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ESG in FMCG

ESG in FMCG

Background

ESG is an acronym for Environmental, Social and Corporate Governance. Some simple examples of ESG initiatives in FMCG would include:

Environmental: removal of single use shopping bags

Social: employing a diverse workforce

Corporate Governance: banning all forms of bribery and corruption

There are several other terms with similar goals that the FMCG industry does, or has, used. For example, corporate social responsibility, company values, ethical trading initiatives, sustainability and a circular economy. Proponets suggest ESG is better because it measures the overall impact a business has. For example, ESG initiative is to use 100% renewable energy by 2030.

Financial Markets

Originally the term (ESG) was used in financial markets to detail ESG actions, that historically were not included in financial analysis. There are now numerous studies highlighting positive ESG activities by a business can correlate to improved financial results.

As explained by Forbes (The Remarkable Rise of ESG, July 2018) ESG investing began in 2004. Today there are numerous groups such as Principles for Responsible Investment (PRI), Sustainable Stock Exchange Initiative (SSEI), Global Reporting Initiative (GRI) and Sustainability Accounting Standard Board (SASB) all helping businesses and investors better understand the potential benefits of ESG actions and how to report ESG activities.

Consumer / shopper demand

For many years shoppers have demanded products that have a positive impact on the world. Numerous organisations have built ranges based on this demand. For example, Fairtrade (founded 1992) aims to improve working conditions and prices for workers and farmers in developing countries.

During the last 20 years consumer / shopper demand for ESG products and services has increased. Research suggests that millennials (born between 1981 – 96) and Gen Z (born between 1997 – 2012) have demanded more ESG products and services vs previous generations. Obviously as millennials and Gen Z spending power and influence has grown manufacturers and supermarkets have had to evolve their offer.

‘From #MeToo to Black Lives Matter, from convening marches on climate change to the Arab Spring, from demanding eco -friendly products to challenging stakeholder capitalism, these generations are compelling real change in society and business.’

Deloitte, A call for accountability and action, 2021

Other research highlights the demand for ESG products and services is now becoming mainstream for consumers. For example, PWC research highlights 83% of consumers think companies should be actively shaping ESG best practices (PWC Consumer Intelligence Series June 2, 2021).

‘the COVID-19 crisis perceptibly shifted consumer behavior and enlarged the pool of conscientious consumers willing to pay more for healthier, safer, more environmentally and socially conscious products and brands.’

PWC, Beyond compliance: Consumers and employees want business to do more on ESG, 2021

The risk to manufacturers and supermarkets that do not improve their ESG offer is potentially lost sales / share. PWC research highlights that Seventy-six percent of consumers told us they will discontinue relations with companies that treat employees, communities and the environment poorly (PWC Consumer Intelligence Series June 2, 2021).

For many manufacturers and supermarkets ESG initiatives are part of their customer centric / customer obsessed strategy. As shopper demands for ESG products and services has increased they have changed their business model to meet this change in demand.

Please note that many ESG initiatives may require a major change to a business operation / supply chain. It is not a relatively simple task such as Coca Cola offering Diet Coke to meet shopper demands for a healthier drink. It is Coca Cola making a long-term commitment to ensure 100% of packaging used is recyclable by 2025 (World Without Waste initiative). This requires not only the Coca Cola company but also their suppliers to change their offer. 

Industry 4.0

Much has already been written about Industry 4.0. Simply put Industry 4.0 enables different members of a supply chain to digitally share information, improving overall supply chain integration. Industry 4.0 is an enabler for ESG initiatives. The sharing of data between manufacturers and supermarkets can be used to measure ESG initiatives. For example, if a major supermarket wants 100% of their P/L (private label) range to be made with materials that are recyclable they will require manufacturers to supply this info. Industry 4.0 (in theory) allows all manufacturers and supermarket to share info about ESG initiatives in real-time creating transparency in the supply chain.

Looking forward technology will continue to be an enabler for ESG initiatives. Numerous developments, such as AI, blockchain and IoT (internet of things), will continue to allow manufacturers and supermarkets to share information. In the future the industry will also probably share this information with others. For example, UNEP (UN environment programme) has a Sustainable Development Goal (SDG 12.3) of by 2030, halve per capita global food waste at the retail and consumer levels and reduce food losses along production and supply chains. So, in the future this information could be shared with numerous stakeholders including governments etc.

Criticisms

ESG initiatives generally have a major criticism – greenwashing. Greenwashing could be defined as misleading consumers to believe a product or companies policies are environmentally friendly. It is suggested that organisations greenwash their products or policies to maximise their financial results. Many argue this issue has occurred due to a lack of regulations, industry and government, to manage ESG based repoting.

‘The rules and regulations governing ESG operations are very much a work-in-progress. Standards vary in method and aims, data is inconsistent and multiple ratings offer conflicting scores.’

John Howell (ESG is huge and terribly flawed. Now what? 2021)

Many, such as Harvard Business Review (An ESG Reckoning Is Coming, Mar 21), suggest that greenwashing cannot continue indefinitely. Eventually the market will demand transparency and organisations will be forced to support any ESG claims made.

There is on-going work to agree global standards for ESG reporting. For example, recently at COP26 (Glasgow, Nov 21) IFRS announced the creation of a new ISSB (International Sustainability Standards Board) to develop a comprehensive global baseline of high-quality sustainability disclosure standards.

Can manufacturers and supermarkets become ESG leaders?

Logically if ESG products and services meet modern shoppers demands and generate greater long-term financial results then all manufacturers and supermarkets should embrace ESG … or should they? All categories and businesses will face unique challenges if they try to move to ESG products and services. The following questions are designed to provoke thought.

Environmental: should hard discounters, such as Aldi, only range P/L (private label) products that offer 100% recyclable packaging? If yes, then they may have to increase their sell prices to cover the additional production costs. Will hard discounter shoppers accept higher prices?

Social: should manufacturers and supermarkets stop selling products that may have a negative impact on shoppers’ health? For example, alcohol, confectionery and tobacco. These products are demanded by shoppers and generate large $ sales.

Governance: should private companies, from small start ups to major multi-nationals such as Aldi, publish the financial compensation, including bonuses, of executives?

These simple questions highlight some of the many potential barriers to FMCG businesses offering ESG products and services. IMHO (in my humble opinion) FMCG businesses, especially public companies, shall implement ESG initiatives that do not risk sales / share. These will improve their overall ESG score / ranking and meet shareholder expectations. For example, using renewable energy or moving to recyclable packaging.

How easy is it to launch ESG products?

Many would suggest plant-based meat alternatives would be an ideal ESG product / category. Using Beyond Meat as an example they claim their product can help humans eat healthier, fight climate change, preserve natural resources and help animals live better lives. To support their claims’ they cite peer-reviewed research from the University of Michigan indicating a Beyond Meat Beef Burger uses 99% less water, 93% less land and produces 90% fewer greenhouse emissions vs a standard US beef burger.

However, there are criticisms of plant-based meat alternatives. For example, claims of high sodium and fat content, lack essential nutrients vs meat, highly processed food, contain GMOs etc. Also, public companies have been criticised for not providing sufficient information to support their claims. As reported in the NY Times, Roxana Dobre from Sustainalytics said We don’t feel we have sufficient information to say Beyond Meat is fundamentally different from JBS (Plant-Based Food Companies Face Critics: Environmental Advocates, Nov 21, NY Times).

‘But an increasing number of researchers, food critics, and environmental groups are casting doubt on these types of claims, warning that faux meat production still relies on industrial farming practices. They claim that we don’t know enough about these relatively new products to say for certain if they’re better for the environment than the meat they are trying to replace.’

Hayek and Dutkiewicz, Yes, plant-based meat is better for the planet, 2021, vox.com

This very brief overview of plant-based meat alternatives / Beyond Meat highlight some of the challenges FMCG businesses face launching an ESG product or service. Historically the industry focused on shoppers / consumers demands. Now businesses have to manage the demands of numerous stakeholders, often with competing demands. Also, businesses have to be more transparent about once confidential business matters to support any ESG claims that are made. To achieve this outcome more data has to be captured from the entire value chain (not just a single business), analysed and then shared publicly.

Summation

Disruption is the new normal in FMCG. This brief blog has highlighted a shift in shopper demands for more ESG products and services. Logically manufacturers and supermarkets are improving their ESG offer by focusing on easier wins, e.g. move to renewable electricity and recyclable packaging. In the long-term ESG creates challenges for what products and services the industry shall offer. Also, how the industry (value chain members) shall capture and share once confidential information.

The information provided in this blog post was general in nature. If you require more information I offer a free initial consultation by completing a contact us form.