THE CAMBRIDGENATURAL CAPITALLEADERS PLATFORM

NATURAL CAPITAL BUSINESS CASE STUDY: THE KERICHO TEA PLANTATIONS

The Natural Capital Leaders Platform is oneof CPSL’s Leader’s Groups and focuses onestablishing natural capital management andmaintenance into core business strategy.

Natural Capital is an analogy to financialcapital. It refers to the stock of naturalresources that exist in a system. Natural capitalgenerates all of the goods and ecosystemservices that business and society ultimatelyrely on, from food and water provision todecomposition and climate regulation.

Natural Capital Business Case studies profilecompanies that recognise the importance ofimpacts on natural capital and take steps tomitigate them, providing inspiration,guidance and learning for companieslooking to follow suit.

However, in the late 1990s increasinglyunpredictable rainfall led to reduced resourcesecurity. Crop productivity fell and thehydroelectric power that ran the factorymachinery became increasingly unreliable.

One of the primary causes was understood tobe the impact of deforestation in the widerMau forest ecosystem, of which the Kerichotea estates were part. Over time the teagrowers began to realise that theirdependence on natural capital extendedmuch further than the boundaries of theirindividual plantations. Producers faced thechoice of selling out and switching to analternative production location or staying andhelping to address the root drivers of natural

capital degradation. Unilever and James Finlaychose to stay. Over the next ten years thesecompanies worked with smallholders,government and a variety of other partners toinitiate a variety of schemes from tree plantingto local education to smallholder developmentto lobbying for policy change. Each recognisedthe need for the company to engage outsidethe traditional sphere of influence for their ownresource security. Today the Kericho teaplantations play a crucial role in maintainingregional natural capital in the Mau ecosystemand thus the water and other ecosystemservices they and others rely on to thrive. Indoing so the plantations are maximising theirchances of securing a long term sustainableresource supply as well as increasing sharedvalue amongst local smallholders andcommunities.

We do it because we believe that the long-termsustainability of the environment andcommunities where we work is vital to oureventual business performance.

Gail Smith, Sustainable Agriculture Research Manager, Unilever

SummaryTea has been grown in the highly productive Kericho district of Kenya for many decades. Formuch of that time plantation managers were focused primarily on agronomic improvementsand crop productivity.

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Historically society and business in particular,have taken these benefits for granted,externalizing them from financial decisionmaking. However, as consumption rises,natural capital declines and so doesproductivity. Today our global footprint is 50%higher than our global capacity to support lifeon earth. If everyone consumed at the samerate as the average European, we would needthree planets to support us . As a result,companies are increasingly exposed tooperational risk through their supply chains,market risk as competitors respond andreputational risk through the perception thattheir private gain is at the cost of public goods.

Responding to these challenges makes soundeconomic sense. The international study onThe Economics of Ecosystems and Biodiversity(TEEB) calculated economic returns 10-100times the value of the cost of natural capitalprotection. Such a response necessarily has to

be a collective effort, driven by society as awhole. But businesses that take a leadershiprole, acting before they are obliged to, are ableto gain competitive advantage and enhancetheir ability to grow through supply chainresilience, new market opportunities, customerloyalty and brand value.

The CPSL Natural Capital Business Case Studiesinvestigates cases where companies havetaken such a leadership role, recognising thebroader implications of their impacts onnatural capital and taking steps to addressthem both for the benefit of themselves andtheir wider stakeholders. By operating at theleading edge of business sustainability eachfaces challenges rarely encountered in a‘business as usual’ context. The case studiesseek to highlight these challenges and thelessons learned in the hope they inspire andinform the next generation of sustainablebusiness leaders.

Introduction

Background to Kenyan Tea

Natural Capital and Sustainable BusinessThe entire spectrum of global activity relies directly or indirectly on the maintenance of anenvironmental infrastructure or ‘natural capital’ and the goods and services this provides.

Every year 3.5 - 4 million tonnes of tea are produced globally across the tropics.

The Kericho highlands : One of Kenya’s primary tea growing areas

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Tea was only introduced to Kenya in 1903, but since thenKenya has grown to become the world’s largest exporter oftea, producing close to 400,000 tonnes a year and directlyand indirectly supporting an estimated 10% of thepopulation. About 40% of this production is controlled bylarger plantation companies.

The Kericho district lies in the Kenyan Rift Valley highlandsin the south west of the country and has been producingtea since the 1920s. It is now one of the primary teaproduction areas.

The Mau ecosystemThe Kericho tea industry lies within the Mau water catchment, Kenya’s most importantcatchment, where 12 rivers drain into Lakes victoria, Turkana, Natron, Nakuru and Baringo,serving over 5.5 million people.

The catchment is dominated by the 400,000 haMau Forest Complex, East Africa’s largest singleblock of closed forest. This natural capitalprovides a variety of ecosystem goods andservices (see below). The direct economic valueof the industries that rely on these services issignificant: the regional tea, hydropower andtourism industries alone are estimated atshillings 20 billion per year (Euro 200 m). But the total value of the Mau natural capital will be significantly higher, with at least five majorurban centres and a multitude of local industries relying on its provisions.

Environmental degradationIn recent years over one quarter of the MauForest Complex has been destroyed by amixture of encroachment, settlement, forestfires, timber collection by both communities andbusinesses, mismanagement of forestplantations and a government excision from theprotected area network. This has beenaccompanied by a noticeable change in regionalprecipitation patterns with increased variabilityin rainfall distribution, and increased incidence of

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Over the past fifteen yearsincreased variability in

Jan-April rainfall in Kericho(blue) has caused teaproduction (green) torepeatedly fall belowexpected levels (red).

Drought damage (right) is acommon problem

both drought and hail. This has had significantimpacts on the tea industry, both through loweraverage yields, higher crop damage and increasingfixed costs. In one year alone, Unilever lost anestimated 3 million tea bushes due to drought.

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GOOdS / SERvICES ExPLANATION

Biodiversity Biodiversity underpins all other services, but also represents a service in its own right for tourism, and other direct uses for certain species

Climate regulation At a regional level forests regulate rainfall patterns and air moisture. At a global level forests play an important role in carbon sequestration

Hazard regulation Natural vegetation plays an important role as a natural sponge for water retention which can prevent flooding

Pest/disease regulation Local biodiversity controlling pests and disease is thought to be one of the reasons pests are a minor problem in the Kericho tea industry

Purification The biodiversity and soils of the Mau play an important role in filtering water before being used for agriculture, aquaculture or consumption

Social/cultural values A variety of intangible social values exist including heritage, aesthetic values and spiritual values.

vegetation Timber is a key resource for local communities and industry as a fuel. The forest also provides forage, medicines and other plant based goods for local communities

Water supply The water that flows through the Mau catchment is used for consumption, hydropower, agriculture and tourism

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The business response

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planting. In 2000 they partnered with theFriends of the Mau Watershed (FOMAWA – see‘Catalysing policy action’ for further details),launching the ‘Trees 2000’ project. This projectidentified the tree species most depleted byexploitation and developed propagationmethods for each before setting up nurseriesto raise 100-150,000 seedlings each year.Individual Unilever Tea Kenya employees areeach encouraged to plant two trees perannum and ceremonial plantings are arrangedto coincide with World Environment Day. Todate, over a million trees have been planted,60% of which are within the local communityoutside the Unilever estates.

At Finlays, the founders and major sponsors ofFOMAWA, efforts have focussed on stoppingon-going deforestation, working with RhinoArk to install the longest wildlife conservationfence in the world, created partly from Finlay’sown waste plastic products.

Recognising the bigger pictureA critical step in the development of abusiness strategy for natural capital is therecognition of the risks and opportunities thatlie beyond the company’s immediate sphere ofinfluence. Challenges of ecosystemdegradation can rarely be viewed from anindividual company perspective andfrequently require cross-sectoral and multi-partnered solutions.

As companies operating within a definedecosystem, Unilever Tea Kenya and JamesFinlay Kenya are examples of companies facingthe highest risks from natural capitaldegradation. As leading global tea businessesthey also represent the kinds of companies forwhom sustainability leadership can result insignificant global impacts . When the impactsof Kericho’s changing climate began to hitbusiness performance, Unilever and JamesFinlay faced a decision: sell out and identifyalternative locations for their tea production, orstay in Kericho and attempt to bringsustainability throughout the tea value chain.They chose the latter and over the next tenyears implemented a number of initiativeswith key partners that addressed both the risks(operational, reputational and market) but alsoidentified opportunities from improvingsustainability practices.

Addressing deforestationRecognised early on as a key driver in theprecipitation problems, deforestation was oneof the first issues the companies addressed. AtUnilever the focus was on indigenous tree

Sustainable energyIn response to increasing unreliability from itsin-house hydropower stations, Finlays has alsofocussed on sustainable alternatives. Trialshave begun for biogas energy production,solar panels have been commissioned and thecompany has also been researching gasifiertechnology. Unilever continues to invest inclean hydropower, and both companies areclose to self- sufficiency in renewable fuelwood and electricity.

Engaging with smallholdersA vital step towards sustainability was therecognition by both companies that actionalso had to include small tea farmers, whoproduce about 60% of Kenya’s tea but lacksufficient resources and access to knowledgeto take action themselves. In 2006 Unileverpartnered with the smallholder-owned KenyanTea Development Agency (KTDA) and UKDept. for International Development (DfID) tostart a Farmer Field Schools programme topromote sustainable agriculture amongst over40,000 smallholders. The project brought inregional and international experts to facilitatelearning on tea harvesting, yields, soilconservation, fertilizer application and thevalue of native trees. In every case theemphasis was on learning through doing andthen teaching others to do the same.

Following initial success the programmeexpanded in 2010 with the support of theSustainable Trade Initiative (IDH), extendingthe reach to over 550,000 smallholder farms.

Meanwhile, Finlays began its outgrowerproject in 2009 in partnership with the UK Co-operative Group and DfID which aimed toimprove access to markets and achievediversification to other cash crops throughcooperatives, as well as achieving Fairtradecertification. This project has demonstratedparticular results in the empowerment ofwomen who were often the first to join.

Catalysing policy actionWhilst businesses can collaborate to buildsustainable supply chains, complementaryaction from the policy side is invariablyrequired to achieve significant impact. In Mau,various initiatives were launched to lobby forgovernment support.

FOMAWA was one of the first initiatives. Set upin 2000 by the former Chairman of Finlays, itsprimary objective was to persuade theGovernment of Kenya to address deforestationin the Mau which it did through comparativestudies with aerial photography and byconvening meetings with local and centralgovernment officials to raise awareness.The major tea growers of the region alsopartnered with the Kenya Forest WorkingGroup and UNEP to set up the South WesternMau Forest Trust with similar goals.

Due in no small part to the pressure from theseinitiatives, a stakeholder consultative forumwas convened in Nairobi in 2008 followed bythe appointment of the Prime Minister’s TaskForce on the Conservation of the Mau ForestsComplex to investigate the issues andrecommend solutions. The Task Force reportedin 2009 with a clear plan for action which hassince moved to implementation.

We saw the possibility of transforming the entireindustry and guarding it against commoditization.We were formidably placed to win; both as a firstmover and as the catalyst of an industry-widetransformation.

Michiel Leijnse, Global Brand Manager, Lipton

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Mainstreaming sustainabilityRecognising both the potential reputationalrisk of neglecting sustainability but also theopportunity it presented, Unilever framedmany of the sustainability challenges as part ofa wider drive to become a leader in sustainabletea, with certification by the Rainforest Alliance(RA) certification. In 2007 Unilever’s Kericho teaestate became the first in the world to becomeRA certified, with pre-existing sustainabilityinitiatives contributing an important part tothe award. Rather than developing a new,niche brand, Unilever then committed tosourcing all tea sold in Western Europe fromcertified sources by 2010 and its entire Liptontea brand from certified sources by 2015.

Although it was estimated that the resultingproducer premiums could cost €5M/yr by2015, and it was recognised that Unilever’scompetitive advantage would be short-lived,Unilever took the decision on the basis thatretail prices would gradually rise oncesustainable tea was commonplace, and withthe largest global market share they wouldcapture a large proportion of the incomegrowth. Unilever’s lead on tea became animportant driver in the development of acompany-wide Sustainable Agricultural Codewhich in turn was a major factor in Unileverbeing named the food industry leader in theDow Jones Sustainability World Index for 12years from 1999.

As expected, Unilever’s lead was quicklyfollowed. In 2008 there were only 16 certifiedestates in Kenya. By 2011 there were 130,000farms and estates certified in 12 countries.Competitors Twinings have since committedto source all of their Everyday range from RAcertified sources by 2015 and Tata GlobalBeverages have committed to source all Tetleytea from RA certified sources by 2016. Between2004-9 sustainable tea production grew byover 5000%, accounting for 7.7% of 2009global tea exports.

Moving into the futureWhilst there is still a long way to go toconserve the natural capital of the Mauecosystem, the initiatives which Unilever,

James Finlay and their partners implementedhave played an important role in improvingthe security of Mau ecosystem services, bothto the benefit of their own resource base aswell to the benefit of the millions of peoplethat depend on the same services. Followingthe Taskforce report many illegal settlers wereevicted from the forest, albeit with mixedresults , and responsibility for the region hasbeen taken on by a permanent monitoringand coordinating body known as the KenyanWater Tower Agency. Furthermore, in May 2011the Water Tower Conservation Fund was set upfor the rehabilitation of the Mau and otherKenyan catchment areas and in November2011 a 2.3m euro EU and UNEP project torehabilitate the northern Mau was launched.

By mainstreaming these efforts into theirglobal businesses, Unilever’s and Finlays’ effortsalso had an impact far beyond south westernKenya. Big brand sustainability is rapidlyaltering the power relations in global supplychains, as evidenced by the reaction to thelead taken by Unilever’s Lipton brand . Theevolution from a corporate social responsibilityapproach to the systematic embedding ofsustainability in core corporate strategy will beessential if the threats to natural capital are tobe challenged in a meaningful way. .

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ReflectionsLooking back over ten years of experience, four key learning points stand out.

The first, according to Richard Fairburn,Unilever’s Senior Agricultural Advisor, wasrecognising the importance of activitiesbeyond the plantation boundaries andengagement with smallholders. “You have toget everyone in the landscape to contribute”he argues, “it is not enough for one or twocompanies to operate in isolation. Even smallactivities, when carried out at scale, can havelarge impacts”.

The second is the importance of awareness ofthe role of natural capital and ecosystemservices in daily life. “If you were to ask howmany small businesses in Kericho town areconcerned about what happens up in the MauI think the answer would be very low”, saysSimeon Hutchinson, Managing Director atFinlays. “I think awareness is probably thebiggest challenge.”

The third learning point, was how importantgovernment engagement was, but also howchallenging it could be. “Why did we fail toinfluence government sooner”, asks RichardFairburn. “Why didn’t government listen toindustry ten years ago when we first started a

dialogue? What can we learn from that?” Partof the answer was the issue of awareness, andpart of it was the difficulty of engaging with aninstitution where natural capital concerns wereone of many and continual staff rotationshindered momentum from gathering. Butperseverance is essential. Engaging withgovernment is not only important forachieving the policy changes business requiresto support a drive towards sustainability, it isalso an opportunity to demonstrate acompany’s value to the country beyond thetaxes it pays and the workforce it employs.

The fourth learning point reflects on thecomplexity of the relationship between naturalcapital and business. In hindsight the teacompanies’ reactions to the perceived riskscoming from natural capital degradation looklike a shrewd, strategic response which is nowyielding benefits. In reality, the time framesover which changes can occur and thecomplexities of cause and effect meant thatmany of the decisions required more than alittle leap of faith. Several of the early decisionswere made based on what was believed to beright rather than what the available dataproved beyond all doubt to be the case. Hadthe companies waited for all of theenvironmental data to become available itwould have been too late to respond. Byadopting a responsible, precautionaryapproach to natural capital maintenance fromthe very earliest days, the tea companiesbenefitted from being first movers insustainable tea and from tangible reputationalgains. But as time passes and further databecome available, the key benefit will probablybe that they have secured a key resourceunder threat for the decades to come.

The evolution of sustainability in business, from a defensive reaction to a systemic, proactiverecognition of opportunity x

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Age of Greed

defensive CSR

Age ofPhilanthropy

charitable CSR

Age ofMarketing

promotional CSR

Age ofManagement

strategic CSR

Age ofResponsibility

systemic CSR

Sources

i WWF, ZSL, Global Footprint Network (2010) Living Planet Report 2010: Biodiversity, biocapacity and development.

ii Juniper, T. and Roberts, M. (2011) Building a leadership narrative for business relating to ecosystems and natural capital. Cambridge Programme for Sustainable Leadership

iii Fairburn, R. and Roberts, M. (2011) Understanding and managing the business risks and opportunities relating to ecosystems and natural capital. University of Cambridge Programme for Sustainable Leadership

iv dauvergne, P and Lister, J. (2012) Big brand sustainability: Governance prospects and environmental limits. Global Environmental Change 22 pp36-45

v Chan, M.K. (2010) Improving opportunities for women in smallholder-based supply chains: business case and practical guidance for international food companies

vi Knight, A. and Adey, M. (2010) Building Resilient Supply Chains Within the Limits of Natural Capital

vii Report Of The Prime Minister’s Task Force On The Conservation Of The Mau Forests Complex, March 2009, Nairobi, Kenya

viii Morgan, J. (2009) Kenya’s heart stops pumping. BBC News http://news.bbc.co.uk/1/hi/world/africa/8057316.stm

ix dauvergne, P and Lister, J. (2012) Big brand sustainability: Governance prospects and environmental limits. Global Environmental Change 22 pp36-45

x visser, W. (2010) The age of responsibility: CSR 2.0 and the New dNA of Business

xi Porter, M. and Kramer, M. (2011) Creating shared value. Harvard Business Review, January 2011

For all Cambridge Programme for Sustainable Leadership reports, please go to:http://www.cpsl.cam.ac.uk/Resources/Publications-and-downloads.aspx

It’s about leadership...the Unilever Sustainable Living Plan is beingdriven from the very top of the organisation. Business has a key role toplay to make sure that this world is sustainable. We must supportgovernments, academia and NGOs and should never underestimate ourinfluence with consumers.

Richard Fairburn, Senior Agricultural Adviser, Unilever

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