WRI: Environmental Strategies Could Affect Consumer Goods Companies' Earnings
December 15, 2008 // Published as a news service by IHS
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These findings are the result of a future scenario analysis – Rattling Supply Chains: The Effect of Environmental Trends on Input Costs to the Fast Moving Consumer Goods Industry - released by WRI and A.T. Kearney Inc.
It is the first report of its kind to calculate the financial impact of environmental issues facing this industry.
The WRI analysis provides consumer packaged goods executives with a tool to assess how environmental legislation and climate change could impact their businesses in future years. It also outlines how these executives can begin developing strategies to address these issues.
Although the current financial crisis has resulted in declining commodity prices, WRI analysts found that environmental pressures will continue to impact the supply and price of key commodities in the long term. The crisis should be viewed as an opportunity to address these challenges through transformational change, and not as a time to ignore them.
"The 'ecoflation' scenario is a vision of a future where companies have to deal with environmental costs previously borne by society," said Andrew Aulisi, director of WRI's markets and enterprise program.
"Environmental concerns are driving a global trend of policy activism and regulation. Our scenario describes this trend and the most pressing environmental challenges, and finds that the earnings of consumer goods companies are exposed to significant risk rising out of their supply chains."
For their research, WRI and A.T. Kearney based the ecoflation scenario on major environmental trends and policy developments, such as U.S. and international climate change regulations, enhanced forest policies, growing water scarcity and new biofuel policies.
They then analyzed how these drivers might affect prices on selected commodities like oil, natural gas, electricity, cereals and grains, soy, sugar, palm oil and timber.
The analysis offers tangible illustrations of how environmental costs might impact the value chain, especially for fast-moving consumer goods that are usually produced in large quantities, such as food and beverages or household products.
Cereal prices, for example, are shown to have upward pressure from climate change policy and growing water scarcity, but may be reduced if certain biofuel policy changes reduce ethanol demand. The report finds a 6% to 13% increase in cereal commodity prices due to these pressures.
"The results highlight the need for strategic scenario-based planning," said Daniel Mahler, a partner at A.T. Kearney. "Winning companies will anticipate this changing landscape. These companies will collaborate with suppliers and other stakeholders, and make environmental sustainability a key business principal."
To develop a robust strategy around a company's sustainability challenges and opportunities, the report outlines a four-step process:
- 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.
- Take inventory of current sustainability initiatives through the value chain to see what the company, its suppliers and its partners are addressing.
- Prioritize environmental issues and opportunities according to their current and future potential impact on costs, revenues and reputation.
- 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 redesign, backward supply chain integration, local versus global sourcing and an upgrade of sustainability standards for the supply base.
Source: World Resources Institute (WRI).