An Exploratory Assessment of FSC Chain of Custody Certification Benefits in Croatian Wood Industry

Croatian State Forest Enterprise covers more than seventy fi ve percent of forest area in the Republic of Croatia and it is the biggest supplier of Croatian wood industry companies. From the year of national forests FSC certifi cation (2002) onwards, the number of issued FSC CoC certifi cates has exceeded two hundred. The increase of issued FSC certifi cates confi rms that CoC certifi cation has become a very important segment of the Croatian wood industry. In this research, the survey among Croatian FSC CoC certifi cate holders has been conducted. The aim of the research was to determine the reasons of implementing FSC CoC certifi cation, benefi ts of certifi cation and problems arising out of implementation. The research has shown that the respondents were forced to implement FSC CoC by the request from their customers. Furthermore, respondents stated that the most important benefi t from FSC CoC implementation was to keep the existing customers and for the largest part of respondents the main problem in FSC CoC implementation was related to high certifi cation costs. Regarding the fi nancial benefi ts of FSC CoC certifi cation for respondents, the results showed small, but signifi cant positive correlation between certifi cation duration and effi ciency of total equity, as well as between certifi cation duration and return on assets.


INTRODUCTION 1. UVOD
Forest certifi cation has been growing steadily in the last twenty years.After the Earth summit held in 1992 at Rio de Janeiro, Brazil, United Nations Conference on Environment and Development (UNCED) and the fi rst global agreement concerning sustainability of forest management called the Statement of Forest Principles, forest certifi cation began to develop more rapidly (Perera and Vlosky, 2006).In the next few years, as a reaction to the summit, the following forest certifi cation schemes were established: FSC -Forest Stewardship Council (in 1993); SFI -Sustainable Forestry Initiative (in 1995); CSA -Canadian Sustainability Association -Sustainable Forestry Management System (in 1996); PEFC -Programme for the Endorsement of Forest Certifi cation (in 1999) (Ozinga, 2004).Today, the two largest international forest certifi cation schemes in Europe and in the world are Forest Stewardship Council (FSC) and Programme for the Endorsement Forest Certifi cation schemes (PEFC).There are two types of certificates: certifi cate for forest management (FM) and certifi cate for chain of custody (CoC).Currently, 272 million hectares of forest area are under the PEFC certifi cation scheme (PEFC, 2015b) and 188 million hectares under the FSC certifi cation scheme (FSC, 2016), which is more than 11 % of the total global forest area (according to Forest Products Annual Market Review 2014-2015 the total global forest area is 4.033 billion hectares).Regarding CoC certifi cates, 30137 companies are the FSC CoC certifi cate holders (FSC, 2016) and 10744 companies are the PEFC CoC certifi cate holders (PEFC, 2015b).CoC certifi cation is applicable to all organizations that trade, process or manufacture wood based and non-timber forest products.The FSC CoC certifi cation is applicable to all CoC operations: trading, processing or manufacturing wood based and non-timber forest products from virgin and/or reclaimed materials including the primary industry sector (harvesting, pre-processing) or, in the case of recycled materials, reclamation sites, the secondary sector (primary and secondary manufacturing), and the tertiary sector (trading, wholesale, retail, print services) (FSC-STD-40-004 V2-1, 2011).Certifi ed forest area has grown from 18 million ha in 2000 to over 430 million ha in 2014, and it has increased by more than twenty times (FAO, 2015).Almost 90 % of global certifi cated area is in Northern Hemisphere (Fernholtz et al., 2015).According to UNECE/FAO's Forests Products Annual Market Review (2015), the number of CoC certifi cates of the two major certifi cation schemes -FSC and PEFC, is steadily increasing.As forests cover almost one third of the earth's land surface, it is necessary to ensure sustainable forest management if global sustainable development is to come true (Paluš and Kaputa, 2009).The market is more and more oriented towards quality of products (Pirc Barčić and Motik, 2013), environmental projects, demands for a restructuration of wood industry in accordance with environmental needs (Lipušček et al., 2010;Oblak and Jošt, 2011).The world's largest furniture retailer -IKEA has been a member of FSC since 1993 and IKEA's long-term goal is to source all wood from forests certifi ed as responsibly managed (IKEA, 2015).
Croatian State Forest Enterprise (Hrvatske šume d.o.o.) covers more than 75 % of forest area in the Republic of Croatia (Hrvatske šume, 2015) and it is the biggest supplier of Croatian wood industry companies.Since 2002, Croatian State Forest Enterprise has been a FSC certifi cate holder.Therefore, Croatian wood industry sector companies got the chance to enter into the chain of custody.Constant growth of the number of FSC CoC certifi cates indicates that the Croatian wood industry has followed certifi cation market trends.From the year of certifi cation of national forests, the number of FSC CoC certifi cates has exceeded two hundred certifi cates (FSC, 2015).Only four PEFC CoC certifi cates are issued in the Republic of Croatia and those companies are engaged in trading with or belong to paper industry (PEFCa, 2015).

LITERATURE REVIEW 2. PREGLED LITERATURE
Since forest products certifi cation market has grown rapidly, the need has emerged of understanding benefi ts, reasons and problems of certifi cation as an important direction of research.Forest certifi cation has brought many positive changes in forest management (Moore et al., 2012).According to Rickenbach and Overdevest (2006), there are three views/perspectives of forest certifi cation: market-based view; signal view and learning organization view.The fi rst perspective sees certifi cation effectiveness in direct market benefi tsprice premiums and market share.Signal view holds that certifi cation operates as a signal that the company applies high ecological standards to all stakeholders -buyers, governmental and non-governmental organizations.The third view sees certifi cation as a tool for improving forest practices and production through learning.
Numerous studies have attempted to determine whether the certifi cation brings any benefi t and why certifi cate holders decided to implement chain of custody standards (Rickenbach and Overdevest, 2006 Rickenbach and Overdevest (2006) came to quite similar results, showing that FSC certificate holders from US have made their decision to become certifi ed to provide cue/signal to all external stakeholders that they apply higher level standards in forest practice.From the above studies, it can be seen that environmental awareness is very important for US certificate holders.Recent research results showed that intangible benefi ts of CoC certifi cation -support to sustainable forestry and responsibility goals were also the highest ranked reasons among Chinese and Vietnamese FSC CoC certifi cate holders (Bowers et al., 2012).Price premium and market-based benefi ts from certifi cation were among the lowest ranked reasons (Rickenbach and Overdevest, 2006;Bowers et al., 2012).On the other hand, Montague's study (2010) has shown that many companies pursue certifi cation because of their customers and in order to achieve market advantage.Vidal et al. (2003) stated that the benefi ts associated with CoC certifi cation may be long term and indirect.Nowadays, customers are willing to pay higher prices for certifi cated products (Kozak et al., 2004;Hoang et al., 2015).Therefore, FSC certifi cation provides economic benefi ts in the form of higher prices (Newsom, 2008).The reasons CoC certifi cation has not been adopted among Malaysian furniture manufacturers are as follows: lack of price premiums, limited market potential and high costs (Ratnasingam, 2009).Narasimhan et al. (2015) researched the impact of FSC certifi cation on company's performance depending on company's position in the supply chain.They confi rmed that the FSC certifi cation brings more market benefi ts (measured via sales growth) to downstream companies -those closer to the end customer.
Chain of custody certifi cation has become very important for wood industry of the Republic of Croatia.As no systematic researches have been conducted in this area, need has emerged to make research among chain of custody certifi cate holders of the Republic of Croatia.The objective of this study is presented through the following research questions: (1) What are the main reasons for the implementation of FSC certifi cation?(2) What are the benefi ts of FSC certifi cation?(3) What are the main problems in implementing FSC certifi cation?(4) Does FSC certifi cation bring fi nancial benefi ts?

METODE
For collecting data about FSC CoC certifi cation, a survey method was used (Dillman, 2000).The survey was carried out among companies from the Republic of Croatia that hold FSC certifi cate.These companies were, therefore, placed in FSC Certifi cate Holder database (www.info.fsc.org).Companies certifi ed under FSC certifi cation scheme were chosen because almost all certifi cates are FSC (99 %).Later in the text, the term certifi cation is referred to FSC CoC certifi cation.In order to gather data from FSC certifi cate holders, Google Docs online questionnaire has been designed.The questionnaire was sent to all FSC certifi cate holders of the Republic of Croatia via a link embedded within an e-mail.The questionnaire consisted of two parts with a total of nineteen questions.The fi rst part of the questionnaire contained general questions about the company.The second part referred to FSC certifi cation, reasons for the implementation of FSC certifi cation, gained benefi ts of certifi cation, problems with the implementation of FSC certifi cation and other questions concerning FSC certifi cation.The survey with a cover letter was sent to 221 FSC certifi cate holder from the Republic of Croatia and resulted with 23.5 % response rate.Financial reports (income statement and balance sheet for 2014), needed for calculating profi tability ratios, were obtained from the Registry of Financial Reports (RGFI, 2015).The research was conducted during June and July of 2015.Data were analysed using descriptive statistics,  2 -test and Pearson correlation by the use of STATISTICA 12 for MS Windows software (Dell Inc., 2015).

Profi le of respondents 4.1. Profi l ispitanika
General characteristics of companies that participated in this research are shown in Table 1.The largest proportion of respondents are limited liability companies (65.4 %) and, according to the number of employees, they are micro and small companies (56.0 %).
The majority of respondents (96.2 %) sell their products outside the Republic of Croatia, mostly to the countries of the European Union (85 %).Italy, Germany, Austria and Slovenia were the most frequently stated (65 %) as the target market countries.
More than half of the surveyed FSC certifi cate holders (56.3 %) are engaged in wood processing and only 6.3 % are furniture manufacturing companies (Table 1).Table 2 presents certifi ed product groups by FSC product classifi cation (FSC-STD-40-004a V2-0, 2011).It can be seen from Table 2 that FSC certifi cate holders from the Republic of Croatia are mostly certifi ed for primary wooden products.The largest number of companies are certifi ed for sawn wood (W5 = 72.9%) and wood in chips or particles (W3 = 64.6 %).

Reasons, benefi ts and problems of certifi cation 4.2. Razlozi, dobiti i problemi certifi kacije
One of the goals of research questions was to establish the main reasons of implementation of FSC certifi cation (Table 3).The most important reason for in-troducing FSC certifi cation is that it was requested by their customers (92.3 %).This was followed by market demand (63.5 %), which means that a large number of companies surrounding the respondents had provided certifi cation, so they decided to implement certifi cation in order to stay competitive.More than half of respondents indicated the image of the company (51.9%) and environmental awareness of FSC CoC certifi cate holders (42.3 %) as the reasons for the implementation of FSC certifi cation.These results show that FSC certificate holders have made the decision regarding FSC certifi cation mostly on request from their customers.They have not recognized FSC certifi cate as an instrument of promotion, and only 19.2 % of respondents indicated that the reason for FSC implementation was company's promotion.Only 50 % of respondents uses FSC trademarks for promotional purposes.Results indicate that for Croatian FSC certifi cate holders, implementation of FSC certifi cate is just one of the ways to survive in the market.In the last three years, there were no governmental subsidies for the implementation of FSC certifi cation.The last subsidy program of the Government of the Republic of Croatia for certifi cation of products was issued in 2013.None of the respondents noted the governmental subsidies as the reason for FSC implementation.
Benefi ts of implementation of FSC certifi cation were also examined (Table 4).Keeping the existing customers is the main benefi t of FSC certifi cation for the largest number of respondents (80.8 %).As other benefi ts of FSC certifi cation, respondents stated obtaining new customers (59.6 %), increase of competitiveness (50.0 %), increase of export (34.6 %) and increase of company's image (32.7 %).Increase of profi t and increase of sales were the lowest ranked benefi ts of FSC certifi cation.Low ranking of fi nancial benefi ts are in correspondence with the results of Rickenbach and Overdevest (2006).Only 11.5 % of respondents stated that they did not achieve any benefi t from the implementation of FSC certifi cation, but it may be just a matter of their personal perception.If they do not see an increase in sales and income, then they can think that there is no benefi t from certifi cation implementation.On the other hand, if they had not implemented FSC certifi cate, they would probably lose market share, considering that the FSC CoC certifi cation was mainly implemented at their customer request.High certifi cation costs (71.2 %) was the highest ranked problem in the implementation of FSC certification.Extensive documentation was the second ranked problem in the implementation of FSC certification (36.5 %).Revealing of confi dential information, lack of understanding of suppliers, frequent changes of standards and resistance of employees were the least ranked problems in the implementation of FSC certification.

The impact of FSC certifi cation on fi nancial performance 4.3. Utjecaj FSC certifi kacije na fi nancijsku uspješnost
During 2014, over a quarter of respondents (27 %) achieved annual income higher than 6571 thousand Euros and 31 % of respondents achieved the income between 1314 and 6571 thousand Euros.In 2014, only 2 % of respondents had the annual income lower than 131 thousand Euros.Only 6.4 % of respondents stated that they have zero income share of certifi ed products.This means that 93.6 % of respondents have been selling FSC certifi cated products.For most of them, the share of certifi cated products in total income was between 80 and 100 %.This research has shown that the share of certifi ed products in total income of 72.3 % of FSC certificate holders from the Republic of Croatia was more than 20 % during 2014.The majority of respondents were those who had the income above 1314 thousand Euros (58 %) and had the income share of certifi ed products above 80 % (34 % of respondents). 2 -test is used to establish whether the share of certifi ed products in total income and total income are independent.In 2014, according to  2 -test results, ( 2 = 34.15;df = 20; p = 0.03), the share of certifi ed products and total income were dependent.Respondents were also asked some additional questions regarding fi nancial benefi ts of FSC certifi cation and certifi ed suppliers.Approximately one third of respondents (34.6 %) stated that profi t increased and 21.2 % of respondents have raised their prices due to FSC certifi cation.Most respondents (75 %) preferred certifi cated suppliers and 25 % of respondents had problems in fi nding certifi ed suppliers.The majority of respondents admitted that FSC certifi cation has met their expectations.This is confi rmed by the positive answer of maintaining FSC certifi cation among 96 % of respondents.Quite interesting results have been gained among the respondents who stated that they did not have any benefi ts from FSC certifi cation.Although they did not benefi t from the implementation of FSC certifi cation, they unexpectedly declared that would keep the FSC certifi cate.
Correlation analysis of employee number, income share of certifi ed products, certifi cation duration, and effi ciency of total equity (EU) and fi nancial performance profi tability ratios (ROA -Return on Assets, ROE -Return on Equity and ROS -Return on Sales) is shown in Table 6.Small positive signifi cant correlations between certifi cation duration and effi ciency of total equity and return on assets were established.No signifi cant correlations were established between employee number and profi tability ratios.Additionally, no signifi cant correlations between the income share of certifi ed products and profi tability ratios were established.Results from correlation matrix suggest that certifi cate holders from the Republic of Croatia are certifi cated on customer's request.They have not achieved any additional fi nancial benefi t, except keeping customers.Although they failed to achieve additional  profi t due to certifi cation, they plan to maintain FSC certifi cate in order to survive in the market.

DISCUSSION AND CONCLUSION 5. RASPRAVA I ZAKLJUČAK
Are wood processing companies implementing certifi cation because of their environmental awareness?According to the results of this study, huge expansion of FSC CoC certifi cation in the last decade was customer driven -certifi cation process was initiated by customers.The majority of certifi cate holders sell their products on EU market (96 %) and numerous sustainable development initiatives among EU member countries have emerged in a form of chain of custody certifi cation.The most frequently stated reason for the introduction of FSC certifi cation is the customer's request (92.3 %).This certifi cate is just one of the ways to survive on the market and companies do not see FSC certifi cate as an instrument of promotion, since the promotion was the second lowest reason for introducing certifi cation.Only 50 % of respondents uses FSC trademarks for promotional purposes.
For the largest number of respondents (80.8 %) the main benefi t of FSC certifi cation is to keep the existing customers.This result is in accordance with their customer driven certifi cation.As other FSC certifi cation benefi ts, respondents stated other market based benefi ts -obtaining new customers, increase of competitiveness, increase of export and increase of the company image.For the largest number of respondents, the main problem in the implementation of FSC certifi cation was related to high certifi cation costs (71.2 %).
Although optional, FSC certifi cation for wood industry companies of the Republic of Croatia is not a matter of choice, rather a necessity.Importance of FSC certifi cation can be seen from the fact that 93.6 % of respondents were selling FSC certifi cated products, almost thirty fi ve respondents (34.6 %) increased profi t due to certifi cation, more than half of respondents have more than 60 % share of certifi ed products in total income and 21.2 % raised prices due to FSC certifi cation.The majority of respondents admitted that FSC certification has met their expectations.This is confi rmed by the positive answer of respondents (96 %) who were willing to maintain FSC certifi cation.Quite interesting results that confi rm the importance of FSC certifi cation were obtained among respondents who stated that they did not have any benefi ts from FSC certifi cation (11.5 %).Although they pointed out that did not have benefi ts from the implementation of FSC certifi cation, they also unexpectedly declared that they would keep FSC certifi cate.
Even though the results of correlation analysis did not show signifi cant infl uence of FSC certifi cation on all fi nancial performance indicators, the impact of FSC certifi cation on fi nancial performance cannot be neglected.Small signifi cant positive correlations between certifi cation duration and effi ciency of total eq-uity and return on assets were established.Although FSC certifi cate holders did not substantially profi t due to certifi cation, FSC certifi cation has enabled them to be competitive, and they had to maintain FSC certificate in order to survive on the market.Results of this study suggest that FSC certifi cation is a precondition for competitiveness for Croatian wood industry companies.These fi ndings are consistent with the fi ndings of Narasimhan et al. (2015), who confi rmed that upstream fi rms (companies at the beginning of supply chain), to which Croatian wood processing companies mostly belong, face coercive pressure from their business customers, and thus might choose to certify even if the benefi ts of certifi cation are not apparent.Although fi nancial benefi ts have not been proven significantly, the share of certifi ed products in total revenue is quite signifi cant.Importance of FSC certifi cation for Croatian FSC certifi cate holders can be presented through the share of certifi ed products in total revenue.
Overall, our fi ndings encourage the implementation of FSC certifi cation.The FSC certifi cation can serve as a signal to customers that the company implements standards which ensure traceability of materials, applies high environmental principles and that it is not included in the trade of illegally harvested timber.However, FSC certifi cation scheme is optional.Many wood processing and furniture manufacturing companies from the Republic of Croatia have implemented FSC standards and this could make it easier for them to provide compliance with mandatory European Union regulations, such as EU Timber Regulation (EUTR 995/2010).
This study is a contribution to the research area of benefi ts of FSC CoC certifi cation, because besides using subjective benefi t measures based on respondent's evaluation, objective measures based on fi nancial reports were also used.Although this study is a significant contribution to the area of chain of custody certification, it is not without limitations.Limitation of this study could be the timeframe of fi nancial performance indicators, so in future research fi nancial performance could be measured over a period of time.Additionally, comparison of fi nancial performance of FSC certifi cate holders of wood industry and other industries (e.g.printing) could be made.