Global News Blog / IPS

Wolfgang Kerler

NEWYORK, Dec 3 (IPS) - 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, according to a future scenario analysis by the World Resources Institute (WRI) and global consulting firm A.T. Kearney released on Tuesday.

”The vast majority of companies are only beginning to realise that the financial impacts of climate change will be so severe that classical cost-reduction efforts will not be sufficient,” A.T. Kearney partner Daniel Mahler told IPS.

The future scenario, entitled ”Ecoflation”, concludes that physical climate change, water scarcity, deforestation and climate change policies could significantly increase the price of commodities, packaging, manufacturing and logistics.

The projection acts on a number of assumptions, one of them being the implementation of comprehensive climate change policies by the next U.S. administration that would increase the price of greenhouse gas emissions.

Other assumptions include rising production costs and declining yields in the agricultural sector caused by water scarcity, as well as an increased use of recycled fibre for all paper packaging and products.

”Even though commodity prices are lower now because of the economic crisis,” Mahler said, ”they are likely to go up again in the future — and companies know that.”

In order to reduce the amount of raw material and ingredients needed, Mahler would advise companies to change the design of their products and packaging, which usually represents 50 percent of the cost. ”There are significant opportunities,” Mahler said.

Furthermore, a network of more and smaller manufacturing sites spread across the country would reduce product shipping costs, compared to a few large-scale factories in the middle of the country. A switch from international to more local sourcing of production inputs would lead to a decrease in transportation cost.

”Winning companies will anticipate this changing landscape. These companies will collaborate with suppliers and other stakeholders, and make environmental sustainability a key business principal,” Mahler said.

Cost increases for FMCG companies that do not implement such strategies could diminish company earnings by 13 to 31 percent in 2013 and by 19 to 47 percent in 2018, the new paper says.

”So far, only a few companies are implementing new strategies,” Mahler said. As examples he mentioned Procter & Gamble, Coca Cola and Nestlé.

Ecoflation is the first future scenario for businesses to include projections of the financial impacts related to environmental trends — for example, changes in weather patterns or water scarcity — and public policies. Conventional forecasts are based on assumptions of future population and economic growth and consumption only.

”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 Programme. ”Environmental concerns are driving a global trend of policy activism and regulation.”

WRI and A.T. Kearney focused on the industry of fast-moving consumer goods — like food, beverages, personal care items and household care items — although this sector is typically not thought of as being especially exposed to climate change.

However, the analysis argues that ”many of the commodities that serve as cost drivers for the industry are tied to natural resources at risk from environmental pressures”. The commodities assessed for the scenario are oil, natural gas, electricity, cereals, grains, soy, sugar, palm oil and timber.

Asked whether companies could not just raise their prices to obtain their level of earnings, Mahler said: ”Absolutely. But 2008 has become a good example of how difficult it is to pass on prices to the costumers in economic difficult times.”

While an average inflation rate is taken into account for the Ecoflation scenario, Mahler argues that ”price increases above that would be hard to deliver to the customers” as demand for fast-moving consumer goods was highly price-sensitive. If a company raises the prices for a product too much, costumers would just start to buy another, less expensive brand.

All rights reserved, IPS – Inter Press Service, 2008.