A tide of consumer activism on plastic packaging has resulted in increased scrutiny and changing preferences for circular, zero-waste business models. This is forcing companies to rethink their approach, with around 60 percent of companies investing to advance biodegradable plastic and recycling infrastructure. Danone is leading the way.
Despite this innovation in the sector, almost 60 percent of the top 10 revenue generating brands for each company have failed to deliver low-carbon innovations in the past 10 years. Given most companies (88 percent) generate over 50 percent of their revenues from these key brands, including Nescafé, Budweiser and Dove, they must up their game or risk falling foul of changing consumer demands.
Many FMCGs are responding by acquiring smaller, sustainable brands. 75 percent of companies have directed M&A efforts towards the acquisition of niche, environmental brands in the past five years, and this type of activity has more than quadrupled over that time.
For food and beverage companies, this trend is further driven by the alignment of health and environmental trends, demonstrated by Nestlé’s recent acquisition of Sweet Earth and PepsiCo’s purchase of Bare Foods. However, this approach will not be sustainable if their fundamental business models -- which are based on driving more consumption -- remain unchanged.
Beyond reputational risks, impending regulation also threatens these companies, as more robust rules on packaging and waste are introduced. The EU 94/62 directive’s 2018 amendment has set measures for reducing packaging waste at source as well as improving recycling and recovery, while product labelling and carbon footprinting is on the horizon.
The sector also is highly exposed to the physical risks associated with climate change. For example, heat stress and water scarcity have the potential to disrupt agricultural supply chains and cause price volatility. This poses a real threat to the sector, especially for diversified food companies like Nestlé and Kraft Heinz, which rely on a variety of raw materials. When it comes to physical risks in the consumption phase, personal care and home care companies are most exposed, due to the amount of water it takes to use their products.
Notwithstanding the media scrutiny around palm oil, some companies are being slow to respond. Despite the palm oil exposure faced by all household and personal care companies, less than 45 percent is supplied from physically certified sources. Of the palm oil users, only Danone and L'Oréal have already achieved a 100 percent physically certified supply.
As consumer facing brands, at risk not just from climate change but water scarcity and deforestation too, these companies have a unique role to play in driving forward the sustainable economic transition Carole Ferguson, head of investor research at CDP.
"Ongoing activism around plastics and packaging is just the tip of the iceberg, and we expect to see more environmental issues come to the fore as consumers start to question what goes into the products they buy, use and dispose of.
"Leading companies are taking action across their entire value chain and redefining the role of business in society – by engaging with suppliers, innovating their product lines and even working with consumers to drive behavior change," Ferguson concludes. "This level of action is impressive but necessary to address fundamental risks. And these efforts need to be replicated by others in the sector, if they are to justify their role in a society that can no longer be based on fast paced, rising consumption and linear business models.”
Carole Ferguson is head of investor research at CDP (www.cdp.net), an international non-profit that drives companies and governments to reduce their greenhouse gas emissions, safeguard water resources and protect forests. It provides climate research to institutional investors managing assets of $96 trillion.