Founded in Trieste, Italy, illycaffè, S.p.A. has been the world’s premium leader and standard-bearer of espresso coffee for nearly a century. Renowned for its ethical values, the company is an 11-time World’s Most Ethical Companies honoree. Its Chairman, Andrea Illy, has long championed ethical business practices and sustainability as a way to build a virtuous cycle between the consumer and company that can help to make the world a better place, one cup at a time.
Congratulations on being named a 2023 World’s Most Ethical Company’s honoree. We all know this is the result of a lot of long-term work and commitment to business integrity. Can you give us a brief overview of why you decided to apply again this year and what your application process was like? What did you learn about your own program as you completed your application?
The reason why we applied for the 11th consecutive time is because we don’t want to be self-referential. Ethics is one of our two fundamental values, which we describe as long-term value building through transparency, sustainability, and people development. But is not to us to state how ethical we are. We need an external audit. And Ethisphere is the most authoritative and respected organization for that. And by the way, it’s unique in its identity because to my knowledge there are no other organizations that assess business ethics. Most of the other organizations assess sustainability or some components of sustainability.
But as you heard with my description about our ethical value, sustainability is under the umbrella of ethics. That is to say, how can you be ethical if you are not sustainable, but you could be sustainable and not necessarily fully ethical, you see? The reason why is because this is our spirit, our philosophy of doing business for improving people’s quality of life. The quality of life for all the stakeholders who are directly or indirectly, impacted by our activity. The quality of life for our millions of consumers around the world, the many thousands of coffee growers we work with, and so on.
As far as the process is concerned, it is a thorough, thorough process. There is a complete set of questions. There is more focus on, and alignment with, ESG principles and particularly, governance. So historically there has been this shift. But other than that, it seems to be for us an annual effort. Of course, we are always a little bit more challenged because the process keeps evolving, but so far so good. Ethics is not a nice-to-have. It has to be really foundational. That is something we see in this application process.
Business ethics and integrity are essential to illy’s identity as a company and its culture. Can you talk about how illy’s business strategy is made more achievable because of the way that your organization operationalizes ethics, compliance, and business integrity?
For us, ethics is a business enabler and a fundamental builder of value. First, let me speak to a principle which is true for any company and then go specifically on Illy’s ethics. Some, shall we say, detractors of so-called business purpose in corporations, they state that the only mission and responsibility of a business is to make a profit. I don’t think is the correct statement because ultimately this economical goal would be not to generate profits, but to generate enterprise value.
The way you calculate enterprise value is with a so-called discounted cash flow formula. You have revenues and then you have costs and then you discount resulting cash flow to the cost of money. The three components are entirely dependent on your ethical profile. If you are not an ethical company, you typically have decreasing returns because maybe some reactions in the market make some customers run away from your company or maybe you have to discount more in order to retain customers. For sure you don’t benefit from the so-called reputational premium if you are not an ethical company.
As far as costs are concerned, if you are not ethical or sustainable, you might have liabilities no matter what else you do with regard to environmental social, or governance. And so, you have decreasing returns from the cash flow, and then you have to discount with the cost of money, which is inversely proportionally to the risk of the business. Typically, if you are a company which is not recognized to be ethical in the market, and as a result of that you have a reputational disadvantage, then your cost of money will be higher.
This just to say that ethics and sustainability—and you can name these things in different ways—are the biggest value-builders for corporations. You could have two companies with the same cash flow, and if one is considered ethical and the other is not, the ethical one will have a higher overall business value. As far as Illy’s concerned, this effect is even higher. Why is that? Because we do coffee. Most of the coffee we source is produced in low-income countries, where we can encounter some significant issues. First of all, there can be an enormous problem of inclusivity. There can be an enormous problem of human rights—thankfully, that is no longer true in certain cases, but it can still happen now, and we have to control that. And there can be significant problems with environmental sustainability as well.
So, in 1991, we decided to pioneer direct sourcing, and we started working hand-in-hand with coffee growers, which has become the most significant aspect of our ethical engagement. Having this hand in hand work has built our relationship and community with coffee growers. We have even a kind of community which is called Circolo illy, in which coffee growers from all over the world participate in order to interact, exchange knowledge, and create a loyal relationship with Illy.
We pay them more. How could we ensure that the price premium you pay gets in the grower’s pocket if we wouldn’t be in direct relationship with them? We enable the grower to sell coffee to us by elevating their sustainable quality practices through knowledge exchange. Our University of Coffee educational program trains thousands of growers every year on the concepts of sustainable harvesting and business practices.
Those are just a few examples. And then of course, if you are recognized as a sustainable and ethical company, then you can command a premium in the marketplace. Illy has a significant premium price versus its competition. Our ethics makes that possible.
“Our partnerships are really doing well in Brazil. They recognize that working with Illy facilitates selling their coffee to the rest of the market. And the coffee that they don’t sell to us sells to the rest of the market at a premium, because they have a reputational endorsement from selling the coffee to us.’”
When Illy began partnering with its local coffee growers back in 1991 the notion of a premium coffee, especially in the United States, was still a somewhat foreign notion. As that market rapidly transformed and grew, the way in which illy pioneered how it sourced its coffee was so revolutionary and transformative. Did you ever face opposition to this methodology, though? And if so, how did you overcome those obstacles? Clearly, it has worked out very well for illy.
In Brazil, where we started direct sourcing, our approach has been warmly welcomed at every level— institutional, regional, professional, and of course locally at the growers’ level. And this facilitated the achievement of our sourcing goals. At the beginning, we weren’t even dreaming about the possibility to source 100% of our coffee directly from the grower. But we eventually reached that as a result after 10 years.
We also reached a very ambitious goals in term of consistency. At the beginning, I remember we were accepting only 10 percent of the samples which were sent to us. Now it’s over 70 percent. When I was in Brazil a few weeks ago, we inaugurated a new award for two Brazilian members of the Circolo illy, which recognized over 30 years of consistent partnership in selling coffee every single year. Can you imagine that? There are already two members over 30 years and there will be probably three more to come next year.
So, Brazil has been a model for us, and I’m so pleased, because we started targeting quality there, and then we started to target resilience and adaptation to climate change. Now we are targeting regenerative agriculture and I am very happy to say that 70 percent of the growers we use now grow coffee using reliable regenerative practices. So, our partnerships are really doing well in Brazil. It’s kind of a symbiosis. They recognize that working with illy facilitates selling their coffee to the rest of the market. And the coffee that they don’t sell to us sells to the rest of the market at a premium because they have a reputational endorsement from selling the coffee to us.
The responses there have been very, very, positive. I remember when the Brazilian parliament, at the federal level, in Brasilia, made an official public acknowledgement for my father as the man who triggered the change of the Brazilian coffee agriculture. Quite amazing.
But it has not been like this everywhere. In one country in Africa, we have had pushback from the intermediaries who were quite disturbed by our approach because we were paying more to the growers. The intermediaries were saying, “Hey, if illy pays more, then we will be forced to pay more as well.” And this created something they really didn’t want. There have even been some violent reactions against our approach. But still we have been able to manage and develop our model there in a positive way.
In another country, in Asia, we encountered some indifference, where the response to our approach was, “Who cares? Come on, this is just nice to have.” But you know, we source from 20 countries. There have been 18 positive experiences and only two that have been a little bit more difficult. It very much depends on the specific country because each country is different.
When COVID-19 happened, a lot of companies suddenly became very aware of their supply chains and their need to manage third-party risk within them. This is something illy has managed masterfully for a long time. For companies that are just starting to work on this, where is a good place for them to start when it comes to exporting ethical standards and corporate culture to third parties?
If you are talking about traceability, this is the very first step for creating true sustainability, whether we are talking about social or environmental sustainability. A lot of businesses that hide behind the difficulty of tracing and getting access to their entire supply chain as reasons not to do them. But in reality, I think everybody can do those things. This is why I kind of like to declare how being able to really document the information and relations within every single step of the value chain is of paramount importance for an ethical company.
For organizations that wish to apply to the World’s Most Ethical Companies®, what advice would you give them based on your own organization’s experience? And especially the fact that you have been doing this for a very long period of time and you’ve been successful at this for a very long period of time.
Don’t fake it. Make it only if you are really intrinsically committed to sustainability. We hear a lot about this term, greenwashing. For me, greenwashing is not okay. For some, it is tolerable only if it is temporary and in the spirit of “fake it until you make it.” Because if you start greenwashing one day, you will really need to accomplish something serious environmentally. Otherwise, you are going to get attacked for it, because what you are doing is basically illegal. It’s fraud.
But then you also have this new word, which is greenwishing, which is aspirational. If you are aspirational in being one of the World’s Most Ethical Companies, you can use the application process as a path for improvement. But don’t do it just for the recognition because your efforts might feel diluted if you don’t succeed in receiving the honor. Or it may be even more diluted if you put it on your packaging, and then one day you don’t get the recognition because you have not been consistent. This creates a problem.
And then finally, ethics really needs to be embedded in the business culture. At illy, this is an aspect where we do not score as highly as we would like. I think everybody in the company is fully invested in an ethical culture, so I will check the questionnaire and understand why we did not score more highly there. Because ethics very much needs to be completely embedded and embodied by every single individual in the company.
ABOUT THE EXPERT
Andrea Illy is Chairman and former CEO of illycaffè, the premium leader and standard-bearer of espresso coffee. Founded in 1933 in Trieste, illycaffè has taken its place as a symbol of Italian excellence. Under Andrea’s stewardship, illycaffè has become a brand recognized around the globe, not just for its coffee but for its ethical values and for the close relationships it has forged with growers, merchants and the contemporary art world. Mr. Illy is also the author of the books Espresso Coffee: The Science of Quality and Coffee: The Dream.