The world's biggest food companies have long been criticized for failing to tackle the insidious problem of child labor in the $140 billion global chocolate market. Now the Netherlands, with a population of 17 million and a large cocoa footprint, is using a carrot-and-stick approach to spur faster change.

The Dutch effort partly relies on a tough new law that requires companies to identify and fix child labor problems in their global supply chains. It also harnesses the market power of local banks, asset managers and pension funds to increase the financial pressure on the cocoa industry. The effort is starting to pay off, as suppliers, manufacturers and supermarkets increasingly change the way they source, track and sell chocolate.

More than 2 million children work in the impoverished and sometimes hazardous conditions of family farms in Ghana and Ivory Coast, which produce about 65% of the world's cocoa. Much of that is sent to the Netherlands, the biggest importer of beans, via Amsterdam, the Dutch capital and the world's largest cocoa port. As a result, the fortunes of myriad Dutch institutions — companies that buy, ship and grind cocoa beans; banks that finance the transactions; companies that make chocolate bars; and supermarkets that sell them — are indirectly but inextricably linked to human rights violations 3,000 miles away.

"A lot of cocoa comes to the Netherlands and is then re-exported, so Dutch banks are very active in supplying finance to trading companies," said Juultje van der Wijk, managing director for agricultural commodities at ING Groep NV, the country's largest bank. Arnaud Cohen Stuart, ING's head of business ethics, added: The problem of child labor "has become more urgent ... and the topic has become more prominent in our approach" to financing cocoa trading companies.

In 2001, eight big food companies, including Nestlé SA, Mars Inc. and Hershey Co., signed an agreement drafted by two U.S. Democrats, Sen. Tom Harkin and Rep. Eliot Engel, to eliminate the "worst forms of child labor" in cocoa production by 2005. Not only did the industry miss that deadline, and several subsequent ones, it also likely will miss a renewed goal to eliminate 70% of such labor by 2020. However, none of the nonprofit groups that monitor the situation can say by how much the effort will fall short, partly because the cocoa supply chain is so complex and scattered.

What's more certain is that strong western demand for chocolate over the past decade has given rise to more cocoa farms and, therefore, to more child laborers. International pressure to fix the problem is intensifying, bringing with it a new set of regulatory, legal and financial risk.

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In Ghana and Ivory Coast, cocoa farmers who cannot afford to hire adults often require their children to spray toxic pesticides, carry heavy loads and use machetes to cleave pods. Many of these children do not go to school. A small proportion — less than 2% — are trafficked, including some from neighboring countries, according to a 2018 study led by Tulane University in New Orleans and the Walk Free Foundation of Australia.

But family-instigated child labor in cocoa remains the "widespread norm," said Darrell High, global manager of the Nestlé Cocoa Plan, which aims to improve the lives of cocoa farmers. High added that while some routine tasks that children perform, such as drying cocoa pods, are acceptable, "anything that stops them going to school, or anything that affects their physical development or harms them, is wrong."

Nestlé's main tool for tackling child labor is the Child Labor Monitoring and Remediation System, which uses a network of smartphone-wielding farmers and a database to first identify child laborers, and then to persuade families to abandon the practice. The system, co-developed by Swiss nonprofit International Cocoa Initiative, or ICI, is now used by other companies including Hershey and Cargill Inc of the U.S., Olam International Ltd. of Singapore and Barry Callebaut AG of Switzerland. Since its adoption in 2012, the system has identified about 33,600 cases of child labor and its actions have benefited about 16,300 of them. So far, though, such systems cover only 15% of the cocoa supply chain, according to ICI.

Some countries are demanding more. Britain adopted a Modern Slavery Act in 2015, requiring businesses with more than £36 million in sales to disclose annually steps they have taken to identify and address the risk of forced labor in their supply chains. Australia adopted a similar act in January. Ghana and Ivory Coast used to quietly accept cocoa prices set by buyers, but in the summer they took the unprecedented step of jointly proposing a minimum floor price of $2,600 per ton of cocoa, part of a wider effort to improve farmers' incomes and thereby also fight child labor.

Such shifts threaten the chocolate industry's strong record of growth. For example, Barry Callebaut, one of the world's biggest manufacturers of chocolate and cocoa products, notched a net profit of CHF357 million on sales of nearly CHF7 billion for the fiscal year ended Aug. 31, 2018. That represented a 2.1% increase in sales and a 27.1% increase in net profit from the previous year. Since going public in 1998, the company's share price has increased nearly sevenfold. In 2016, Barry Callebaut took a bold step — it vowed to eradicate child labor from its supply chain by 2025. "The existence of the worst forms of child labor is an indication that the cocoa supply chain in west Africa is not prospering, nor self sustaining," the company said in a 2017-18 progress report.

Lawyers are circling, too. In April, Coast Law Group in Encinitas, Calif., filed a class-action lawsuit against Nestlé, maker of KitKat, for allegedly misleading consumers about the use of child labor on cocoa farms in Ivory Coast. In December, Koskie Minsky LLP of Toronto filed a similar lawsuit against Hershey seeking $500 million in damages. "The suggestion that Hershey is working to combat child labor doesn't hold water," said Adam Tanel, a lawyer involved in the Canada lawsuit. "They say they have a zero-tolerance policy, but they tolerate it in their supply chains."

Hershey declined to comment on the pending litigation. "I can tell you that at Hershey, we do not tolerate illegal and abusive forms of child labor in our cocoa supply chain," a spokesman said in an emailed comment. "At the same time, we recognize this is an enormous challenge well beyond the ability of a single organization or entity to solve."

In an emailed response, Nestlé said: "Similar suits against Nestlé USA and others have all been previously dismissed and we are confident this one will be too ... Regrettably, in bringing such lawsuits, the plaintiffs' class action lawyers are targeting the very organizations trying to fight forced labor."

Some lawmakers have become skeptical about corporate promises. Senators Sherrod Brown, D-Ohio, and Ron Wyden, D-Ore., during the summer urged the U.S. Department of Homeland Security to block cocoa imports made with child labor and to pursue criminal charges when necessary. "The last 20 years demonstrate that the travesty of forced child labor in the global cocoa supply chain cannot be solved by chocolate companies' self-regulation," the senators wrote in a July 12 letter to the agency. "It's time to pursue a comprehensive, aggressive enforcement agenda."

The Dutch have got there first. In May, the country adopted a law that requires any company that sells goods or services to Dutch consumers to identify and prevent child labor in their supply chains. The statute requires a regulator to publish corporate responses in a public online registry, and is the first such law anywhere that introduces criminal sanctions for those that fail to comply. Separately, the Dutch government, banks and other groups have joined forces in a pact that aims to prevent or end human rights violations by companies that borrow from Dutch banks. It identifies specific areas in the cocoa supply chain where banks can usefully intervene — and several have responded.

'Cocoa clients are high-risk clients'

ABN AMRO Bank NV is the third-largest Dutch bank and a major lender to cocoa traders and processors. Every year, a relationship manager assesses a client's sustainability performance on certain criteria, such as its recent track record on child labor, and whether it has recently been criticized by human rights groups. That assessment is sent to the bank's sustainable banking department, where a credit committee decides whether to keep lending to the client. "Cocoa clients are high-risk clients," said Ruben Zandvliet of ABN AMRO's sustainable banking department. "It's a very serious procedure we have."

Critics want more. "As a starting point, banks should publicly disclose who they are financing in the cocoa sector," said Ryan Brightwell, human rights campaign coordinator at BankTrack, a banking watchdog group based in Nijmegen, the Netherlands. "They should also demand an audited assessment of child labor in their clients' supply chain as a requirement for getting financing."

Banks are trying other ideas. ING, ABN AMRO, Rabobank and others recently provided a €750 million credit facility to Barry Callebaut. The loan matures in June 2024 and comes with a twist: If Barry Callebaut can hit certain environmental, social and governance scores as measured by an independent assessor — including those relating to child labor — it pays a lower rate of interest and saves hundreds of thousands of euros. If it misses the target, the interest rate is higher. "While our ESG score has constantly improved over the last [few] years, it has not yet triggered a change in the credit spread," said a Barry Callebaut spokesman in an email.

Challenge of lending to farmers

ING and other Dutch banks are mulling whether they can provide loans to West African cocoa farmers, to invest in their farms and help them send their children to school. But without a local presence, the banks cannot easily assess the credit risk of borrowers. They hope to pick up valuable intelligence via their clients — cocoa merchants and processing companies — who are able to study satellite images and assess the size, health and productivity of distant cocoa holdings. A more robust assessment of an individual farmer means a more reliable credit profile.

APG Asset Management, a unit of APG Groep NV, manages more than €500 billion of pension assets for government and education employees in the Netherlands. The company has investments in Nestlé, Hershey and others. The issue of child labor and cocoa "is quite central to us since it involves children who are [forced to] work, and we serve teachers," said Willem Hettinga, senior responsible investment specialist at APG.

The pension fund pushes big chocolate brands to set targets to eradicate child labor from their supply chains, but concedes that the task is daunting. For example, it notes that the smartphone-and-database system Nestlé and others use to fight child labor, and which costs $75 per farm per year, is expensive and logistically complex. "We are concerned about how scalable" these programs are, said Hettinga.

An ethical market leader

One Dutch company, Tony's Chocolonely, was founded on the premise of fighting child labor in the chocolate industry. It operates on the idea that farmers' extreme poverty is the underlying cause, and that big Western companies ought to pay more for the cocoa they buy. It tries to lead by example. In Ivory Coast in 2018, the farm gate price of cocoa was $1,328 per ton. Fair Trade cocoa cost an additional $200 per ton. Tony's said it paid a further $320 per ton to help farmers earn a living wage. Dutch consumers, in turn, seem willing to pay a little more for ethical chocolate: Tony's launched in 2005 and is now the Dutch market leader for chocolate bars.

One of Tony's biggest coups was persuading the Netherlands' largest supermarket chain, Albert Heijn, a unit of Koninklijke Ahold Delhaize NV, to source its own-brand chocolate, Delicata, with the same ethical sourcing methods pioneered at Tony's. It was a big commitment because it requires Albert Heijn to pay a higher price for ethical, fully traceable cocoa. Its new Delicata chocolate bars — with a "slave free" stamp on the wrapping — began appearing on store shelves in March.

"You have to have guts," said Anne-Wil Dijkstra, COO of Tony's. "You have to take responsibility for all the people who work in your supply chain."

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