Sustainability

Ecoflation scenario analysis—anticipating and addressing sustainability challenges and opportunities

With growing constraints on natural resources and the potential for new government policies, industry leaders will be companies that make environmental sustainability one of their core business principles. These companies will not only be able to anticipate the changes, but also collaborate with suppliers and other stakeholders to address them.

Ecoflation scenario approach and tool
The World Resources Institute and A.T. Kearney conducted a scenario-based study that calculates the financial impact of environmental issues. The study uses the fast moving consumer goods industry (FMCG) to illustrate this forward-looking approach and outline steps companies can take to make sustainability an advantage.

The study provides executives with a tool to assess how environmental legislation and climate change could impact their businesses in future years. Ecoflation analyzes the way four major policy and environmental issues play out over the next ten years in a hypothetical, yet distinctly possible future:

Climate Change Policy—the United States implements a comprehensive climate-change policy, which spurs international cooperation and results in a global price for greenhouse-gas emissions
Water Scarcity—climate change causes more drought and water scarcity throughout major agricultural regions and leads to increased production costs and declining yields
Deforestation—consumer products companies in the United States and the European Union voluntarily agree to source all wood and fiber from sustainability-certified forests, and to increase the use of recycled fiber for all paper packaging and products
Biofuels—major biofuel-producing countries retreat from existing mandates and apply sustainability requirements to all relevant government policies

It is important to note that the ecoflation approach is valid—even with fluctuations in the global financial system and commodity prices, such as oil. Fundamental issues governing commodity availability and price remain unchanged. Future rises in commodity and energy prices are highly probable, due to both physical and policy-driven constraints. Population growth and its concomitant effects on demand for goods, energy, and land remain unabated. Climate change continues unchecked. A growing water shortage looms. Governments will have to respond to these threats, and those responses will have an impact on manufacturers that are not preparing in time.

Findings for FMCG – sharp earning reductions without steps
We applied these four scenarios to the price implications for eight important commodities—oil, natural gas, electricity, cereals and grains, soy, sugar, palm oil and timber. These resources represent large expenses for FMCG firms, are used throughout the supply chain, are at risk for price volatility, are influenced by policy changes, and are vulnerable to water scarcity and other environmental factors.

We then examined the effects these commodity prices have on the earnings of a set of FMCG companies. Based on our findings, we estimate a sharp reduction in earnings for FMCG companies that do not develop strategies to mitigate risks posed by environmental pressures throughout their supply chains—13 to 31 percent decreases in earnings before interest and taxes (EBIT) by 2013, and 19 to 47 percent EBIT decreases by 2018.

Strategies for ecoflation issues
The study outlines a four-step process to determine the extent of a company’s sustainability challenges and opportunities:

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, including product re-design, backwards supply chain integration, local versus global sourcing, and an upgrade of sustainability standards for the supply base

This study does not purport to be a “crystal ball” or suggest that the environment issues confronting the FMCG and other sectors have easy solutions. But the challenges are real and significant, and the responses require action. To each company, our study asks a simple question: Are you prepared to face these challenges?

Download the executive brief: “The Costs of Ecoflation”

Download the complete research report: “Rattling Supply Chains: The Effect of Environmental Trends on the Fast Moving Consumer Goods Industry”

Recent Media Headlights

Ecoflation, a New Worry, Could Hit Consumer Goods
8 December 20087 — Reuters.com
Add another economic worry to inflation and deflation: ecoflation, the rising cost of doing business in a world with a changing climate.

ECONOMY: Companies Warned to Go Green or Go Under
3 December 20087 — ipsnews.com
If companies in the fast-moving consumer goods (FMCG) sector do not implement sustainable environmental strategies, their earnings could be cut in half by 2018.

Go Green Or Else!
2 December 2008 — Brandweek
A.T. Kearney Partner Daniel Mahler discusses how environmental legislation and climate changes could eat up as much as 47 percent of packaged goods companies' profits by 2018 if they don't adopt long-term sustainability measures.

Consumer Goods Companies Face Major Earning Hit Without Smart Environmental Sourcing
2 December 2008 — atkearney.com
Companies in certain consumer goods sectors that do not implement sustainable environmental strategies could face a potential reduction of 13 percent to 31 percent in earnings by 2013 and 19 percent to 47 percent in earnings in 2018.