all of which threaten cocoa production. Disease and pests are already responsible for the loss of up to 40% of global cocoa production.
Deforestation and Land Use Change

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To date, roughly 90% of West Africa’s primary forests have been destroyed. In Côte d’Ivoire, roughly a quarter of forest loss since 1970 is tied to the expansion of cocoa production. Cocoa production also drives deforestation in other parts of the world; for example, approximately 9% of commodity-driven deforestation in Indonesia has been attributed to cocoa production, and thousands of hectares of rainforest were destroyed in Peru to make way for cocoa plantations in recent years. Widespread poverty often motivates cocoa farmers to cut down remaining forests, including in protected areas, to increase their harvests and income. This has increasingly become an issue in recent years in the major cocoa growing regions in Côte d’Ivoire and Ghana.
Soil Health and Biodiversity

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The tropical rainforests where cocoa crops thrive, including the Amazon, those in Southeast Asia, and those in Upper Guinea, are also some of the most biodiverse areas in the world, providing critical habitat for many endangered and endemic species. In 2015, less than half of the protected areas surveyed in Côte d’Ivoire still contained any of the country’s 22 primate species, and seven out of the 23 areas surveyed had been converted almost entirely into cocoa production. Recent research indicates that preserving biodiversity and related ecosystem services is vital to limiting average global temperature rise to 1.5℃. Failure to address this issue may expose companies to material climate risk.
Land Rights

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The majority of cocoa producers are smallholders, many of whom may have insecure land tenure. Women farmers in particular often do not have official land titles and may inherit land through informal or traditional tenure systems. Without secure land tenure, many smallholders are unable to access the credit which would allow them to invest in the long-term productivity of their farms.Without being able to make these investments, farmers must often rely on manual labor and rudimentary technology. Additionally, low yields in cocoa production systems are attributed to farmers’ reluctance to replace old unproductive cocoa trees with new ones. Farmers' rights to land are often associated with the cocoa trees and not the land itself, which incentivizes expansion into new land to plant more trees to maintain livelihoods.
Water Use and Pollution

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Cocoa production has not been a major driver of water issues.
Working Conditions

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Two-thirds of African cocoa farmers live below the poverty line. In West Africa, where the majority of cocoa is grown, few farmers earn a living income. Farmers in Ghana earn an estimated single dollar per day; farmers in Cote d'Ivoire earn even less. Only 6.6% of the value of a chocolate bar goes to farmers, while most of the profits from cocoa products go to manufacturers (35%) and retailers (44%). The remaining 14% goes to grinders, processors, taxes, marketing, transportation and traders. Poverty drives many producers to employ children in cocoa production, especially in West Africa, where approximately 2 million children work on cocoa farms in Cote d’Ivoire and Ghana. Although almost all (99%) of these children work on their families’ cocoa farms, the remaining 1% are often migrants, trafficked from neighboring countries like Burkina Faso or Mali, and may be as young as ten years old. Children working in cocoa production are exposed to dangerous work, including using harmful agrichemicals, lifting heavy loads, burning fields and wielding sharp tools for splitting cocoa beans.

Commodity Background

The global chocolate industry, valued at $106 billion, consumes 40% of all cocoa.

Cocoa is the key ingredient in one of the world’s most popular sweets – chocolate. Globally, food and beverage industries use 80% of all cocoa, while the remaining 20% goes to cosmetics and pharmaceutical companies, often for use in skincare products. According to recent estimates, the global chocolate market is poised to increase by 7.3% between 2019 and 2025.

Cocoa is grown throughout the tropics. Though the crop originated in Latin America (and is still grown in Brazil and Ecuador) and can also be found in Indonesia, almost 80% of it is currently produced in African countries, including Cameroon and Nigeria. Almost two-thirds of the world’s cocoa is grown in just two West African countries, Cote d’Ivoire and Ghana.

While most of the world’s cocoa is produced by smallholders in Cote d’Ivoire and Ghana, the processing and manufacturing of finished cocoa products typically occur in Europe. Between 2017 - 2018, European markets exported the highest amount of chocolate, with Germany leading at approximately $4.51 billion, followed by Belgium- Luxembourg ( $3.06 billion), and Italy ( $1.96).

Top Production Regions

Cote d’Ivoire and Ghana are the Leading Cocoa Producers with a combined 62% of Global Production.

Production Statistics, Trends, and Drivers of Demand

Between 4,000,000 and 4,600,000 metric tonnes of cocoa beans are produced annually.

In 2018, the global production value of chocolate was valued at $49.4 billion.

73.8% of all cocoa beans are exported.

Supply Chain

The cocoa supply chain is complex, and cocoa passes through many hands before making it into products sold on supermarket shelves. Cocoa grown by multiple farmers, mostly smallholders, is mixed together at multiple stages of the production cycle. This mixing makes it difficult to trace cocoa back to the individual farm level, where most of the supply chain risks originate. Additionally, the complex nature of this supply chain leads to inequities along the value chain, with only 6.6% of the value of a chocolate bar going to farmers. Downstream manufacturers (35%) and retailers (44%) see the majority of profits from cocoa products, while the remaining 14% goes to grinders, processors, taxes, marketing, transportation and traders.

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Nestlé

In a human rights saliency assessment, Nestlé found that the majority of its salient human rights issues were in its supply chain. For its cocoa supply chain, it found that the most salient issues include combating child labor, ensuring access to water, sanitation and hygiene, protecting communities against land acquisition and ensuring a living wage for workers. To address the child labor issues in its cocoa supply chain, Nestlé established a Child Labor Monitoring and Remediation System (CLMRS) in coordination with the International Cocoa Initiative. In 2019, Nestlé reported that its CLMRS monitored 78,580 children in the communities it sources cocoa from, and discovered 18,283 child-laborers within its supply chains, of whom 62% were engaged in hazardous labor. Nestle’s CMLRS currently covers 70% of its supply chain, which it achieved through investing millions of dollars in efforts to make cocoa farming more sustainable. This system helps Nestlé target its efforts to reduce child labor. Nestlé is also working to create robust grievance mechanisms across its supply chains, informed by local context, to ensure those mechanisms will be accessible to and meet the needs of communities in its supply chain.

Mars

Mars has actively sought to eliminate deforestation in its cocoa supply chain, both through its own Cocoa for Generations plan and through its action plans submitted as a member of the Cocoa and Forests Initiative, a collaboration between 35 major cocoa companies and producer-country governments addressing deforestation from cocoa production. In March 2019, Mars released the names of its direct cocoa suppliers for the previous year and committed to achieving traceability to the farm level for 100% of its cocoa supply by 2025. To date, Mars has reported it can trace 95% of its cocoa to the country of origin, 40% to the farmer group, and 24% to the farm level. Mars is one of a few companies that have extended their own monitoring beyond their direct suppliers; while many other companies rely only on third-party certifications to verify that their upstream cocoa supply is deforestation-free.

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