ESG (Environmental, Social, and Governance) in Consumer Goods – Thematic Research

Environmental, social, and governance (ESG) is the most important theme for 2021 and the next 10 years. The climate emergency is becoming more apparent. Scientists predict severe, widespread, and irreversible effects if the world’s temperature rises by another degree this century. FMCG companies face unavoidable pressure from consumers.

Companies must excel across all three aspects of ESG. Being a laggard in one ESG area will taint brand image and influence consumer decisions, despite progress in other areas. Many social and environmental issues exist within FMCG supply chains. Lack of traceability is no longer an excuse, and FMCG companies will be judged based on supply chain ethics. Many social and environmental issues exist within FMCG supply chains. Lack of traceability is no longer an excuse, and FMCG companies will be judged based on supply chain ethics.

GlobalData’s Q1 2021 global consumer survey found that three quarters of consumers demand more ethical or environmentally friendly products.

What are the main trends shaping the ESG theme in the consumer goods sector?

Technology trends

AI refers to software-based systems that use data inputs to make decisions on their own or help users make decisions. Different AI technologies can be used to drive sustainability initiatives across the FMCG supply chain, such as supply chain optimization, sourcing sustainable ingredients, and minimizing food waste. Vendor Afresh created a demand management platform to forecast demand and avoid waste. The platform uses historical data and machine learning regression algorithms to predict demand.

Blockchain is an electronic ledger of transactions that is continuously maintained in blocks of records. The ledger is jointly held and run by all participants and protected by cryptographic security. Blockchain technology is also referred to as distributed ledger technology as participants in a distributed network maintain a copy of an immutable ledger of transactions without the need for a single central version.

The internet of things, or IoT, describes the use of connected sensors and actuators to control and monitor the environment, the things that move within it, and the people that act within it. IoT technology can be used to tackle food waste, a big problem in the FMCG supply chain. 1.6 billion tons of food is lost or wasted globally every year, with a value of $1.2tn. The UN has targeted reducing 50% of food wastage by 2030 as part of its Global Opportunity for Sustainable Development Goals.

Macroeconomic trends

Consumer goods companies are beginning to realize the importance of ESG, and many will improve their ESG image by acquiring sustainable companies in the future. Some companies are using M&A to diversity their plant-based product offering. Hormel Foods is planning to acquire plant-based snack brand Planters from Kraft Heinz for US$3.4 bn. The acquisition will broaden Hormel Food’s snack portfolio and appeal to vegan consumers.

The impact of COVID-19 on ESG has been twofold from a social perspective. Operationally, it increased health and safety risks for staff members often working in restricted, crowded spaces, forcing companies to develop contingency plans to minimize risks. From a consumer preference standpoint, it increased demand for product safety and traceability, heightening the need to develop and effectively communicate stringent health and safety protocols.

Anyone born between 1991 and 2005 is a member of Generation Hashtag. This demographic, which incorporates both younger Millennials and older members of Generation Z, cannot countenance a world without the internet or smartphones, and their priorities and preferences are reshaping the corporate world. Generation Hashtag makes up around one-quarter of the world’s population, and its influence will only increase over the next decade as its members continue to enter the workforce.

What are the ESG challenges in the consumer goods sector?

Environmental challenges

FMCG companies have a huge impact on the environment. Lengthy global supply chains and agricultural sourcing can mean FMCG companies are significant contributors to carbon emissions and users of natural resources. According to the OECD, agricultural irrigation accounts for 70% of water use worldwide. FMCG companies also contribute heavily to landfills and waste, both in the manufacturing process and because of the prevalence of single-use packaging. Carbon emission reduction targets and offsetting schemes, conservation of natural resources, and recyclable packaging are three areas where FMCG companies should be excelling if they want to be successful long term. Companies that set targets must actively work towards them to avoid greenwashing.

Social challenges

FMCG companies are at huge risk of social issues due to their wide-reaching supply chains and vast array of stakeholders. Health and safety and human rights issues can occur at supplier sites, but these will be linked to the FMCG companies because they are profiting off social misconduct. This creates a very unethical brand image. Companies also need to protect consumer data, as personal data breaches are a human rights issue, damaging consumer trust and putting consumers at risk of further cyber-attacks. All companies, regardless of sector, must invest in cybersecurity to protect stakeholders and the company’s image.

COVID-19 disrupted operations, increasing health and safety risks for staff members often working in restricted, crowded spaces, forcing companies to develop contingency plans to minimize risks. FMCG products are essential to consumers, making staff in the supply chain key workers. They continued working when others were self-isolating or staying at home. Meat manufacturers have been linked to outbreaks of COVID-19, with many staff contracting symptoms.

Governance challenges

Corporate structure is key to good ESG practices, it is the cornerstone of good governance, and any corruption will trickle down and affect all stakeholders. FMCG corporate leaders also need a clear view of all supply chain activities to avoid social and environmental issues and ensure good governance across all their stakeholders. Speaking at Field Consulting’s webinar ‘Food for Thought: How does the food and drink sector get to net-zero?’ Emma Piercy, head of climate change and energy policy for the Food and Drink Federation, said: “We can’t manage what we can’t measure, and more needs to be done on reporting.” Actionable targets with timeframes for completion are key for corporate accountability on sustainability.

Corporate structure and shareholder representation are especially important for climate crisis initiatives, and FMCG companies are navigating this with varying degrees of success. In October 2020, P&G faced an investor rebellion, with over two-thirds of votes in favor of a shareholder proposal criticizing how P&G uses palm oil and forest pulp. They voted in favor of P&G disclosing its impact on forests. P&G executives face mounting pressure to improve the sourcing of forest materials, although the company argued in a statement: “We continually work to ensure that we are following responsible practices in our supply chains.”

Which are the leading companies focusing on ESG theme in consumer goods sector?

Leading companies focusing on ESG in consumer goods sector include BrewDog, Molson Coors, Diageo, L’Oréal, Danone PepsiCo, Nestlé Unilever, AB In-Bev and Philip Morris.

Market report scope

This report provides an in-depth analysis of the following:

• Unilever, AB In-Bev, and Philip Morris are governance leaders, and Coca-Cola, Heineken, Danone, and Diageo are governance laggards. Environmental and social leaders and laggards are also highlighted in the report.
• Senior executives are skeptical of corporate sustainability, with 74% considering it a marketing exercise or greenwashing.
• Supply chain management is the foundation for ESG progress for FMCG companies. The report contains examples of companies using AI and blockchain technologies to track distributed supply chains, increase transparency, and mitigate ESG malpractice. Unilever launched a blockchain pilot to track and manage transactions across its tea supply chain, verifying 10,000 supply chain contracts.

Reasons to Buy

• Position yourself for the future and create a holistic ESG strategy using GlobalData’s ESG framework. Assess sustainability policies, performance, and progress against GlobalData’s ESG framework. Identify and mitigate factors that contribute to negative consequences and pursue actions to improve ESG performance.
• Uncover the FMCG companies excelling in ESG operations with GlobalData’s thematic scorecard. Understand competitor activity and positioning in the ESG theme with the extensive coverage of each leading company’s activity in the companies section.
• Use the trends section to identify key technology and macro trends affecting and shaping the ESG theme, such as using blockchain ledgers for supply chain traceability.
• Discover the key challenges to FMCG companies across environment, social, and governance, with company examples of mitigating actions and malpractice.
• Understand the ESG action feedback loop, a market mechanism that drives reputational and competitive advantage, incentivizing further action and drawing more participation.