Sustainability Becomes an Integrated Part of Corporate Business Strategy

“Sustainability” has gone beyond a fashionable topic at TED Talks. Issues and corporate initiatives surrounding sustainability, corporate social responsibility (CRS) and/or ethical labels appeared to be nothing more than a PR exercise 10 years ago.

Today, sustainability is linked to a company’s financial performance; it is not only a long-term “money burning division”, it is also operating as a value generator. Understandably, like any other investment, sustainability would have an objective, commitment, a plan and a strategy which is clearly designed, monitored and shared within a firm and has an effect on the whole supply chain. Sustainability itself is an industry and also an integral part of corporate strategy. This piece attempts to highlight the market situation of the sustainability industry.

Suppliers working towards partners’ commitments

Major FMCG companies all now have a strategy to identify how to better use their allocated resources to approach their commitment, and they require their suppliers to follow their vision. Many companies have a supplier code of conduct and code of ethics.

Unilever reports that more than 55% of its agricultural raw materials are now sustainably sourced, reducing the risk to supply – putting it more than half way to its 2020 target of 100%. This means that those suppliers of agricultural products to Unilever will need to look at adapting their sustainability strategy to align with Unilever’s 2020 commitment. Barry Callebaut (BC) is one of Unilever’s suppliers of cocoa and put “Sustainable Cocoa” as one of its four strategic pillars, according to its presentation in CAGE 2016. BC engages with the World Cocoa Foundation, some NGO partnerships and ethical certification such as UTZ.Euromonitor International’s Ethical Labels database shows that UTZ is one of the leading labels in the world’s hot drinks market.

Global Reporting Initiative (GRI) guidelines influencing corporate reporting

Looking at the bigger picture, the regulatory environment and corporate reporting rules and guidelines are also experiencing evolutions which are shaping sustainability reporting. Global Reporting Initiative (GRI) standards provide sustainability guidelines via an international and systematic framework for companies’ accountability and reporting initiatives related to environmental, social and economic performance and impacts of their businesses.

Sustainability information is becoming more accessible, comparable and available. The increasing requirement of transparency of doing business and the speedy flow of sustainability information represent a long-term challenge. Companies will need to show their specific initiatives and sustainability vision and also need to communicate these initiatives to consumers or business partners in order to achieve commercial value in the long-term.

It is noted that some companies refreshed their corporate websites and placed sustainability at the same level of importance as brand marketing. From the hot drinks industry perspective, Twinings and Lavazza published sustainability reports for the first time in 2014/15. Unilever has a “Sustainable Living Brands” portfolio, which now represents half of the company’s growth and is growing twice as fast as its other brands.

Additionally, in the capital market, there are many variants of sustainability funds. For example, in the UK, there is Jupiter Responsible Income Fund, which set some criteria as to which type of companies potentially fits the bill and help potential investors decide whether or not to do so. With the GRI guidelines, listed companies follow a similar reporting structure and make their activities comparable and help decision-making for investors. While in the US and Western Europe, sustainability funds have been around for many years and are still growing, in many emerging markets, such as China, they are little heard of or non-existent, indicating long-term potential.

Diverse strategies and a boost to the accreditation industry

Sustainability is a comprehensive eco-system; from plantation to recycling to compostable foods and beverages. From the hot drinks industry perspective, tea, coffee and cocoa are the agriculture raw materials for those familiar consumer household brands. It is noted that their strategies are diverse and flexible. Major manufacturers created their own in-house projects and are typically close to the markets where they run their core businesses, for example, Twinings runs the Ovaltine Foundation to support young people in Thailand through education and health projects. Manufacturers are also linked to NGOs including Fairtrade, FSC, Rainforest Alliance and RSPO, and some are associated with one or two NGOs depending on certain circumstances. They also partner with NGOs to form a specific scheme which is suitable for their brand-specific requirement, such as Nespresso AAA Sustainable Quality Program in partnership with Rainforest Alliance. Under the AAA programme, Nespresso pays the farmers 30-40% premium above the standard market price. The advantage of this programme is that Nespresso gets the first pick of the good quality crops and the rest of the crops also qualify for the Rainforest Alliance seal.

Moreover, there are also manufacturer-led schemes, in which category players worked together to set up organisations. Twinings and Tata/Tetley are the founders of the Ethical Tea Partnership and Lavazza is a member of International Coffee Partnership. In order to put certain chosen seals on their consumer brands, the suppliers and/or brand owners will need the registered accreditors to certify the plantations, farms or forests. Thus, the sustainability movements in fact boosted the accreditation service. Some accreditation service providers which have no sustainability certification may choose to diversify into this new field to widen their income stream. For example, China Quality Mark, a government-funded accreditation company, obtained the exclusive right to certify Rainforest Alliance farms in China in 2012. This a niche category as the concept of sustainability is relatively new and there is little awareness of the Rainforest Alliance in China thus far.

All in all, sustainability is a journey and most multinationals have already set up their strategy to move in that direction. Some schemes may have higher standards, but challenges and room to improve will remain. Thus far, there are no concrete published figures showing how much companies could earn from their spend on sustainability projects and initiatives. But, it is known that an absence of such initiatives will yield unfavourable publicity and/even losses of business contracts. There is no doubt, both financially and socially, that sustainability can help the bottom line.