The G of ESG: The Importance of Governance in Tobacco
The final article in our TLEAZ series on ESG focuses on Governance (G), which involves creating a management structure to support sustainability, supply chain due diligence, and traceability. The Environmental (E) and Social (S) goals of any organisation cannot be achieved without a strong Governance structure. Governance is also one of the eight themes of the Sustainable Tobacco Programme (STP), initiated by seven major cigarette manufacturers worldwide. Key Governance areas include farm monitoring, training and awareness, verification, stakeholder engagement, and traceability. This article aims to provide a general overview and highlight the important points that influence customer buying decisions.
Customers who purchase Zimbabwe’s tobacco are looking for clear supply origins and tobacco merchants with robust Supply Chain Due Diligence (SCDD) processes. These processes indicate sustainably produced tobacco. STP regularly assesses participating tobacco merchants, including those in Zimbabwe, providing STP members with ratings for each tobacco supply origin. Ultimately, manufacturers want to assure their customers that their products are sustainably produced.
Other stakeholders, like banks and insurers, also assess ESG ratings when choosing business partners. To achieve this, SCDD must be implemented throughout the value chain, including within their own processes. This is now a legal requirement in trade blocs that purchase significant amounts of Zimbabwe tobacco, such as the EU, with regulations like the EU Deforestation Regulation (EUDR) and the EU Corporate Sustainability Due Diligence Directive. Companies operating in these blocs may face heavy fines and other penalties for breaching supply chain regulations. While there’s a misconception that China, our largest tobacco buyer, doesn’t have these requirements, this is incorrect. In December 2024, China’s Ministry of Finance issued Basic Guidelines for Corporate Sustainability Disclosure, outlining general sustainability information disclosure requirements for Chinese enterprises. Further ESG and SCDD developments are expected from Chinese companies importing mining and agricultural commodities.
Traceability is a crucial issue. In the context of sustainability, traceability means “the ability to identify and trace the history, distribution, location, and application of products, parts, and materials 1 in the areas of human rights, labour (including health and safety), the environment, and anti-corruption.” Traceability allows tracking the tobacco product through all supply chain stages, including who grew the tobacco, how it was grown, its impact on people and the environment, and who the end users were. In some cases, traceability is required by law.
1. www.environmentalsafetyupdate.com
Tobacco merchants, as traders to manufacturers, must meet traceability requirements to qualify as suppliers. There may be a lack of understanding among tobacco growers regarding detailed customer requirements. Merchants must maintain comprehensive records of the tobacco used in blends, including detailed processing records for each bale, to facilitate customer SCDD checks. This includes grower details, good Agricultural Labour Practice (ALP) training, Crop Protection Agents (CPAs) used, seed variety and seedling production, environmental issues, Good Agricultural Practices (GAP), rights awareness, contracting documents, grievance mechanisms, and elimination of Non-Tobacco Related Material (NTRMs). Unannounced farm visits may occur to verify training and monitoring integrity. This has been covered in detail in previous ESG articles. Contracted tobacco allows for this traceability, whereas uncontracted tobacco, like auction or third-party supplies, does not, limiting its market to lower-paying customers.
Anti-corruption, mentioned in the traceability definition, is also vital for customers and the industry’s regulatory environment. Corruption impacts the value chain, often negatively affecting growers through lower prices. Addressing issues like side marketing and debt under-recovery, which benefit only a few, is essential for improving grower viability. Governance due diligence may also scrutinise levies and sales deductions to ensure they are used for their intended purposes.
Governance issues require senior executive and director involvement, as well as participation from grower representative bodies, regulators, and government actors. Reporting lines and independence must be maintained. While executives have various priorities, ESG impacts must be considered. Anti-competitive behaviour, strictly enforced at TLEAZ, is another key governance issue, with national and international laws and regulatory bodies addressing such practices.
Governance is crucial in the ESG framework for Zimbabwe tobacco customers. Beyond regulatory and ethical implications, reputational damage and brand value are significant concerns. As with the E and S aspects of ESG, active participation from all stakeholders is essential. Buyers look for a willingness to remediate, strengthen SCDD processes, and monitor and report breaches. Only in extreme cases will buyers stop purchasing until breaches are resolved.