Consumer Goods Industry Needs Green Sourcing To Avoid Potential 47% Earnings Hit

December 2, 2008

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Companies in consumer goods sectors that do not implement strategies to mitigate the risks posed by environmental pressures could face a potential loss of 13 percent to 31 percent in earnings by 2013, according to a scenario proposed in an analysis by the World Resources Institute and A.T. Kearney Inc. The number could hit 47 percent in earnings in 2018.

The analysis, “Rattling Supply Chains: The Effect of Environmental Trends on Input Costs to the Fast Moving Consumer Goods Industry” (PDF), calculated the financial impact of environmental issues facing consumer goods industry and found that future policies and constraints on natural resources will force firms to add the environmental costs previously borne by society to their cost of doing business.

The analysis also found that by 2013, most major global economies will be paying $30 per tonne of CO2 emissions, based on the premise that the U.S. will adopt a national cap-and-trade system. The increase in carbon prices will result in increased energy prices, with oil prices increasing by 15 percent, natural gases prices increasing by 25 percent, and electricity prices increasing by 24 percent.

The report also looks at a a carbon dioxide equivalent price of $50/tonne in 2018.

According to the report, these increases in energy prices would be felt throughout the value chains of every company we studied. In addition, we incorporated them into the price impacts on cereals, soy, sugar, palm oil, and timber.

The report outlines a four-step process to develop a strategy around a company’s sustainability challenges and
opportunities:

1. Understand environmental impacts and dependencies by examining how cost drivers are exposed to emerging environmental trends and, when possible, seek substitutes with lower environmental impacts.
2. Take inventory of current sustainability initiatives through the value chain to see what the company, its suppliers, and its partners are addressing.
3. Prioritize environmental issues and opportunities according to their current and future potential impact on costs, revenues, and reputation.
4. Chart a new course by having a cross-functional team systematically evaluate opportunities to reduce cost exposure to critical input commodities. This evaluation should include product re-design, backwards supply chain integration, local versus global sourcing, and an upgrade of sustainability standards for the supply base.

According to a recent Edelman report on consumer attitudes, 68 percent of respondents said they would remain loyal to a brand during a recession if it supports a good cause.

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