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Profits vs Sustainability - the False Trade-Off in the CPG Sector

The “whac-a-mole” approach to sustainability does not work

The adoption of ESG among corporations at large has been on the rise – and the CPG industry is no exception. However, the industry is also riddled with instances of greenwashing and token sustainability initiatives. For context, greenwashing is making people believe that the company is doing more for sustainability than it actually is. This is bound to occur as most companies take a reactive, “whac-a-mole” approach to sustainability and not a proactive one. This approach has involved reacting to trending movements rather than taking a comprehensive look at the business models and corresponding strategies. While not unique to the CPG industry, companies banning plastic straws without addressing deeper environmental issues within their business models is a great example of this.

Companies often fail to understand that consumers and investors alike can see through such superficial efforts. Most often, companies promote individual sustainability initiatives without assessing the overall footprint of their business models. Even CPG conglomerates have been susceptible to this and have suffered reputational damage as result. Once inflicted upon a brand, such damage can be hard to repair and involves significant direct and indirect costs. Such instances represent avoidable missteps by corporations.

But the world is not simple and most companies are neither perfect nor evil. Jehan Vichhi, who focuses on the CPG industry at Salesforce, illustrated this point in a recent interview where he highlighted how the 80/20 rule applies here as well. Some companies may be doing all the right things in 80% of their business but get a bad reputation for what is happening with the remaining 20%. Thus, he states, it is important to get “granular” - down to the product category or regional level. Understanding the big picture, the company’s overall strategy and what matters within each brand is imperative to manage sustainability in an integrated fashion that satisfies customers, regulators, and investors. This further solidifies the need for a cohesive integration of sustainability objectives into the business model so that no business units are left out.

Consumers and investors are voting with their dollars

When considering a shift towards sustainability as a core tenant of business strategy, corporations are often dissuaded by the costs and seeming short-term detriments to profitability. This mindset fails to appreciate that sustainability does not just “do good”; it creates a competitive advantage, de-risks the business, and generates alpha for investors. In fact, 50% of CPG growth from 2013 to 2018 came from sustainability-marketed products. Furthermore, buyers want sustainable products and over one-third will pay 25% more for them. Similarly, as shown in our previous piece, ESG performance can drive companies out of favour with investors. Hence, the case for sustainability for CPG companies is now stronger than ever.

Corporations cannot anticipate movements or oncoming public scrutiny. All they can and should do is design their business models for resilience. This entails making sustainability core to the business strategy, creating systems with scalability, and communicating outcomes in a scientific and measurable way. Such an approach would lead CPG companies to adopt lifecycle thinking rather than tackling sustainability through siloed initiatives. As Jehan points out, being able to manage your progress means you need to measure and track it with the right metrics and benchmarks– one of the greatest inherent challenges with the speed of adoption of a core sustainability mindset and organizational strategy today.

View sustainability as an investment rather than a cost

For companies, knowing where to start can be daunting and the journey will vary depending on the nature of the business. However, it is important to start this with an understanding of which issues are most material to the business. As an example, the SASB Materiality Map®, offered by the Sustainability Accounting Standards Board, is a great interactive tool that illuminates issues material to companies depending on their industry. This enables companies to focus business strategies on the most material sustainability issues and understand the metrics that underpin each of them.For context, SASB defines financially material issues as ones that are reasonably likely to impact the financial condition or operating performance of a company and therefore are most important to investors. Once the material issues have been identified, suggests a five-step process for developing and executing a cohesive sustainability integration plan:

  1. Establish overall strategic objectives that incorporate material sustainability issues;

  2. Determine Key Performance Indicators (KPIs) to measure progress on these issues;

  3. Design organizational processes and performance management mechanisms to tie executive incentives to identified KPIs;

  4. Integrate into business reporting, operational and control mechanisms, such as CRM, ERP and ERM systems and tools;

  5. Create communication channels to efficiently and transparently convey both objectives and results to stakeholders, internally and externally.

A simple yet powerful tool for framing:

Source: Justin Bull’s COMM 386J - Strategies for Responsible Business @ UBC, 2020

Adhering to such a framework leads to a corporate cultural shift with wide ranging effects - from a change in talent acquisition strategy to a thorough assessment of the supply chain and incentives. All in all, the rise of sustainability represents both great opportunities and threats for the existing corporate paradigm. Corporations can either evolve with this change and unlock more value for their shareholders, employees, and society at large - or get swept-up by it.

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Disclaimer! The views expressed in this post are the opinions of the authors and are not representative of the people, organizations or institutions that the authors may or may not be associated with in a professional or personal capacity.

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