Global CPG supply chain transformation required to meet ESG goals

23 November 2016 Consultancy.uk

Moving towards sustainable and social business practices, in light of the reality of what the environment can bear, is becoming an ever more prominent imperative. Global agreements surrounding scientific findings related to environmental conditions, from climate change to water use, mean that the illusion currently lived in by much of humanity needs to transform to fit reality. Consumer packaged goods companies play a key role in the transformation, as practices within their wider supply chains tend to be highly inefficient in terms of both social and sustainability goals.

Humanity in its wasteful and inefficient utilisation of key resources, is embarking on a difficult to reverse global experiment. While a range of human wants, aside from needs, are being met by the market, the procurement of resources, production and waste externalities related to meeting demand, leaves much to be desired in terms of environmental and social damages. In recent decades increased attention has begun to be paid to the effects of the activities of corporates and SMEs, and their respective supply chains, on the environment and society.

Scientific consensus around the effects of the CO2 emissions of various industries, from energy to meat production, places considerable concern about the long-term viability of those practices on environmental stability – and human civilisation itself. The Paris Agreement, among others, puts serious pressure on governments, consumers and businesses to end wasteful practices and move towards sustainability. 

The role of the CPG industry

A new report, from consulting firm McKinsey & Company, looks into the role the consumer packaged goods (CPG) industry is playing in light of key environmental and social challenges facing the industry. The analysis finds that CPG firms hold a large role in the sustainability ecosystem, and that improvements to supply chains can lead to significant results.

Sustainability factors

Social and sustainable business

The CPG industry is projected to see steady growth of 5% on average for the next two decades. This growth is the result of up to 1.8 billion people joining the global consuming class by 2025, a 75% increase over 2010. CPG companies are therefore expected to see considerable increases in their enterprise value, with around half of their current enterprise value based on expected growth.

The realities of environmental constraints being incompatible with current 'best practice' in the CPG industry means that the expected growth side of enterprise value is vulnerable to being 'chipped away'.  As the report notes, "To make and sell goods, consumer businesses need affordable, reliable supplies of energy and natural resources, as well as permission from consumers, investors, and regulators to do business." Given the growing global consensus on a number of key sustainability issues – from global leaders as well as top business leaders – there are calls for dramatic improvements in sustainability performance. 

Achieving global climate goals

Meeting reality

The Paris Agreement is one of the agreements aimed at curbing the effects of human activity on the environment. Translating the targets set out by agreement into limits for the fast growing CPG companies means that a sustained drop in CO2 equivalent output from CPG companies and their value chains is required, from 33 gigatons of CO2 in 2015 to 15 gigatons of CO2e by 2050. In terms of carbon intensity, as a function of revenue, the target sees a 92% drop, from 2.27 CO2e per $1,000 in 2015 to 0.2 CO2e by 2050.

The stark figures mean that CPG companies will have to "greatly reduce the natural and social costs of their products and services in order to capitalize on rising demand for them without taxing the environment or human welfare." A number of possibilities are open to companies, from transforming their supply chains to more sustainable and efficient utilisation of resources in line with human rights, to transforming their product offerings to that which meets 'circular economic' principles – whereby much of what is produced can be reused. A recent report highlights that a circular economy is not merely good for growth in Europe, but may be a key element to meeting long-term sustainability target

Most of the environmental impact associated with consumer sector result of supply chain

Problems in the supply chain

As it stands, the typical consumer company's supply chain creates (far) greater social and environmental costs than its own operations, accounting for more than 80% of greenhouse-gas emissions and more than 90% of the impact on air, land, water, biodiversity, and geological resources. 

Ecological effects are already impacting a range of supply chain dimensions, from procurement to production. The report notes a number of large scale events, such as GrainCorp, a large Australian agriculture business which reported that a drought cut its grain deliveries by 23%, leading to a 64% drop in 2014 profits. Unilever estimates that it loses some €300 million per year as worsening water scarcity and declining agricultural productivity lead to higher food costs. In 2014, a ranking of the world's 100 most reputable companies included eight apparel companies. Of those, two were dropped from the ranking in 2015, following the deadly collapse of the Rana Plaza factory in Bangladesh, which had been making goods for them, and they were left off the list in 2016.

Addressing the impact

Transforming the supply chain

As it stands however, few companies are working with supplies to manage environmental and human rights related risks in their respective supply chains. Of the companies reporting the wider impact of their business activities in terms of supply chain GHG emissions, 25% actively seek to reduce the impact of their suppliers. In many instances, the report notes, GPG do not, even to themselves, have transparent access to what goes on in their supply chains – of 1,700 respondents to a survey run by the The Sustainability Consortium, less than a fifth have a comprehensive view of their supply chains' sustainability performance, while more than half reported being unable to determine sustainability issues in their supply chains.

To transform the wider supply chain into a more efficient, and sustainable, operation in line with reality, the firm notes three key levers:

Locate critical issues across the whole supply chain: To meet global human rights and sustainability standards and targets, an almost complete understanding of conditions in the wider supply chain is required. A variety of independent organisations provide KPIs and best practices for disclosing the effects of practices in wide and deep supply chains.

Link supply-chain sustainability goals to the global sustainability agenda: following identification of key human rights and sustainability issues, companies can find ways of implementing "scientists' recommendations for bringing various types of sustainability impact under thresholds that will maintain or improve human well-being." Transforming to wider circular economic principals may provide sell and demand side savings. 

Assist suppliers with managing impact – and make sure they follow through: the firm also suggests that CPG companies support suppliers with transformation of their respective operation in line with human rights and sustainability targets set by the company. This could imply monitoring of suppliers' performance in line with requirements, as well as collective action between companies if there is supplier overlap to transform practices.

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