A REVIEW OF THE MARKET BENEFITS ASSOCIATED WITH CERTIFICATION This review was prepared by Erin Neave for the Eastern Ontario Model Forest to provide background materials for a series of seminars on Chain of Custody (CoC) Certification. The review consists of: • A brief summary of the current literature regarding the potential economic and social benefits of certification, current market drivers and anticipated opportunities; • An annotated bibliography of references collected for the review; and, • A series of referenced images that may be of use in communicating key messages in the seminars. The review looks at both forest certification and Chain of Custody certification, and includes information relating to the three systems utilized in Canada: the Forest Stewardship Council (FSC), the Canadian Standards Association (CSA), and the Sustainable Forestry Initiative (SFI). A number of recent reviews have evaluated the similarities and differences between these and other certification systems (Rotherham 2011; Clark and Kozan 2011; Fernholz et al. 2010; Moyes 2008; Kraxner et al. 2009). It is accepted by the Canadian Council of Forest Ministers that all three systems contribute significantly to sustainable forest management with requirements for 3rd party auditing, engagement with local communities, and provision for the conservation of biodiversity at the landscape and site-level (Moyes 2008). Direct comparison of standards has shown that the FSC is more prescriptive on social and ecological requirements (Clark and Kozan 2011). However in Canada where regulations already cover some of these elements other standards have deferred directly to legislative requirements (e.g. CSA) (Moyes 2008). FSC has been criticized for its lack of connection to national governments or standards institutes and its internal review process (Rotherham 2011). Direct comparison of FSC to other standards has also been challenging as a result of the use of regional standards by FSC, which present a barrier to direct comparison (Fernholz et al. 2011). The benefit of competition between the certification systems over the last 10-15 years (a result of criticism and comparison) has been the continual changes and improvements to each of the systems (Fernholz et al. 2010). The result is a suite of programs with similar structural elements (Fernholz et al. 2010), and a trend towards global recognition through the PEFC (Programme for the Endorsement of Forest Certification). The CSA and SFI are both endorsed by the PEFC, while the FSC remains independent as the other international certification system (Rotherham 2011). Chain of custody systems have also been established under all three systems, most recently for SFI. These systems have also evolved over time, however the benefits of competition among CoC certification systems remain unclear, and it is likely that a common approach would allow for more rapid/ widespread adoption through the supply chain (Fernholz et al. 2010). In the case of both forest certification and Chain of Custody the market share of each of the systems has changed through time (see box 1). This relates to both market demand for certain certification standards and the length of time the system has been in place 1
Box 1: Evolution of market share of FSC, SFI and CSA through time for forest certification and Chain of Custody certification (www.certification.org).
Why Certify? Economic Costs and Benefits The economic, social and environmental benefits commonly attributed to certification under all three of the systems include: • Assurance that forests are sustainably managed for a range of values including cultural assets, biological diversity and for the long term protection of livelihoods and wood supply; • Credibility and accountability for forest Box 2. Costs Associated with management; Forest and CoC Certification: • Ability to report back to stakeholders; For forest certification, the additional costs include: • Improved reputation which may translate to • Price of initial assessment, annual competitive advantage and enhanced marketing audits and re-assessment at year five opportunities; (based on FSC); • Maintaining or creating access to certified wood • Potential compliance costs to meet markets; and certification standards (Butterfield et al. 2005); and, • The potential for increased revenues. •
For Chain of Custody certification, additional benefits include: • Traceability assurance that final wood and nontimber products can be tracked back to a sustainable source, ensuring that illegally logged wood does not enter the supply chain; • The potential for greater management efficiencies over time (improved inventory control, record keeping, increased communication along supply chain, and better understanding of the markets) (Vidal et al. 2005). From an economic perspective, it remains unclear whether certification translates into direct economic benefits for companies (i.e. a price premium for certified wood products). This is an important question, since forest certification and Chain of Custody certification is an added cost to a business (see Box 2). Most general information regarding certification points to the potential price premium, but also recognizes that the benefits associated with certification are often long-term and indirect.
Growing need for double certification by more than one system to access different markets (Kraxner et al. 2009).
For Chain of Custody certification the additional costs include: • System development, implementation and maintenance (costs depend on the starting point and complexity of the wood supply chain); • Costs of segregating material from different sources; • Third party audits; • Membership fees and renewals; and, • Logo and label use fees (included in membership fees with FSC) (Naturally Wood 2011). These additional costs are usually more easily absorbed by larger companies that already have quality management systems in place (e.g. ISO 9000) (Vidal et al. 2005). There are often inequalities in access to certification systems by small forest enterprises where benefits and affordability are questioned (Butterfield et al. 2005).
Does Certification Influence Consumer Behaviour? A range of surveys have indicated the value of certification labeling in helping consumers identify wood products from legal, responsible sources. Consumer concern about the impacts of 3
forest management can translate into purchasing preference and/or market premiums. For example: • In a survey of 1935 wood products buyers in the US and UK, consumers showed a preference for products certified by a government agency or NGO over a non-certified option (Aguilar and Cai 2010); • A study of consumer attitudes in Germany, France, Italy and the UK demonstrated that 20% of consumers find certification very important to their purchasing decision, 40% quite important, and the remainder found it of little importance (Rametsteiner 2000 in: Ozanne and Vlosky 2003). • A willingness to pay survey in the U.S. showed that consumers were willing to pay a 10% premium for three of four of the certified wood products studied including a ready to assemble chair, dining room set and kitchen re-model (Aguilar and Vlosky 2007). • A consumer focus group study in western Canada also indicated that most respondents were willing to buy certified value added wood products. Price premiums ranged from 5.6% in Kelowna to 14% in Vancouver (Kozak et al. 2004). • In an Ontario based survey, 39% of respondents said they would pay a 10% premium for certified wood. Tolerance for premiums varied with price however, and a higher premium was accepted more readily on a less expensive product (Spinazze and Kant 1999). • In a BC study of consumer preference, 67% of respondents were willing to pay a 5% premium on certified wood products, 28% a 10% premium and 13% a premium of greater than 10% (Forsyth et al. 1999 cited in Archer et al. 2005) • A study from New York State found that architects often paid a premium to source FSC certified wood for green building projects (Germain and Penfield 2010). This premium was attributed to interplay of supply and demand with scheduling of construction projects, difficulties in sourcing FSC wood locally and the use of high-end specialty products (e.g. FSC certified tropical hardwoods) (Germain and Penfield 2010). • A survey of Canadian wood products retailers indicated a price premium of up to 20% on some certified forest products, however the number of customers who requested the products remained small (less than 10%) (Chen et al. 2011). It should be recognized that consumer preference and expressed willingness to pay doesn’t always translate to purchasing behaviour. Most studies indicated that price was ultimately a factor in choice, along with availability, quality and brand (Archer et al. 2005). For example, an Oregon study showed that FSC certified plywood had a purchase rate of double that of noncertified plywood when it was offered at the same price. When the price was increased by 2%, the number of buyers dropped to 35% (Anderson and Hansen 2002b in Archer et al. 2005). A similar study comparing consumer behaviour between 1995 and 2000 showed that while consumer understanding regarding certification continued to increase over a five year period, willingness to pay actually decreased, particularly with respect to lower value products (Ozanne and Vlosky 2003). Demographic characteristics also play a role in consumer willingness to pay a premium. These characteristics include age and income level (Aguilar and Carr 2010; Aguilar and Vlosky 2007), level of education, and exposure to forestry or conservation activities through employment or recreation (O’Brien 2001). Another key attribute found to influence consumer purchasing was 4
product source, with consumers placing a higher value on more proximal sources (e.g. ‘Ontario Wood’ or ‘Made in Maine’). This is potentially associated with the concern for the protection of local jobs and economies (Kozak et al. 2004). Other factors that influence consumer behaviour regarding certified wood products include information on labeling, advertising and credibility of certifying organizations (Archer et al. 2005; O’Brien 2001). Communication and marketing of certification and labeling to both buyers and retailers may be necessary to expand markets for certified wood products (Chen et al. 2011). The commitment of buyer groups (e.g. the Certified Forest Products Council in the U.S. which includes the Home Depot) to purchasing and stocking certified products has had some influence on consumer demand over time. What Do the Companies Have to Say About Certification? Many surveys have also been completed to assess the willingness of wood products manufacturers to pursue certification. Some results from these surveys include: • A Canadian national survey of value added wood products manufacturers showed that the majority of participants were not interested in certification (64.8%). Only 17.6% were involved in certification at the time of the survey, and an equal number showed interest in being involved in the next 5 years (Jayasinghe et al. 2007). • In a 2010 FSC survey of 3500 companies in 29 countries, companies cited economic reasons as the most important reason for seeking CoC certification (78%); followed by environmental (57%) and reputation (23.5%). The economic benefits identified by participants included increased access to clients, higher sales and greater client retention (Forest Stewardship Council 2010). • An Ontario study by FP Innovations looking at the export capability and readiness of the wood product industry found that over two thirds of exporters and half of non-exporters were familiar with Chain of Custody certification (Lihra 2011). Approximately half of the respondents who were familiar with CoC certification felt it was an important attribute for domestic markets. Fifty eight percent of companies that were exporting and familiar with CoC rated it as important for export sales. • A survey of hardwood manufacturers in the Appalachians demonstrated that many factors influence a company’s decision to pursue certification, but the cost of certification is still the most important factor in the decision (Montague 2011). Reasons identified by companies for pursuing certification included: gaining a competitive advantage/ market access (45%); to accommodate customers (31%); for ‘green’ image (14.5%); required to do business/ company policy (6%); to gain financial benefit (1.5%) (Montague 2011). The reason the last value is low, is that most producers in the study recognized that financial benefits are not being fully realized at this time. • A survey of Wisconsin primary wood manufacturers showed most non-certified companies did not feel the costs of attaining CoC were worth it, many who had engaged felt the same way (Hubbard and Bowe 2005). Of those that had attained CoC certification, 1/3 responded that CoC had given them access to new customers; just under 1/3 felt they had obtained access to new markets, and most felt it provided credibility 5
with the public. Most did not feel that it had improved company operations and management (Hubbard and Bowe 2005). A national online survey by the Forest Sector Products Council of employers looked at extent to which certification has an impact on human resources priorities. On a scale of 1 to 5 (where 1=to no extent and 5=to a great extent) responses were distributed as follows: 1 (17.4%); 2 (14.4%); 3 (24.2%); 4 (22.8%); 5 (17.1%); rather not say (4%). Sixty four percent fall in the mid to high range (3 to 5) which suggests that certification does have an impact (Allister Hain, Forest Products Sector Council, personal communication).
Several of the surveys suggest that support for certification is variable depending on the size of the operation and level of knowledge about CoC certification. Most studies recognized that the market for certified wood products is still immature and greater demand is needed in order for price premiums to be realized. Some market values, though indirect, were identified as being an important driver for certification. The key benefit over the short term is likely to be increased market access. In some cases certification is now seen as a necessary cost of doing business. Many companies had a ‘wait and see’ attitude toward certification and plan to wait for consumer markets to develop before certifying their products (Jayasinghe et al. 2007). There is a need to manage expectations for companies, and communicate that certification benefits are mostly indirect and long-term. The Changing Market Place – What is Driving Demand for Certified Products? A range of programs and policies that demonstrate social and environmental responsibility are beginning to influence the demand for certified wood products in North America and Europe. The implementation and expansion of these types of programs and policies will create market growth for certified products and raise awareness with respect to certification. Examples include: 1. Green Building: Green building schemes and standards now exist in 15 countries with a focus on energy efficiency, minimizing waste and utilizing renewable resources (e.g. sunlight and certified wood products for construction) (Kraxner et al 2009; Simula et al. 2010). Some examples include: • The U.S. Green Building Council’s Leadership in Energy and Environmental Design Program (LEED), which requires that FSC certified wood, be purchased from a Chain of Custody certified vendor (Montague 2011). The LEED rating system is also applied in Canada through the Canadian Green Building Council standard (Kraxner et al. 2009). Other standards such as BOMA Go Green (Green Globe Canada) and the Canadian Home Builder’s Association have shown interest in including all three forest certification standards for credit in their programs (Kraxner et al. 2009; Moyes 2008) • The Green Building Council of Australia’s green building rating tool that accepts PEFC and FSC certifications (SFI 2010). • Japan’s Sustainable Building Consortium that developed the Comprehensive Assessment System for Building Environmental Efficiency. • China’s Evaluation Standard for Green Building. 6
Green Building Schemes in the UK, Netherlands, Germany and Italy.
The market for ‘green’ homes is expected to increase over time and this may be an important market for certified wood products. Kraxner et al. (2009) projected that the share of the market (at 1% or 2 billion in 2005) would increase to $20 billion by 2010. This project was based primarily on increased energy costs, but certainly has implications for certified wood products. The focus on FSC certification for many of these programs is being debated by jurisdictions, industry and within the programs themselves. The Canadian Home Builder’s Association conducted a study of the major certification systems used in Canada and the potential for FSC preference under LEED. The results argue that the restrictions are misleading to consumers and deny recognition to builders using other certified wood sources (Moyes 2008). 2. Public procurement policies for construction and refurbishment: Some governments and departments have also put policies into place requiring certification of wood products in all new government structures. Policies range from voluntary to mandatory, and most accept forest certification systems as a mechanism to demonstrate compliance. Some examples include: • In Canada, the Government of B.C. requires that new government buildings be built according to green building rating schemes and has adopted a ‘Wood First’ policy to promote use of certified wood products in construction (Kraxner et al. 2009). • Public Works and Government Services Canada requires all wood products used in their building projects to be SFI, FSC or CSA certified (SFI 2010). • In Maine, the design, construction, operation and maintenance of any new or expanded state building must incorporate ‘green building’ standards that recognize forest products grown, manufactured and certified under SFI, FSC, PEFC or the American Tree Farm System (Abusow 2011). • Six European Union member states have developed strong government public sector timber procurement polices (Belgium, Denmark, France, Germany, the Netherlands and the UK) (Simula et al. 2010). • Outside the European Union, China, Japan, Mexico, Norway, New Zealand and Switzerland have also developed policies (Simula et al. 2010). 3. Investment policies: Some major banks have policies regarding forests and forest products and use certification to demonstrate compliance (this is particularly important in some tropical countries) (Nussbaum, undated). 4. Import Controls: Some countries have placed restrictions on imports to reduce illegal logging (e.g. the U.S., European Union, Japan and Australia). These restrictions will impact Canadian exports and are driving importers, manufacturers and retailers of forest products to adopt Chain of Custody Certification to demonstrate legality of supply (Potts et al. 2010; Naturally Wood, 2011). Specific examples include: • The U.S. Lacey Act which was recently amended and now requires imported wood products to include a declaration of species name, value and quantity of 7
wood imported, and country where the timber was harvested (Aguilar and Cai 2010). The Forest, Law, Enforcement, Governance and Trade (FLEGT) Action Plan of the EU also has import regulations (Potts et al. 2010).
5. Access to developing ecosystem markets: Several developing ecosystem markets could be linked to certification in the future. For example: • The potential for payments for emission reductions or Carbon Sequestration Credits could be linked to certification. • The growing demand for biomass to generate energy will also likely be linked to certification and regulations (e.g. EU Biomass Regulations). It will be important to link science-based guidelines (including biomass harvest guidelines, forest restoration policies, and revised BMP’s that integrate biomass removal standards) with third party certification and forest management planning (Heinz Center and Pinchot Institute for Conservation 2010). Key Messages/ Summary 1. Direct financial benefits of certification (market premiums) are not being realized by companies on a consistent basis. Where price premiums do exist, they vary considerably at different levels of the supply chain. 2. Domestic markets for certified products tend to be small and consumer preference is variable depending on a range of external factors (e.g. price, availability, quality, brand). 3. Greater demand must be generated for price premiums to become a reality. Strategic communication and marketing to consumers, retailers, and producers is required to generate momentum. 4. Cost is still the main limiting factor for companies considering certification. The benefits need to be demonstrated/ communicated (direct and indirect). 5. Despite all of this both forest and CoC certification continues to grow in Canada and globally. The main sector responsible for this growth has been paper/ printers/ publishing, but other sectors also continue to grow (e.g. wood products manufacturers/brokers) (see Box 2). 6. Increased market share is the chief benefit to certification. Market pressure from Environmental NGO’s remains a key factor driving certification in North America (Kraxner et al. 2009). Green building programs and government procurement programs are also expected to influence future demand. Political and financial support from governments is the key driver creating demand in Europe (Kraxner et al. 2009). It is expected that these types of programs along with the actions of ‘buyer groups’ will act to increase interest of other consumers in certification. 8
7. Certification is becoming a cost of doing business. While it has always been defined as a ‘voluntary market based concept’, in some cases it is becoming the standard of practice (e.g. Quebec and New Brunswick where forest certification is mandatory on public lands (Kraxner et al. 2009); and through the Forest Products Association of Canada requirement that all members be certified). Moyes (2008) describes how LEED advocates for FSC have suggested that SFI and CSA should not be recognized because they represent the conventional practice. In a country like Canada where provincial environmental legislation and standards are high, and voluntary certification systems complement and assure those practices are followed, the debate has become an interesting demonstration of the shifting definition of ‘voluntary’ stewardship. Box 2. Increase in CoC Certification in Canada by Sector (www.fsccanada.org/factsandfigures.htm)
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