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In the consumer goods sector, embracing sustainability can rightly propel businesses ahead of the competition. Companies within this industry that increase their commitment to the environment and society can differentiate their products, drive compliance, and bring cost savings. Further, they stand to win and protect important business relationships in a realm where more major buying organizations are requiring stringent commitments around ESG from suppliers of consumer goods.
This change in consumer behavior, combined with the increasing importance of addressing global climate and ESG risks, is compelling companies to revisit and refine their sustainability practices and embrace opportunities to ensure their future prosperity.
Demonstrating a commitment to sustainability through data transparency and ongoing improvement is becoming increasingly important. This blog post will dissect how ESG factors are changing the consumer goods industry, identifying the risks, threats, and opportunities that companies might face.
The demand for sustainable products and services among consumers is burgeoning, particularly within the younger generation, evidenced by 90% of Gen Z's suggesting they would pay a higher price for sustainable merchandise. Consumer goods companies must, therefore, prioritize ESG and sustainability to maintain their market positions.
In the face of sustainability-related risks and regulatory requirements, consumer goods entities are compelled to consider ESG in their operations. Certifications like B Corp, Fair Trade, and Cradle to Cradle are allowing companies to highlight their alignment with high levels of sustainability, giving them a competitive advantage.
Companies at the vanguard of this shift, like IKEA, have demonstrated that cost-saving and risk mitigation bring financial benefits of a sustainability-first approach, culminating in a robust brand reputation.
A drive toward sustainability is increasingly becoming a priority in the consumer goods sector, often setting the benchmark for ESG achievements compared to other sectors, particularly in social sustainability. Three key areas of focus: labor rights, with evolving practices and legal frameworks like the US Uyghur Forced Labor Prevention Act; supply chain optimization, where companies are tackling the environmental impacts stemming mostly from their supply chains; and the shift towards a circular economy to reduce waste, especially in sub-sectors like food and cosmetics, are opening paths for significant revenue growth and sustainable innovation.
• Labor Rights: The industry is evolving in its approach to labor practices, driven by new legal frameworks like the US Uyghur Forced Labor Prevention Act. Industry leaders like footwear brand Veja, which gives priority roles to people with disabilities and other vulnerable people and are certified Fair Trade across their supply chain.
• Optimized Supply Chains: The environmental impact of consumer goods firms is largely due to their supply chains. On average, 80% of a consumer goods company's emissions come from its supply chain and over 90% of its other environmental impacts. Bedding company Sol Organix is a shining example of a company that manages its supply chain. They go through a rigorous process, including certifications, to ensure their suppliers are ethical and sustainable.
• Circular Economy and Reducing Waste: The linear economy model is proving unsustainable and costly, particularly in some consumer goods sub-sectors like food and cosmetics, where trillions in value are discarded. Recent research found that companies in the EU could add as much as €500 billion to annual revenues by 2030 by implementing a circular economy. Companies like GoodWell, a sustainable dental company, are creating products using new materials like bioplastics to ensure their products are biodegradable and low carbon.
The rapidly evolving sustainability landscape is reshaping the consumer goods sector, driven by four pivotal developments. These include the emergence of stringent sustainability regulations, a marked shift in consumer preferences towards eco-friendly products, increased competition from innovative sustainable brands, and the imperative for supply chain transformation. Together, these four elements signify a profound change in the industry, emphasizing the need for companies to adapt proactively and embrace sustainability not just as a compliance measure, but as a strategic advantage for future growth and relevance.
1. Regulation Reinvention: Companies are contending with a barrage of new regulations that affect their entire production process. The EU’s proactive measures on the circular economy and the U.S. SEC’s proposed regulations are creating a new paradigm for sustainability reporting, necessitating companies to collect sustainability data and change how they design their products.
2. Sustainable Choices in Consumerism: Studies show a trend towards consumers preferring sustainable products, with consumers ready to pay extra for these options. Brands that don't genuinely commit to sustainability practices are quickly falling out of favor.
3. Competition from Sustainable Brands: Market disruptors like Beyond Meat, with protein-based alternatives, and Veja, with sustainable footwear, are reshaping consumer expectations with their sustainable product lines, signaling a shift in industry dynamics.
4. Adapting Supply Chains: Consumer goods companies' biggest impacts are found within the supply chain. Therefore, working with suppliers or finding new, more sustainable ones can have the biggest effect on reducing environmental and social footprints. Plus, as climate change impacts become more tangible, companies face increased costs and logistics challenges. A strategic pivot towards more localized and adaptable supply chain models is becoming a necessity.
These themes are not exhaustive but are crucial starting points for developing an effective sustainability strategy in consumer goods.
For a consumer goods company, developing a winning ESG strategy is essential for aligning with evolving market expectations and regulatory demands, ensuring long-term business viability and competitive edge. Without a robust ESG strategy, companies risk falling behind in regulatory compliance, losing consumer trust, and missing out on opportunities for innovation and sustainable growth, ultimately impacting their market position and financial performance. Here is a good place to start:
Assess Industry-Specific Materiality Factors: A materiality assessment will determine which ESG issues your company should prioritize based on your specific industry sub-sector, geography, and what you produce. For example, an apparel company’s primary material issues may be water waste and use, whereas an electronic goods company may consider circularity as their most material issue,
Benchmarking Against Peers: Compare your sustainability practices with peers and competitors to identify industry best practices and inform your ESG targets. This can help you ensure you are not being left behind by competitors on sustainability.
Analyze Sustainability Metrics: Collect accurate, regular data to guide your sustainability strategy, enabling effective reporting and tracking. ESG software can help with the measurement, management, and reporting of this data.
Gauge ESG Risk: Getting a clear sense of any ESG risks will be important for climate risk reporting regulations. Plus, evaluating your company's sustainability-related risk exposure informs risk mitigation strategies.
• Goal Formulation: After benchmarking and analysis, set concrete ESG goals that align with your company’s sustainability vision.
• Strategy Formulation and Implementation: Build strategies based on your findings and initiate programs that drive progress towards your ESG goals.
• Sustainability Reporting and Strategy Adjustment: Share your sustainability performance publicly and refine your approach based on this reporting and ongoing review.
For the consumer goods sector, the spotlight on sustainability is brighter than ever. Keeping pace requires acknowledging the shift in consumer preferences towards sustainability and actively enhancing sustainability performance to stay ahead of emerging competitors and regulations.
To successfully transition towards sustainability, starting with thorough data collection, materiality assessments, and strategic benchmarking is crucial. These foundational steps are pivotal in paving the way for a successful sustainability journey. However, to truly elevate your sustainability efforts from the ground up, expert guidance is often a game-changer. Our team specializes in providing consumer goods companies with bespoke sustainability frameworks, meticulously crafted to meet their specific needs and objectives. Contact our team below to get started.
The information provided in this communication is of a general nature and should not be considered professional advice. You should not act upon the information provided without obtaining specific professional advice. The information above is subject to change.
