April 2nd, 2019 by Carolyn Fortuna
Have you ever thought about decarbonization of the consumer goods that you buy every week? This sector traditionally has not been targeted in global decarbonization scenarios, given its relatively low emissions compared to industrial and energy sectors. However, if we step back and take a holistic, value chain approach, the sector emerges as a significant influence on both agricultural emissions associated with food production and household emissions in the consumer use phase.
Food and agricultural production accounts for about 25% of all global emissions, while emissions from electricity and heat production associated with water heating, cooking, and appliances in the built environment account for 8%. Consumer goods companies have a key role to play in the decarbonization of over a third of global emissions, which presents significant transition risks and opportunities for the sector.
The world’s largest consumer goods brands, from Gillette to Gordon’s gin, have failed to deliver low carbon innovations and now face a race to catch up with consumer demand for plant-based products and less packaging. If companies do not work to adequately mitigate these risks and capitalize on decarbonization opportunities, then climate change has the potential to significantly disrupt their business models.
Newly released research from CDP analyzes 16 of the largest global food and household goods companies and finds that 60% of these companies’ top 10 revenue generating brands have failed on low carbon innovation.
Exceptions include Nestle, which has invested in plant-based brands such as Garden Gourmet. On overall climate performance, Kraft Heinz and Estee Lauder perform most poorly, while Danone, Nestle, Unilever, and L’Oreal all perform well.
Indeed, the number of acquisitions of small, environmentally-conscious brands by global firms has quadrupled in the last five years. While 75% of companies have acquired smaller, environmentally conscious brands to create strategic optionality, it is important to note that the major consumer goods core brands remain unchanged.
Scope 3 Findings Point to Need for Consumer Good Improvements in Product Life Cycle Emissions
The Greenhouse Gas (GHG) Protocol Corporate Standard classifies a company’s GHG emissions into three scopes.
- Scope 1 emissions are direct emissions from owned or controlled sources.
- Scope 2 emissions are indirect emissions from the generation of purchased energy.
- Scope 3 emissions are all indirect emissions (not included in scope 2) that occur in the value chain of the reporting company, including both upstream and downstream emissions.
Most of the largest companies in the world account and report on the emissions from their direct operations — Scopes 1 and 2. It is imperative that businesses act on the full range of corporate value chain and product life cycle emissions as well. Product life cycle emissions are all the emissions associated with the production and use of a specific product, from cradle to grave, including emissions from raw materials, manufacture, transport, storage, sale, use, and disposal.
The consumer goods sectors’ key carbon exposures exist in the value chain, driving large Scope 3 emissions, which make up 90% of lifecycle emissions. Developing a full GHG emissions inventory – incorporating corporate-level scope 1, scope 2, and scope 3 emissions – enables companies to understand their full value chain emissions and to focus their efforts on the greatest GHG reduction opportunities.
Scope 3 emissions disclosure is strong relative to sectors such as Capital Goods. 88% of companies disclose both purchased good and services and use of sold products.
Interestingly, the robustness of calculation methodologies varies among the different companies.
Food & Beverage Subsector: Strides in Sustainability
Food and beverage companies are more exposed to supply chain risks associated with agricultural raw materials both from a carbon and water perspective. A reliance on agricultural commodities means that the majority of life-cycle emissions are generated upstream in their supply chain.
Transition risks include Scope 3 emissions, business resilience, brand analysis, raw material risk, and emissions and energy. The top 9 Food & Beverage companies identified as tackling transition risks were:
- AB InBev
- Kraft Heinz
Momentum is building around alternative proteins beyond meat with global sales of plant-based meat alternatives growing at twice the rate of processed meat since 2010. In recent years a number of large meat players, including Tyson Foods and Cargill, have invested in alternative protein groups.
Scope 3 emissions analysis focuses on two key categories which make up the majority of life-cycle emissions for the sector: purchased goods and services and use of sold products.
- AB InBev
- Kraft Heinz
Nestlé ranks first overall in brand analysis, as it is the only Food & Beverage company with a diversified portfolio of brands with no top 10 brand driving a significant proportion of group revenues. Of its top 10 brands, 4 have delivered low-carbon innovations to market and these innovations have also been assessed as having the greatest impact of the group. These active carbon management brands account for 62% of the total revenue generated by the top 10 brands.
Household & Personal Care Subsector: Winners & Losers
The top Household & Personal Care company rankings for transition risks were:
- Estée Lauder
6 out of the 7 household & personal care companies are actively innovating to replace petrochemicals in their formulations with natural, biodegradable ingredients. L’Oreal makes points due to its purchase of the ethically-minded Body Shop in 2006, a strategy which has caught on.
The Scope 3 disclosure for Household & Personal Car companies is as follows:
- RBEstée Lauder
Henkel ranks first overall in the brand analysis. It is the only company in the Household & Personal Care sub-sector that has a diversified brand portfolio, with group revenues not depending on any key brands. Even its highest earning brand, Persil accounts for a relatively small proportion of group revenues. Of its top 10 brands, 5 have delivered low carbon innovations to market accounting for 65% of top 10 revenue.
Why are these Findings Important to Consumer Goods Companies, Audiences, & Investors?
Businesses have found that developing corporate value chain of Scope 3 delivers a positive return on investment, and a full GHG emissions inventory helps companies to reduce emissions and costs to meet strategic business objectives. Such an inventory works to:
- Identify and understand risks and opportunities associated with value chain emissions
- Identify GHG reduction opportunities, set reduction targets and track performance
- Engage suppliers and other value chain partners in GHG management and sustainability
- Enhance stakeholder information and corporate reputation through public reporting
Despite acknowledging the significance of Scope 3 emissions, 56% of Food & Beverage companies have no Scope 3 emission reduction targets with Household & Personal Care companies performing better at 29%.
Diversified food companies which are reliant on a wide range of agricultural commodities including meat, dairy, nuts and soy have amplified exposure to raw material risks from water and emissions intensive supply chains.
Pure-play beverage companies are less exposed to these supply chain risks; however, the use of water as a key ingredient generates operational and reputational risks. On average, beverage companies withdraw more than 4 times the water in their operations than their food counterparts.
All Household and Personal Care companies are exposed to risks associated with palm oil use. On average, less than 50% of palm oil is supplied from physically certified sources.
A number of companies are embracing trends in consumer preferences where there is a convergence of health and environmental benefits.
Outside the brewers which are already plant based, 5 out of the remaining 7 Food & Beverage companies have innovated existing dairy or meat-based products to offer vegan options.
- Packaging is one area where companies can introduce circularity to their business models. 63% of companies are investing to advance depolymerization and recycling infrastructure.
- Almost 60% of the top 10 revenue generating brands for each company have failed to deliver low carbon innovations to market in the last 5 years, representing 48% of top 10 revenues.
- R&D is low for the sector while M&A activity is high.
- Highly consolidated brand revenues result in exposure to losses if key brands are not positioned to respond to changing consumer preferences. 88% of companies generate over 50% of group revenues from top 10 brands.
CDP is a not-for-profit charity that runs the global disclosure system for investors, companies, cities, states, and regions to manage their environmental impacts. Their analysis traces 9 food & beverage companies and 7 household & personal care companies.
Research Authors: Christie Clarke, Carole Ferguson, Tom Crocker and Kane Marcell