Sustainability for Tomorrow’s...

Sustainability for Tomorrow’sConsumerThe Business Case for Sustainability

Report was prepared in collaboration between Deloitte Touche Tohmatsu and the World Economic Forum January 2009

Bus-Sustainability-FIN 21.1.2009 8:56

The views expressed in this publication do not necessarily reflect those of the World Economic Forum.

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Contents

Preface 4

Executive Summary 5

Business Case Rationale 8

Macroeconomic View of Supply and Demand 11

A View of Resource Intensity of Products and Businesses 17

Financial Considerations for the Future 21

Social and Economic Aspects of Sustainability 25

Emerging Solutions for Business 27

Concluding Thoughts 33

Authors 34

Glossary 35

Endnotes 37


The World Economic Forum’s Consumer Industriescommunity is pleased to present this report as partof the Sustainability for Tomorrow’s Consumerinitiative. The Consumer Industries communitycomprises leading companies from the agriculture,food and beverage, retail and consumer goodsindustries. This initiative was kicked off in responseto the mandate of consumer industry chiefexecutives at Davos in January 2008. These chiefexecutives had the vision to view sustainability as anopportunity for innovation and growth, and withsupport from the consumer industries community,this initiative has spent the past year exploring theseopportunities in more depth.

The three pillars of this initiative are:1. The Business Case for Sustainability:

Understanding the implications of increasedconsumption and resource volatility on coststructures and business models and establishingthe need for disruptive innovation

2. Design Innovations for Consumer Industries:Exploring breakthrough lifecycle innovationstowards a sustainable consumer basket

3. Shaping the Framework Conditions: Having animpact on the future playing field for sustainabilityby engaging stakeholders such as investors andregulators

This report aims to present the business case forsustainability for consumer industries. The analysisconducted as a part of this project suggests thatsupporting sustainability is not only responsible, butalso makes good business sense. In addition topresenting the change imperative for businesses, thereport shares learning explored through this initiativeto guide companies along the path to sustainableconsumption and growth.

A broad network of partners has contributed to theongoing success of this project. We expressappreciation for the Project Board and Advisory

Board for their input to the initiative and specificallytheir attendance at the workshops held throughoutthe year. Along with numerous meetings and calls,three workshops were conducted, in Beaverton,Oregon, in May (hosted by Nike); New York City inSeptember as part of the Forum’s Industry Strategymeetings; and New Delhi in November inconjunction with the Forum’s India EconomicSummit. This report represents the collective input ofmore than 100 individuals who attended these andother meetings to discuss this issue. Partnercompanies also provided input to the in-depth lifecycle analyses conducted for a basket of consumerproducts as part of background research andanalysis.

The initiative’s Project Board includes: Best Buy Co.,Estée Lauder Companies, Nestlé, Nike Inc. as chair,PepsiCo, S. C. Johnson & Son, Sealed Air Corp.,The Coca-Cola Company and Unilever. Specialthanks to Kraft Foods, Nestlé, Nike Inc. and Unileverfor providing specific data to support business caseanalyses.

The Advisory Board includes Aron Cramer ofBusiness for Social Responsibility (BSR) as chair,Susan Burns of the Global Footprint Network, BrianCollins of Collins Design, David Cook of The NaturalStep, Helio Mattar of The Akatu Institute forConscious Consumption, Malini Mehra of Center forSocial Markets (CSM World), Ted Howes of IDEO,Mindy Lubber of Ceres, Simon Zadek ofAccountAbility, Jimmy Wales of Wikipedia.org andBill McDonough of McDonough & Partners.

This report was produced in partnership withDeloitte – our project adviser for this initiative – andspecial thanks are due for their support of bothcontent and the year-long process that hasproduced this new insight on business andsustainability.

Preface

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Robert GreenhillManaging Director, Chief Business OfficerWorld Economic Forum

Sarita NayyarSenior Director, Consumer IndustriesWorld Economic Forum


The Issue

There will be a tripling of the global middle class1 by2030. Each year, at least 70 million people will beentering this income bracket in purchasing powerparity terms. If this projection plays out, almost twobillion people will have joined the global middle classby 2030, bringing almost 80% of the world’spopulation into a middle income bracket.2

On the other hand, three planets Earth would berequired were everyone to adopt the historicconsumption patterns and lifestyles of the averagecitizen in the United Kingdom; and five planets ifthey were to live like the average North American.3

This conundrum creates a systemic challenge to ourworld economic system and the business community:how is it possible to create wealth for tomorrow’sconsumer and value for tomorrow’s businesses in anenvironmentally sustainable manner?

The Dialogue

This question inspired chief executives of theConsumer Industry community at the WorldEconomic Forum Annual Meeting 2008, to launch a12-month discussion: What does sustainability fortomorrow’s consumer mean? What is the businesscase to start meeting tomorrow’s consumerdemands today?

The community developed four hypotheses forconsumer industry executives and experts tochallenge:1. Global consumption patterns are out of balance,

with demand for resources and commoditiesgrowing more rapidly than supply despite thecurrent recession

2. Resource use intensity of the consumer industriesand associated supply chains is commensuratewith underpricing of natural resources, and notreflective of true resource costs

3. The financial sensitivity of consumer industrycompanies to resource volatility and constraints issevere

4. New business opportunities will emerge through afundamental rethinking of what successfulbusiness models may look like in the future

Over the course of 2008, a series of workshops washeld in the US and India to explore these themes.Over 100 consumer industry executives and expertsin sustainability, business strategy and productdesign took part in the discussions. Additionally,quantitative analysis of resource intensity andbusiness impact of resource scarcity on businessprofitability was conducted to evaluate the scale ofthe challenge faced by companies.

During the 12 months of discussion, the financialcrisis took hold and the threat of economicslowdown became a reality. Executives remainconvinced of the underlying growth potential ofconsumption from the new middle class, but felt thatthe financial crisis held critical lessons for thesustainability agenda: 1) there is a need to addresssystemic risks (financial, social, environmental)before they fracture the imperfect institutions andgovernance that currently restrain them; 2) the crisiscreates an opportunity to build back new anddifferent business management approaches; 3) intoday’s global system, wider collaboration, althoughdifficult, is the only effective way to address asystemic crisis.

Findings

Four business imperatives for a more sustainabletomorrow emerged from the dialogue:

• Meaningfully engage consumers – Consumersare confused about sustainability, and new waysto reshape the role of consumers will be requiredto proactively engage them in an experientialrelationship, beyond the purchase of a product.As consumers remain price sensitive, the onuswill be on business innovation to meet tomorrow’sdemands.

• Innovation is the only way forward – There is along-term need to dematerialize the economy andshift to new value-driven relationships whichfocus on meeting consumer needs, and sellingvalue rather than just selling more “stuff”.Incremental improvements will not be adequate tomeet the challenge of sustainability.

Executive Summary

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• Rethink core business models – With morevalue placed on externalities, a change from abuild, buy, bury mentality is inevitable. There willbe no “going back to normal” as the relationshipbetween product, service and consumerirreversibly evolves.

• Collaborate along the value chain and closethe loop – New forms of collaboration such asopen sourcing will be required with supply chainpartners and consumers, based around resourceefficiency, product take-back, and reverselogistics. Information sharing will become morecommon, for example, through standardization ofpackaging materials to boost recyclability.

In addition, shaping the policy to support and alignincentives acts as a fifth imperative and a catalyst forthese four.

Next Steps

The implications of these findings are clear: there aresystemic risks to sustainability which are embeddedin the current economic structure, which will need tobe addressed in a breakthrough manner rather thanthrough incremental improvements. It is up to theconsumer facing industries to be proactive, and theywill need to engage with their entire markets andsupply networks. New forms of collaboration will berequired to create a competitive commercialenvironment that enables room for innovation andvalue creation for all.

During the World Economic Forum Annual Meeting2009, the Project Board which has led this work isdiscussing its implications with a wider group ofchief executives in the Consumer Industries. The aimis to gain feedback and support to design andlaunch a major new initiative for the Forum, centredon the business innovations that will be required tomeet the demands of tomorrow’s consumer andtomorrow’s stakeholders in a sustainable manner.

A further session at the Annual Meeting 2009 isinviting executives from other industries to discussthis issue, exploring whether these imperativesresonate with leaders from consumer facingindustries such as automotives, aviation, ITC, media;

and from industries within the supply chain such aschemicals, mining and metals, logistics andtransport. Is there appetite from other companies inthe value chain to help build such an initiative?

Companies that take the lead on sustainability willbe market makers rather than market takers. Byshowing the consumer that there is no need tosacrifice price and quality for sustainability,tomorrow’s successful businesses will meaningfullyengage the next two billion consumers, the largestnew market the world has ever known. In doing so,they will secure stronger markets and a betterbusiness tomorrow. Politicians and governments arelooking for ways to regulate a better world and priceexternalities without compromising development orliving standards. If business can build sustainabilitywithout compromise to the consumer and voter,they will pave the way for better and more welcomeregulation.

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A working proposition for the newsustainability initiative: Tomorrow’sConsumer• What does a good future look like? Create a

normative vision of a sustainable world in2030, and the systems that will enable it,building on economic and environmentaltrends to challenge current assumptions

• Explore in depth the new business models thatwill be needed to deliver this breakthroughsystem, the new collaborations required, thenew types of consumer relationship todevelop, especially in different cultural contexts

• Engage key stakeholders (business,government, investors, consumers) to illustratehow this new system will create wealth fortomorrow’s consumer, value for tomorrow’scompany and lower systemic risks intomorrow’s economy

• Based on the evidence above, use thecollaborative power of collective stakeholdersto pull the structural levers which will changeindustry, financial sector and governmentalagendas to prepare for tomorrow’s needs


Getting involved

As this initiative expands through 2009, interestedpartners should please contact:Sarita Nayyar, Senior Director, ConsumerIndustries, [email protected] Krantz, Associate Director, EnvironmentInitiatives, [email protected] Mastioni, Associate Director, Retail &Consumer Industries,[email protected]

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“This is not the same old sustainabilitychallenge. This is not a fringe discussion anymore about using soft power. We’re beyondthat. Sustainability is no longer a ‘nice tohave’. It has become a human security andsurvival issue. We need a progressive riskmanagement agenda to help improve the livesof everyone who participates in tomorrow’sglobal economy.” Environmental and sustainability cluster summary

report (incorporating the viewpoints of 120international sustainability experts from public,

private and academic sector), Inaugural Meetingon the Global Agenda, Dubai, November 2008


Sustainability as an issue of relevance

Sustainability has received an unprecedentedamount of attention over the last several years. Chiefexecutives have aggressively set priorities and goals;companies have issued sustainability reports andundertaken numerous initiatives focused onenhancing environmental performance; and newreports and articles are released on the topic everyweek. Given this focus and attention, why the needfor yet another initiative and report highlighting therisks and opportunities associated withsustainability?

Consumer industry chief executives, in partnershipwith the World Economic Forum, undertook thisinitiative, “Sustainability for Tomorrow’s Consumer”,because they recognize the need to viewsustainability as an opportunity for innovation andgrowth rather than a new campaign or a responsefor the purpose of regulatory compliance. Thisinitiative represents the recognition by industryleaders that there is a need to go beyond thehistorical response to sustainability – largely focusedon incremental improvements – to achieve a desiredfuture state where human consumption is in balancewith natural systems.

Sustainability in the context of this initiative isfocused primarily on environmental impact, but notat the expense of the social or economicfundamentals. As such, it is important to take abroader view than just environmental sustainability.The 1987 UN Brundtland Commission developedone of the first definitions of sustainability:“Sustainable development is development thatmeets the needs of the present withoutcompromising the ability of future generations tomeet their own needs.”4

Several factors are contributing to heightenedinterest in sustainability by business: increasingvolatility in commodity and energy prices, morepublic and investor scrutiny of the traditional supplychain, the flattening world of information andcomplexity of value webs, and the inevitable long-term need for the economy as a whole to innovateto improve resource use efficiency in order to bothdeliver wealth for tomorrow’s consumer and sustainvalue creating companies. These factors mean that

some forward-thinking business leaders arebecoming more interested in sustainability as anissue right across the economic system, and howthey can collaborate to make this shift, rather thanjust how they each might be able to reduce cost ormeet regulatory requirement within their owncompany.

The immediate economic environment

“This is not the same old sustainability challenge;this is not a fringe discussion about soft power:we’re beyond that. This now requires hard power. Itis a security and survival issue.” This was theconclusion of more than 120 environmental andsustainability experts who met across 12 GlobalAgenda Councils at the World Economic Forum’sglobal brainstorming event held in Dubai inNovember 20085. The current refrain, “a crisis is aterrible thing to waste”, seems particularly apt.

Given the current state of the global economy, manyconsumer industry company leaders will have nochoice but to focus in the short term on cost cuttingand even business survival. However, thesustainability challenge is a shakeout in the making.The current economic environment offers awonderful opportunity for companies to reflect onhow they are run today, and what needs to bedifferent to be prepared for the future. As theframework conditions that govern business are notwithin the direct scope of just one company, acollaborative setting provides not only the leverageof scale, but also the opportunity to redefine howperformance is measured.

Economies moving out of the downturn and into arecovery cycle will present very compelling situationsfor sustainable technologies and products, thoughsome challenges may remain, particularly indeveloping economies. As companies plan ahead,there is the question, “When will things return tonormal?” It is increasingly likely that there will neverbe a return to the “normal” of the past two decades.Prices will stabilize over time and parts of theeconomy will be picking up again bit by bit, but itmay take years before economies return to previouslevels and when they do, the landscape will lookvery different than it does today.

Business Case Rationale

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Guiding hypotheses

The realization by industry leaders that there is anincreasingly strong business case for sustainabilityset the tone and agenda for this work. This premiseresulted in the development of a guiding set ofhypotheses which are addressed in this paper:

1. Consumption imbalances: Despite the currenteconomic downturn, global consumption patternsare out of balance – with demand growing morerapidly than supply – and this imbalance is likelyto grow exponentially in the future

2. Resource efficiency: The resource intensity ofconsumer industry products and business modelsis significant, not well understood, and notreflective of “true” resource costs

3. Bottom line: The financial sensitivity of consumerindustry companies to resource constraints issevere and will likely be exacerbated in the futurewhen resources begin to be priced moreaccurately

4. New opportunities: There is a remarkableopportunity associated with fundamentally re-evaluating and innovating how we do businessand who we do business with as significant newmarkets open up globally

New business models are needed to respond tothese challenges. Companies that embrace theseemerging realities will be best positioned to succeedover the medium and long term.

Need for systemic change

We are a consumption-oriented society. The successof individuals, businesses and societies as a wholehas historically been linked with growth inconsumption since the industrial revolution. Supplyand demand patterns, fuelled by current economicparadigms and continued population growth, putinto serious question the long-term viability ofcontinued growth in consumption-oriented behaviour.Even though currently there is a significant drop inglobal demand in response to the economicslowdown, consumption levels are expected to pickup again once economic activity resumes.

Two influences or triggers have the potential to shiftbehaviours: scarcity and value creation. Whether it isshortage of oil, water, financial liquidity orimagination, we are entering a new era wherescarcity will influence the architecture of society andbusiness. As business increasingly looks at meetingthe future needs of consumers, there is a new shifttowards value creation and innovative businessmodels that extend available resources. Thiscombination of “sticks” and “carrots” will result inincreasing wealth and value for tomorrow’sconsumers and businesses in an environmentallysustainable manner.

These influences and triggers are not future eventsfor deliberation; they represent the reality to be dealtwith today – a journey on which leading innovatorsare already embarking. Consumer industrycompanies are experiencing an unprecedentedperiod of change and volatility; even the underlyingassumptions on which current business modelswere built are changing. Access to cheap resourcesand labour, predictable consumption growth,stakeholder expectations, and traditional businessroles and accountabilities represent dynamicbusiness conditions that require new thinking.

Globalization, developing market demand, resourceconstraints and broader environmental concern havecreated a higher level of inter-connectednessbetween business and society. The evolution of thisglobal, interconnected model, combined with thevolatile business conditions we face today, ischallenging the business strategies of manycompanies.

Volatile input costs, greater societal expectationsand evolving policy directions are possible earlysignals of a transition from a historicallyconsumption-based model to one of sustainableproduction and consumption. Work through thisinitiative is intended to facilitate (and hopefullyaccelerate) the industry’s movement through thistransition.

The analysis, recommendations, and insights in thisreport are intended to represent a balanced view ofrisk and opportunity and highlight the need forcompanies to fundamentally rethink their valueproposition. While it is unlikely that this work willserve as the tipping point for achieving sustainable

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growth, it is hoped that it will serve to accelerateindustry’s understanding of the key issues requiredto shift environmental concerns into the core ofbusiness.

The long-term trends of resource scarcity along withrising consumer markets in emerging economies willendure the current economic crisis, and so it iscritical not to allow the urgent overtake theimportant. Much as business adapted quickly toglobalization, the challenges of sustainability presentan opportunity for new investments, new businessesand new business models. Collaborative innovationand a common understanding can increasemomentum towards a new future for consumerindustries.

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It is useful to look first at the economic elementsthat are shaping the argument for sustainability.

Globalization

Until the current global economic crisis, the worldeconomy had grown for 20 years at a paceunprecedented in economic history. Unlike previouseconomic cycles, this growth was driven by rapiddevelopment in emerging economies, allowing manyof them to narrow the historic gap with thedeveloped world. It also enabled hundreds ofmillions of people to move from poverty into a newglobal middle class with material disposable income.

The primary cause of this growth was the integrationof several major emerging countries into the globaleconomy – China, India and Russia, among others,went from self-sufficient economic policies toembracing globalization. This meant freer movementof goods, capital and even people acrossinternational borders. It also marked the adoption ofmarket-oriented policies, the end or reduction ofinternal and external trade restrictions, a reduction insubsidies and price controls, and even theencouragement of entrepreneurship.

This economic growth was additionally driven by anumber of specific events: the collapse ofcommunism in Eastern Europe, privatization trendsof the 1980s and 1990s which started in MargaretThatcher’s United Kingdom, “demonstration effects”

of the success of market-oriented policies indeveloped countries, and success of export-orientedpolicies in the newly industrializing countries of EastAsia.

These changes had a huge impact on the largerglobal economy. With roughly a billion new workers,globalization put downward pressure on wages andcosts – and also downward pressure on prices. Thiscontributed to the low inflation of the past 20 yearsand increased purchasing power globally. Thosebillion new workers also became a billion newconsumers in the global economy. This increasedthe size of the market into which global companiescould sell and also contributed to their efficiencygains.

Globalization, it seemed, was a very good thing.Some, however, have now suggested that thebenefits of globalization are waning and costs areincreasing, signalling perhaps that the era of lowinflation is coming to an end. Nevertheless, thereare, and will continue to be, consequences toglobalization.

First, and most notably, the huge increase indemand in emerging countries has put upwardpressure on global prices of commodities such aspetroleum and many types of food and minerals(Figures 1 and 2). This has caused redistribution ofglobal income, rising inflation and, in the case offood commodities, potential hunger. The recent drop

Macroeconomic View of Supply and Demand

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Figure 1: Crude oil price volatility

Sources: Energy Information Administration, http://www.eia.doe.gov/

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in commodity prices is in response to a dramaticdecline in economic growth globally. Wheneconomic activity begins to pick up again, so will thedemand forces that are expected to drive up thecommodity prices.

Second, globalization has contributed to increasingincome inequality in developed countries. Theincreased supply of low-wage labour has reducedthe demand for such labour in developed countries,thereby increasing the gap in pay between skilledand unskilled workers. This has given some basis toprotectionist sentiment in developed countries.

Third, rapid economic growth in emerging countrieshas placed enormous pressure on the physicalenvironment. Pollution in many emerging countrieshas become exceptionally bad and is already addingto public health costs and reduced life expectancy.In China, it has been estimated that a “Green GDP”,which incorporates the health and social costs of theenvironmental degradation, ends up costing 3% ofChina’s 2004 economic output – more than half atrillion yuan6. Environmental damage is oftenexacerbated by subsidies to food, fuels and energyuse designed to create jobs, increase consumptionand encourage economic growth.

It is estimated that one third of China’s emissions aredue to exports.7 Can the global economy continueto reap the enormous benefits of globalization whilesimultaneously dealing with the increasingly evidentenvironmental and social costs? Society wants tosustain economic growth and lift billions more out ofpoverty, especially given that we will have one billionmore consumers by 2020. They will expect to drivecars, travel by airplane, buy major electricappliances, and live in larger homes with airconditioning8,9. But we cannot afford to be asinefficient in the future in how we use resources andcreate waste as we have been in the past. We needto create new technological and managementapproaches, and entire new ways of doing business.

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The Rise of Washing Machines in India

As women’s roles have changed in Indian societyand as the middle class has grown, washingmachines have increasingly found their way intoIndian homes. The washing machine industrygrew by 22% in 2007, with sales ofapproximately 2.2 million units. The fullyautomatic category is particularly attractive tomanufacturers and retailers because of its 40%growth rate in 2007. One large consumerelectronics company has introduced a US$ 66washing machine that caters to the uniquepreferences of Indian families by eliminating thedrying cycle and also programming the machinesto automatically resume the washing cycle afterpower returns from an outage.

As appliance manufacturers refine their productofferings and marketing activities, more and moremiddle class Indians will likely purchase washingmachines, which will have significant impact onthe environment. Almost every washing machinereplaces hand-washing of clothes, requiring morewater and more energy. There are opportunitiesas well, as countless hours of women’s time willbe liberated, offering a potential to increaseeconomic output and productivity.

By 1940, 60% of the 25 million wired homes inthe United States had an electric washingmachine. By contrast of scale, India currently hasover 100 million homes with televisions, andwashing machines are rapidly catching up. In2008, the University of Leeds created a washingmachine that uses only a cup of water to carryout a full wash. The machine leaves clothesvirtually dry, and uses less than 2% of the waterand energy otherwise used by a conventionalmachine. The challenge that presents itself is howto embrace the lifestyle aspirations of these newconsumers, while incorporating the next practicesand technologies the world has to offer in theinterest of the local and global environment.10


With increased information flows and greatertransparency brought about by the spread ofinformation technologies, the rising middle class willbe perhaps less tolerant of societal failures. They willlikely rebel against environmental pollution, be moreattentive to the health and safety of the productsthey purchase, and be more focused on issues ofpublic health and societal well-being in general.Thus, a process of globalization that does notaddress these issues will likely be deemed a failurenot only to policy-makers, but by consumers as well.

Consumption patterns

Historically, energy and resource use have beenstrongly coupled with economic and populationgrowth. In the coming years, a disproportionateshare of both economic and population growth willtake place in developing countries as theireconomies strive to catch up with traditionallyWestern technology and lifestyles. Figures 3 and 4show the projections for population growth and GDPgrowth for key economies. As these economiesgrow, consumer markets will rise rapidly as a result –as will consumer spending, which will rise as a shareof GDP in many emerging markets, especially China.

As disposable income continues to increase,traditionally exporting economies like China will likelyshift away from growth based on exports andtowards growth based on domestic consumerspending.

Figure 5 compares consumer spending as apercentage of GDP and indicates the current gapbetween developed markets and emerging markets.This variation in consumer spending as a percentageof GDP will converge as the economies of theemerging markets grow further and mature. Notethat the drop in consumer spending as a percentageof GDP for China in the last decade confirms that itsGDP growth is not the result of growth in localconsumption; however, this will change as China’smiddle class expands further.

As consumption growth takes place, the number ofhouseholds moving from poverty to middle class willrise faster than the growth of the economy itself.When households grow out of poverty towards anew middle class with disposable income, theresource intensity of consumption – including food,energy, and raw materials – increases dramatically.

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Figure 3: Population projections

Source: UN Statistics and Population Divisions

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Thus, as emerging countries grow rapidly, thecorresponding demand for basic resources – suchas water, food and energy, as discussed below –also rises rapidly.

Water

Water security is the gossamer that links togetherthe web of food, energy, climate, economic growthand human security challenges that the worldeconomy faces over the next two decades. In manyplaces around the world, water has beenconsistently under-priced, and has been wasted andoverused as a result. Stocks of groundwater havebeen unsustainably depleted at the expense offuture water needs. In effect, the world has enjoyeda series of regional water “bubbles” to supporteconomic growth over the past 50 years or so,especially in agriculture. A number of these regionalwater bubbles are now bursting in parts of China,the Middle East, south-western US and India; morewill follow. The consequences for regional economicand political stability will be serious.

From 1900 to 2000, global freshwater withdrawalsgrew ninefold against a population increase of factorfour.11 According to the OECD, 2.8 billion, or 44%, ofthe world’s population lives in areas of high waterstress. This figure is expected to rise to 3.9 billion by2030 under a business-as-usual scenario. If presenttrends continue, the livelihoods of one-third of theworld’s population will be affected by water scarcityby 2025, and could impact annual global crop yieldto the equivalent of losing the entire grain crops ofIndia and the US combined (30% of global cerealconsumption)12.

With agriculture remaining a thinly-traded good,gains from trading so-called “virtual” water arelimited. Agriculture as a share of exports ininternational trade decreased from 46% in 1950 to9% in 2000. Changes in the geopolitical landscapewill start to occur, as water-scarce countries seektheir own water solutions. The global water forecastfor the next two decades, if no reform actions aretaken, is chilling; water scarcity will have a profoundeffect on global and regional systems, whether froman economic growth, human security, environmentalor geopolitical stability perspective.

Food

Food production needs to rise by 50% by the year2030 to meet the rising demand, according to aspeech by Ban Ki-moon, calling on world leaders toincrease food production and revitalize agriculture toensure long-term food security.13

When households in emerging economies enter themiddle class, they often shift from grain-based dietsto diets dominated by foods that are more resourceintensive such as meats, fruits and fresh produce.Given, for example, the large grain requirements formeat production, this leads to a disproportionateincrease in the demand for grain, one factoraffecting grain prices in recent years.

Additionally, the dynamics of food are inextricablylinked to water use, as more than 70% of globalfreshwater withdrawals are used for agriculture,

14but

inefficiencies in water use are high. Traditionalirrigation, in most water-scarce countries, consumesonly a fraction of the water it withdraws (about50%); the rest is wasted or evaporates. Trade is alsoa complicating factor, and as society looks tobiofuels and biomass for a solution to energysecurity, food supplies are likely to be affected.Domestic reform of water for agriculture is thereforeurgently required in many water-stressed countriesto produce “more crops with fewer drops”. Engagingin global trade can also help countries to managewater security issues, but the global trade systemfor agriculture is outdated and in urgent need ofreform. Systems thinking will be required to ensurethat strategic long-term solutions are developed andimplemented.

The volume of food production depends on anumber of key factors – market pricing, protection ofprivate property rights for farmers, availability ofenergy and water, cross-border trade, and impactsof climate change. Despite advances in agriculturaltechnologies and land productivity, most of thesefactors augur low increases in food production indeveloping economies.

Long-term economic growth will result in continuingincreases in the demand for grain and otheragricultural commodities, creating upward pressureon food prices, despite the current recession. To

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feed tomorrow’s consumers, there will be a need forfreer trade, transparent pricing, encouragedinvestment in agricultural infrastructure, and moreefficient use of the food that is already grown.

Energy

Today, energy usage is inefficient in many emergingmarkets, as well as in most of the OECD with thenotable exception of Japan. Although developednations may use more energy per capita, manydeveloping nations use more energy per dollar ofGDP. Using the most recent available data, the US(not generally the world’s role model on efficientenergy policy), is nearly five times more efficient thanChina in terms of energy consumed per dollar ofGDP.15

These inefficiencies are often the result of subsidies,which discourage conservation and investment inefficiency,16 creating, in many cases, anunsustainable economic burden while exacerbatingenvironmental damages. Energy subsidies in the 20largest non-OECD countries reached US$ 310 billionin 2007. In the past, efforts to change such policieshave been politically very unpopular; meaning, it isoften difficult to shift towards market pricing ofenergy. Still, such pricing of environmental and socialexternalities is a necessary ingredient in shifting toclean energy supply and more efficient use of allenergy.

In coming years, energy demand is expected togrow rapidly, especially as the effects of higherprices are not permitted to influence demand, oftenthe case for energy used in transportation. Energysupplies will rise, although not necessarilycommensurately with demand, in part becausemany countries with large potential supplies ofenergy are not actively encouraging investments innew capacity. The lack of encouragement forefficient energy use and demand-side managementwill compound supply shortfalls. This gap will lead tolong-term increases in energy prices worldwide,despite current oil prices reflecting the economicdownturn. If unregulated, this higher energy usagewill likely drive continued price volatility and havenegative effects on both business and theenvironment.

While energy demand increases globally, the US andEU will be simultaneously seeking to improve energysecurity. Energy policy decisions have strongconnections to water, climate and food securitypolicy, which can spin negatively or positively, andenergy policy must take into account theseinterlinkages. To add a level of complication,domestic energy security can be seen as a decisionto switch from relying on foreign oil to relying ondomestic water. Fast-growing economies, especiallyin the Middle East and Asia, will likely allocate lesswater to agriculture over the next two decades andmore to the growing demands of their urban, energyand industrial sectors. Under business-as-usual,water consumption for energy production isexpected to grow by as much as 165% in the USand by as much as 130% in the EU over the sameperiod, with serious consequences for water andfood security.

The business imperative

Considering that resource prices have recentlydropped dramatically, many business and politicalleaders may wonder why they should now botherwith investing in resource efficiency. The currentdrop in resource prices is related to extremeweakness in demand given the downturn in theglobal economy, and many leading economistsexpect the global economy to begin recovery by theend of 200917. Once a sustained recovery is underway, it is likely that resource prices will rise quickly.Investments in efficiency can begin to pay offimmediately and will position a company better asthe global economy recovers.

| 15

Figure 6: Current and projected fossil fuel demand

Source: Energy Projections: World Energy Outlook 2006, International Energy Agency

0

20

40

60

80

100

120

Oil Natural Gas Coal

Qu

ads/

Yea

r

2015 2004 2015 2004 2015

BrazilRussiaIndiaChinaEUUSA

2004 2015 2004 2015 2004 20152015201551025102 201520152004


Resource prices are likely to rise even higher andremain more elevated than in the past. If improperlyaddressed, policy decisions for resource securitycould lead to resource crises or even collapse.Business and governments will need to act togetherto ensure systemic solutions are put in place for thelong term. Additionally, changes in pricing and theperception of environmental risk will likely changeconsumer behaviour, especially in developedcountries.

Consumer industry businesses can act pre-emptively to meet such uncertainties by makingsome fundamental and mutually reinforcing changessuch as:• Investments in improved efficiency of resources• Diversification of resource sourcing• Changes in packaging and waste management• Changing supply chain patterns to minimize

transport costs• Efforts to emphasize environmentally positive

actions in brand positioning

To address these challenges and to avoid anescalation of personal interests at the expense ofpublic goods, there is a need to have a clearer viewof shared resources and interests. In game theory,this is referred to as the Prisoner’s Dilemma, while inenvironmental circles it is commonly known as the“tragedy of the commons”, in reference to a 1968paper by ecologist Garrett Hardin.18 Companiesacross different sectors will need to work together toshift the boundaries of their thinking from singlecompanies and products or lifecycles to systemsand interlinkages along the whole value network andbeyond.

Consumer response

Consumers play a big part in the calculus, especiallysince they tend to respond to economic incentivesmore than moral arguments. Looking at recenthistory, it will primarily be higher resource prices thatlead to changes in consumer behaviour. Businessestend to respond to consumers – if consumerschange, then businesses will change. The challengefor business is to know when best to anticipateconsumer behaviour and lead accordingly, and whento follow existing trends. The complexity of thisdilemma from a sustainability standpoint is

highlighted in the struggles of the North Americanautomotive industry in recent months.

Looking forward, it is likely that permanently highercommodity prices will alter consumer behaviour infavour of lower energy consumption, fewer materialpurchases, and more efficiently grown food. Thishappened before in the 1970s, when consumersshifted to smaller cars and more energy-efficienthomes. Similar shifts in consumption patterns arelikely to happen again, only permanently this time,reflecting that the world is a very different place thanit was 30 years ago. When oil prices spiked in 1973and 1979, global demand decreased by 2% and7%, respectively. By contrast, during theunprecedented oil price increases in 2008, globaldemand continued to rise, driven in part by demandin China and India.19

While the degree to which consumer and businessbehaviour shifts will depend largely on regulatorypolicies, farsighted companies need to help shapepolitical will and consumer opinions. Ultimately, thereis a common benefit in acting with long-terminterests – for the consumer, business andgovernment.

16 |


Consumer industry companies have longunderstood the importance of environmentalresources to their business models. Companieshave undertaken significant initiatives to improveresource efficiency and many have investedsubstantial effort developing lifecycle assessments(LCA), an analysis used to understand all inputs formaking and using a product. These LCAs quantifythe resource consumption and associated impact ofproducts through both the supply chain and theconsumer experience to the end of a product’s life.

The focus on resource intensity and LCAs is notintended to replicate work that has already beendone, nor is it intended to provide a precise anddetailed level of accuracy associated with resourceintensity. Instead, this work focuses on using existingdata to highlight unique aspects of resource intensityof consumer industries’ business models forsustainability considerations.

As part of this initiative, LCAs were evaluated acrossa range of consumer industry products andbusinesses. A set of specific products were chosento represent elements of a consumer basket.Availability of information in certain productcategories, for example white goods and appliances,proved to be a hurdle, highlighting the need for moreresearch in this area. Items assessed were a bottleof water, a cotton T-shirt, a cup of coffee, an athleticshoe, powder detergent, a polyester jacket, runningshorts and a package of cream cheese.

Based on these assessments, several recurringthemes emerged which represent unique aspects ofconsumer industry companies:• The large majority of resource consumption is not

within companies’ direct scope of control – anextended lifecycle perspective is critical tounderstanding true resource intensity

• Resource views of consumption do not align witheconomic views – many critical resources aresignificantly underpriced

• Resource consumption may be decreased notonly through technology, but also throughbusiness model innovations such as closed loopsystems for recovery of waste and product atend-of-life

Extended value chain

Most consumer industry companies measure basictypes of aggregate environmental information, suchas levels of energy usage, carbon emissions andwater usage. It is often difficult to calculateadequately the full resource footprint for a givenproduct whose scope of impact, by definition, cutsacross the entire value chain. Indeed, mostcompanies are only able to focus suchmeasurement “within their four walls” without takinginto account elements of a product’s lifecyclebeyond their own scope of control.

Even though a company can control only direct-input materials, its product will be directly affected ifthe supply of critical inputs is affected anywhere inthe value chain. One challenge in any LCA is to usemeaningful input boundaries; for example, whetherjust the direct inputs should be included or whetherthese should instead reflect the basic raw materialsused, irrespective of where the input enters the valuechain. Companies will need to look as broadly aspossible when conducting LCAs for their products.

In the example of a cotton T-shirt, a manufacturerneeds cotton, water and energy as resource inputs.It takes roughly 1,500 litres of water in a typical T-shirt batch manufacturing process. But a broaderview of the inputs is that growing the cotton requiredto make the T-shirts consumes 6,500 litres of water.And another 2,700 litres of water are used by theend consumer in washing the same T-shirts in theirestimated lifetime use. Water is a key input for manyother commonplace examples. Nestlé estimates thatthe amount of water that goes into a cup of coffeeranges, depending on whether rain water isaccounted for or not, from 5 (non irrigated coffee,rain water excluded) to 140 litres (irrigated coffee,rain water included).

A View of Resource Intensity of Products and Businesses

| 17


Product usage considerations

Product usage is a critical step that drives resourceintensity for specific products, as indicated above inthe need for water for washing a T-shirt. Forexample, analysis by Unilever in Western Europesuggests that to wash a load of clothes using awashing machine is almost three times more energy-intensive than to manufacture and distribute theneeded detergent.20 Other examples – like runningshorts or a polyester jacket – further highlight theenergy and water intensity involved with therepeated washing of everyday products. Both usefar more energy in their product use phase than theenergy cost to make them.

Such simple objects underscore the challenges thatso many consumer industry companies regularlyface – to design products that minimize theirenvironmental impact beyond the boundaries of thecompany itself. These considerations will have adirect impact on the price of manufacturing as wellas the price of ownership of the product, which inturn will affect a company’s bottom line.

Looking at an example from the food and beverageindustry, the LCA view for a month’s consumption ofcoffee, shown in Figures 7 and 8 below,

demonstrates the impact that upstream input,product use and end-of-life issues can have on theoverall “footprint” of a product – activities which arenot directly controlled by a consumer company. Inthis illustration, the energy used in the product-usephase, to heat the water required to make the coffeeas well as wash the coffee cup, is a larger costdriver than the energy used in manufacturing it.

18 |

Figure 7: Material view by lifecycle stage for a monthí s consumption of coffee

Sources: Consumer goods company data and public sources *Based on average usage pattern for 30 days

Material View Total

Water (L) 900 - 10 - 50 - 960 L

Electricity (kWh) 0.5 - 2 - 80 - 82.5 kWh

Natural gas (m3) 0.6 - - - - - 0.6 m3

Oil (L) - - - 4.3 - - 4.3 L

Plastic (g) - - 30 - - - 30 g

Paper (g) - - 25 - - - 25 g

Agro-input (kg) - 3.4 - - - - 3.4 kg

UpstreamInput

Sourcing Manufacturing Distribution Product Use Disposal

Figure 8: Resource intensity in equivalent dollars by lifecycle stage for a month’s consumption of coffee

Sources: Consumer goods company data and public sources*Based on average usage pattern for 30 days

0%

25%

50%

75%

100%

Upstream Input Sourcing Manufacturing Distribution Product Use Disposal

Agro-Input

Paper

Plastic

Oil

Natural Gas

Electricity

Water

% o

f T

ota

l Un

it C

ost

Lifecycle Stage

43.9% 1.1%

16.9%

33.5%

Input Cost View by Lifecycle Stage

4.6%

Scope of Direct Control Scope of Influence



Aligning resource and economic viewsof consumption

Lifecycle assessment results in a calculation ofresource intensity for a specific product and, byextension, businesses involved at various stages ofthe product’s manufacture and sale.

The LCA view for a cotton T-shirt (Figures 9 and 10)was developed using publicly available information.For simplicity, the key inputs evaluated are water,electricity, oil and cotton, while disposal andrecycling costs are assumed to be negligible. Theabsolute amount of water consumed in making asingle cotton T-shirt, 10,700 litres, far exceeds anyother input. In this example, it is apparent that, whilewater is the key resource consumed in making theproduct from a material standpoint, it is not thecritical cost driver – the oil use associated with itsdistribution is. The reason? The vast difference in theprice of both inputs – water is cheap by comparison.

The material view of an LCA looks very different fromthe economic view; and accordingly, prioritization ofresource versus process steps generally is different.The economic view of product LCA is highlysensitive to the pricing of the input commodities.The same economic view is also quite sensitive topricing of the impact of waste and by-products. If

carbon emissions and landfill waste had a price tagassociated with them, they would be significant inthe design and usage considerations of a T-shirt.This again goes beyond the boundaries ofmanufacturing, as a consumer will think about thetrade-off between washing it often versus its ultimatedisposal. In a future with higher prices onexternalities like water and waste, a consumer maybuy a synthetic alternative with different properties,or indeed not buy a T-shirt at all. Consumerbehaviour in turn will affect manufacturer behaviour,and companies will need to be prepared to managethe reprioritization driven by resource price changes.

| 19

Figure 9: Material view by lifecycle stage for a cotton T-shirt

Sources: Public Sources

Carbon: http://www.eoearth.org/media/approved/5/52/Textile_total_energy_input2.gif

Water: www.wetstyle.ca/en/faq_bathtubs.html

Energy: http://www.wupperinst.org/de/publikationen/wuppertal_spezial/uploads/tx_wibeitrag/ws27e.pdf; http://www.sciencealert.com.au/news/20080809-17917-2.html

Conversions: http://www.cs.umu.se/~thomash/seapac1.htm

Material View Total

Water (L) 6,500 - 1,500 - 2,700 - 10,700 L

Electricity (kWh) - - 2.8 - 16.0 - 18.8 kWh

Oil (L) - - - 0.03 - - 0.03 L

Cotton (g) - 70 - - - - 70 g

UpstreamInput

Sourcing Manufacturing Distribution Product Use Disposal

Figure 10: Resource intensity in equivalent dollars by lifecycle stage for a cotton T-shirt

Sources: Public Sources 21

0%

25%

50%

75%

100%


Cotton

Oil

Electricity

Water

% o

f T

ota

l Un

it C

ost

Lifecycle Stage

Input Cost View by Lifecycle Stage

50.0% 0.9%

34.9%

13.8% 0.3%



Industry consumption

Given both their direct and indirect impacts, consumerindustry companies play a critical role in building amore sustainable future. The scale of resourceusage of many consumer industry companies givesthem tremendous leverage to have a meaningfulimpact on the use of key resources. To get a senseof the scale of consumer industry consumption, it isestimated that a US$ 80 billion consumer industrycompany uses the energy equivalent of 40 millionlight bulbs over one year and as much water in asingle day as 5,000 Indians use in a year.

Consumer industry companies do not often have all ofa product’s resource drivers in their scope of control.The ability to change what is within their scope ofcontrol has led to a strong “incremental improvement”mindset – making the same product with lowerinputs and with improved efficiency. Given the scaleof consumption that is within their direct control,companies are right in doing this. At the same time,the current challenge will additionally require thatbusiness models be fundamentally redefined to includecollaboration across value chains to address thesepresent and future resource constraints. Companieswill urgently need to redefine their product andprocess models in light of sustainability consideration,and align their supply chains to support them.

It is clear that consumer companies can use full lifecycleviews of their business as a strategic means ofoptimizing their operations and value chains in waysnot otherwise possible. The added benefit to consumerindustry companies of innovating products andservices through a broader lifecycle view is that they

can better balance market and environmental impact oftheir activities. The prioritization of areas forimprovement may be driven by most economic benefit,more resource use reduction, or simply ease ofchange. Another lens for prioritization may be drivenby consumer need – is this resource input critical tomeeting consumer needs and adding value they arewilling to pay for, or does it just end up as waste?

Nevertheless, the effort required for better resourceefficiency through integration along the value chain issignificant. Breakthrough thinking is needed to adaptexisting operational strategies and to develop newsupply chains that achieve sustainability goals whilestill optimizing cost and service levels. This thinkingwill require additional collaborations upstream anddownstream in the value chain with both existingand indirect partners.

20 |

Water usage of a consumer industrycompany

Looking at businesses instead of products (Figure12), the cost structure and resource intensity ofan illustrative consumer goods companyunderscores the basic driver of our product-based economy – raw materials – whichinherently need to be converted to finishedproducts in what is currently a one-way stream.Few companies track the magnification of per-unit input into their business-level input. However,most companies do track the total amount ofinput for key resources.

In this example of water usage, based on publiclyavailable information for this consumer industrycompany, it is evident that even though thiscompany has been reducing its water-per-tonusage each year, its processes still require aconsiderable amount of water.

Figure 12: Water usage in a consumer goods company

Sources: Company Sustainability Report, 10K (2007), Price of Water (http://www.hcmud186.com/water_issues/water-rates.pdf)

4,2004,4005,000Specific Water Usage (litres / tonne)

2005 2006 2007

Total Company Production (tonnes) 18,802,000 20,660,000 21,742,000

Total Water Usage (litres) 6,561,358,035 6,344,577,075 6,373,360,227

Price per litre $0.0008 $0.0008 $0.0008

Total Water Cost $74,512,326 $72,050,510 $72,377,379

Water Cost as % of COGS 0.22% 0.20% 0.18%

Figure 11: Scale of consumption in consumer industry

The average Indian uses 135 liters of

water per day

• A German: 200 liters per day

• An American: 500 liters per day

• An $80 billion consumer company:

250 million liters per day, more than

what 5,000 Indians use in a year

*Per capita energy number includes energy required

to manufactureconsumed products

**Only includes direct energy used by company

Source: http://www.worldpopulationbalance.org

Estimates based on publicly available information

and company inputs

Source:

http://www.data360.org/dsg.aspx?

Data_Set_Group_Id=757

Company sustainability report

The energy footprint for an average

Indian is comparable to burning seven

60W light bulbs for a year

• An average German: 80 light bulbs*

• An American: 160 light bulbs

• An $80 billion consumer company:

40 million light bulbs**


The above analysis of resource intensity highlightsthe breadth and scale of consumption withinconsumer industries. However, economic viabilitymust be a core component of any discussion ofsustainability. To be prepared to serve tomorrow’sconsumer, consumer industry companies mustapproach business model innovation andsustainable growth in a manner informed by thecurrent and likely future economic realitiesassociated with resource consumption.

Many companies have looked at sustainabilitythrough the lens of risk mitigation, responding torising pressure from stakeholders, includingconsumers, retailers, regulators and non-profitorganizations. Based on the changed outlined here,it is clear that the next wave of sustainability will bedriven from the inside outwards, with a focus onfast-changing economic imperatives.

The global business model

Business models have evolved over the past severaldecades to take advantage of opportunitiesassociated with globalization. Successful globalbusiness models have been largely predicated onthe availability of inexpensive resources and labour.These models are based on taking in globallysourced, lowest-cost raw materials, converting theminto products and selling them for a profit – backinto global markets. Macro-level assessment ofsupply and demand would indicate that thesehistorical assumptions will continue to be challengedin the short and long term.

Figure 13 shows the key raw materials and inputsfor a typical consumer company which are directlytied to constrained resources. These are agriculture-based inputs and other raw materials, water, packaging,energy and distribution costs. Others costs includelabour as well as indirect costs. The latter areindirectly affected by resource price increases but forsimplicity sake are not included here.

Although different companies use varying portions oftheir revenue to cover the costs of these resources,one can clearly see in Figure 13 that agriculturalinput and other raw materials constitute the largestportion, while water cost is generally the smallest ofall (agricultural water is highly subsidized by thepublic sector). Irrespective of the variation acrosscategories, most consumer companies useapproximately 40% of their net-sales revenue tocover the cost of resource-based inputs – typicallyyielding gross profit margins in the 10% range. Thisis demonstrated in Figure 14, which shows theresource dependence and profit margin of a sampleset of companies in the consumer industry.

Bottom-line sensitivities

Now let’s take a closer look at the bottom-linesensitivity to rising energy costs for a specificcompany. For this company, with a revenue base ofUS$ 80 billion, a 1% increase in the price of energywill represent an income loss of US$ 9.5 million,unless these cost increases could be passedthrough to consumers. A similar 1% increase in theprice of water would remove “only” US$ 700,000

Financial Considerations for the Future

| 21

Figure 13: Range of corporate resource cost (% revenue) in consumer industry companies

Source: Estimates based on publicly available information and company inputs. Included companies represent food & beverage and diversified consumer goods sector of consumer industries

0% 5% 10% 15% 20% 25% 30% 35%

Distribution

Energy

Packaging

Water

Raw Materials

Figure 14: Resource dependence (% Revenue) of consumer industry companies

Source: Estimates based on publicly available information and company inputs

Typical companies have 40% of their revenue tied to covering costs ofresource-based inputs

0%

5%

10%

15%

20%

25%

% Revenue Covering Resource Costs

Pro

fit

Mar

gin

30% 35% 40% 45%

Less vulnerable

More vulnerable

Circles indicate different companies and their exposure to resource price volatility


from the bottom line. Though these amountsrepresent a rather small percentage of the totalprofitability of this company (0.05% and 0.005%,respectively), they are nevertheless significant inabsolute terms. And the effects of these priceincreases would begin to compound quickly if theinput price increases were several percentagepoints, as has been the case recently.

Other things being equal, and with no pass-throughof costs or with limited pricing power, a companycan find itself squeezed surprisingly quickly. For atypical company with profitability of 10%, the year-over-year impact of a 3.5% increase in the price ofresource-dependent inputs could erode that company’sentire profit margins within a decade (Figure 15).

22

The trend is hard to ignore. For companies using a

conventional global business model, i.e. companiesrelying on resource-constrained global inputs, thebottom-line impact of rising input costs over time willbe dramatic, regardless of the profit and costassumptions illustrated here. Furthermore, if all elseremains unchanged in these cost scenarios, theprofitability of companies will slowly evaporate just tocover the increased cost of inputs in an alarminglyshort time frame.

Who bears the costs?

Who really bears the cost of increased resourceinput – producers or consumers? Figure 16illustrates several scenarios that reflect possiblevaluations of a company based on variousresponses to rising input costs. The valuations areestimated assuming a company with US$ 40 billionin annual revenue, and the illustrated cost structure.

Control Scenario: Resource prices stay the same

Scenario 1: Company absorbs all of the resourceprice increases

Scenario 2: Demand halves in response to priceincrease of the product

Scenario 3: Consumer absorbs the resource priceincrease, maintaining the margin

22 |

Figure 15: Impact of 3.5% year-on-year resource price increase on profit margins

Source: Publicly available company data, Deloitte analysis

Pro

fit

Mar

gin

Number of Years

Resource costs

as a percentage

of Net Sales:

20%

25%

30%

35%

40%

We attempted to estimate a company’s valuation based upon who bears the burden for resource price increases

REVENUE

Net Sales $40 billion

EXPENSES

Cost of Goods Sold 50%

Raw Materials 26%

Packaging 9%

Water 1%

Energy 4%

Distribution 3%

Other Costs 7%

SG&A 30%

Interest Expense 2%

Income Tax Rate 25%

CORPORATE PROFIT

Illustrative Cost Structure Varying Company Valuations Due to DifferentResponses to Price Increases

Assume 3.5% annual resource price increase and 3% revenue growth

Costcategoriesimpactedby resourcevolatility

Company

absorbs all

resource price

increase

PerfectlyElastic

Demand

Demand

decreases due

to price

increases

ElasticDemand

112100

Consumer

absorbs

resource price

increase at

same profit

margin

No resource

price increase

PerfectlyInelasticDemand

ControlScenario

100 65 78 112

Company Valuation

10%

Figure 16: Company valuation scenarios


Needless to say, the net present value of thecompany, based on projected future cash flows, islowest in Scenario 1, where the company absorbsall of the price increases. It is also lower than theControl Scenario in Scenario 2, when the companypasses on the cost increase to the consumer whichresults in a drop in demand. In the unlikely Scenario3, the company valuation appears higher than eventhe Control Scenario, as consumers would have topay a higher price to maintain the existing margin.While this is common for extractive industries, inparticular oil and gas companies, consumer industrycompanies face hurdles from both consumers andregulators when it comes to passing on priceincreases.

This analysis reflects that the profitability drop in thefuture will pull down the current valuation ofcompanies once the marketplace accounts forprojected resource challenges. The goal of thisanalysis is not numerical precision, but rather toserve as input in defining strategic priorities so thatbusinesses can prepare for the imminent future.

Despite the drop in resource demand given thecurrent recessionary environment, resource priceincreases appear likely over the medium and longterm. Indeed, as economies emerge from thisrecession and demand begins to pick up, the inputprice response may be quicker than somecompanies might anticipate.

The true costs of resources

Looking beyond price increase trends for productsthat actually have a price tag, what if the true cost ofsome of the inputs began to be reflected? What ifwater was charged at 1 cent per litre, or if a pricetag on carbon emissions became the norm? What ifthere was a significant charge for waste or anythingthat was sent to a landfill? These are not idle questions,but real and spreading challenges which are alreadya reality in certain geographies and industries.

The current price of water varies across the globe,driven in part by the localized supply and demandequation for the area. Nevertheless, for manyproducts, the price of three dollars per 1,000 gallons(US$ 0.08 cents/litre) is negligible compared to thecost of other inputs. As a result, the cost of water israrely seen as a priority when taking an economicview of a product. The management of waterconsumption is often attributed to growing interest insustainability and social responsibility rather than thebusiness case. This may be changing.

Within consumer industries, the amount of waterused towards generating a dollar of revenue varieswidely based on the product in question. Of thecompanies evaluated, this ratio ranged from 0.13litres to more than 10 litres per dollar of revenuegenerated (Figure 17). The potential impact of risingwater prices will affect some producers dramaticallymore so than others.

| 23

Figure 17: Water use per dollar of revenue in a sample set of consumer industry companies


0

2

4

6

8

10

12

$0 $20 $40 $60 $80 $100

Lit

ers

of

Wat

er p

er $

of

Rev

enu

e

Company Revenue ($ Billions)

Circles indicate different companies andtheir exposure to resource price volatility

Figure 18: Impact of a water price increase of one centper liter on company profitability


High exposure on price of water

% D

rop

in

Pro

fita

bili

ty f

or

Incr

ease

d W

ater

Pri

ce

Liters of Water per $ of Revenue

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

0L 2L 4L 6L 8L 10L


An additional 1 cent per liter of water being usedcould have a dramatic impact on the profitability ofthese companies. Figure 18 quantifies thepercentage drop in the profitabiltiy of the samesample set of companies as in Figure 17 as a resultof this change.

These illustrations are intended to inform businessthinking on the overall sustainability of their productsand services in tomorrow’s consumer environment,and help add to the framework with which businessleaders and policy-makers can think about thebusiness case for sustainability.

Financial considerations dictate that consumerindustries can no longer take a business-as-usualapproach, with incremental improvement inresponse mainly to stakeholder pressure, at itscentre. Instead, tremendous economic considerationwill be required by businesses to think through howtheir products and services can and should evolveto deliver on the promise of sustainability. Moreexploration of best practices and potential actions todrive this necessary innovation is found later.

24 |


In addition to the direct financial considerations ofsustainability, the discussion is incomplete withoutacknowledging the equal importance of the social andeconomic aspects of sustainability. The complexityand the enormity of these challenges makes itdifficult, if not impossible, to quantify their impact infinancial terms. The impact, however, is real andaffects business decisions directly. This section aimsto provide a brief perspective on the interlinkages ofthese issues in business decision-making.

When exploring social injustice and its linkages withhealth and environment, there has been alongstanding mindset that contamination or pollutionwould occur in communities or regions with nosocial or political power to stop it. Within countriesthen, there was a disparity between social strata andenvironmental impact. With global challenges suchas climate change, the concept extends todeveloped versus developing countries and emittersversus those who suffer the impacts of climatechange. In a discussion about resources and publicgoods such as clean air and water, this raisesquestions about who pays either for contaminationor for the protection of natural resources andecosystem services provided by nature.

The willingness to pay to correct these societal andenvironmental injustices is inherently becoming abigger business issue. In a broader view, the socialand economic aspects of sustainability are tied tothe fundamental baseline of “resource” itself – be itoil, water, land, etc. There are many complex systeminterlinkages, for instance, between water use andenergy extraction, which makes for difficult policychoices.

The choice to build a dam on a river to generateelectricity, for example, may seem like the rightchoice for supporting sustainable energy generation.At the same time, the dam can have a negativeimpact on the local ecosystem of the river andagricultural use of the river water for irrigationdownstream. Such tradeoffs have consequencesbeyond just the financial case for sustainability, andit is clear that one must avoid scenarios in whichone need, energy, directly competes for a resourcewith another, in this case, water for growing food.Such decisions will impact local decline ordevelopment, and future ramifications will becomplex to manage.

Adding to the complexity, a recent global study wasundertaken by the IPCC to explore the impacts ofclimate change on water.23 The study highlights thesocial as well as the economic challenge of leavingwhat may be our most precious global resource totraditional market forces, showing why water is anexcellent example to use in the context of social andeconomic aspects of sustainability.

As a commodity, water is already complex andcontroversial, with inevitable pricing shocks andeconomic impact. When addressing social andeconomic tradeoffs, the subject of water becomesmore involved. Water is not a commodity in mostgeographies but rather a human right. Businessesexploring new markets often need access to publicwater supplies, and looking at pure economicsignores additional layers of both politics andpotential solutions.

If natural resources are not priced appropriately andare not being recognized at their true cost, they willnot likely be conserved accordingly. There are globaltrends towards pricing of externalities such as wateror carbon, and the fairness issue is still highlycontentious. There are those who believe that inmany countries, if water is priced appropriately, therewill emerge a whole new income stratification and abroader class of people facing basic survivalchallenges.

From a social perspective, extractives, including oil,are another classic example of resource tradeoffs.Drilling and mining often take place in economicallydeprived geographies, and present many challengesassociated with labour and resource contracts. Inwhat is often known as the resource curse, or the“paradox of plenty”, regions with an abundance ofextractive natural resources tend to have lowereconomic growth than countries with fewer naturalresources. This is often attributed to poorgovernance or corruption, volatile resource markets,and declines in competitiveness due to lack oftechnologies and investment associated with thetransformation of the natural resources.

Balancing these social pressures with environmentalones can add another level of complexity to abusiness that wants to be ethically sound. Thejuxtaposition of social investment does notnecessarily need to cost a company more if it

Social and Economic Aspects of Sustainability

| 25


recognizes the importance of supporting itsworkforce and local communities for the long term.

The same can be said about interlinkages with theenvironment. The Club of Rome commissioned astudy almost four decades ago which explored theimpact of economic and population growth on finitesupplies of resources. Titled “Limits to Growth”,24 itwas a seminal study for the environmentalmovement and its predictions on the challenges ofindustrialization, pollution, food production andresource depletion have today been largely fulfilled.The world of 2009 and the next 10 years will be verydifferent that the decade from 1974 to 1984, notleast because of a global population increase ofmore than 50%.

Taken separately, social, economic andenvironmental issues all may appear to compete forthe same investment and attention. In fact, thesecannot be regarded as separate issues, but a singleone involving long-term systemic thinking. Bythinking about the interactions among society,economies and the environment, businesses canplan more efficiently for the future and look beyondits shareholders to its broader stakeholders. Byinvesting in the local community and environment,stakeholders will ultimately be part of a win-win plan.

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Water: Innovative approaches to balancingbusiness needs with societal implications

A beverage company expanding into India, forexample, must resolve the issue of water useefficiency from an operational standpoint butmust also coexist within a community or area thatmay already have severe water access issues.

At a recent innovation workshop conducted inIndia to support this work, one of the teams wasprovided with retail bottled water as the productto “redesign” for the future. Balancing theconsumer need of having potable water with theneed to reduce waste in the form of a disposablecontainer, the team came up with a fundamentallynew business model based on an innovative rainwater harvesting system which eliminates theneed for water bottles themselves.

While removing one part of a consumer businessand the sale of bottled water to localcommunities, the group came up with a businessmodel built on the installation and leasing of therequired infrastructure, with empowerment oflocal women to manage the water through micro-franchising. This solution provides access to meetthe need of the local community – in this casewater – while making the business solution morerelevant to local needs and also helping supportthe local community by providing the muchneeded resource.

Businesses have such opportunities to bringcreative solutions using their economic strengthto invest in infrastructure that meets both theirown and wider public needs.


The business case for sustainability reinforces theneed for action and for fundamental, breakthroughchange. Companies and their chief executives needto focus on specific behaviours and actions that canbe undertaken now and in the future to acceleratethe pace of change towards sustainable growth andconsumption.

This initiative intends to provide equal perspectiveson both the change imperative and the way forward.Through a combination of analyses, discussions anddesign workshops conducted as part of this work, aset of design principles has emerged to guidecompanies along the path to sustainable growth: • Consumer engagement: Consumers must be a

part of the solution; however, they remainconfused as to the definition and impact ofsustainability. As such, any future innovation musthave a significant component of capacity-buildingto proactively engage consumers

• Breakthrough innovation: Step changes inperformance can come about as readily throughinnovative application of existing best practices aswith new and emerging thinking

• Reinventing business models: Businessesneed to be proactive in reinventing their businessmodels and challenging historical assumptions –inclusive of fundamentally rethinking their valueproposition, products and service offerings, andtraditional roles along the extended value chain

• Closing the loop: The most powerful solutionswill be created through collaboration across theextended value chain – involving manufacturers,suppliers, customers, retailers and consumers –from raw materials through product take-backand recycling

• Role of policy: Private sector will need toengage with government, civil society and mediaand help shape policy that supports and alignsincentives for migration towards a sustainableeconomy

Even though the discussion has been focused onresource intensity, the next steps for companiesaren’t necessarily to discourage consumption perse, but instead to consume in a more sustainableway themselves and offer products and services thatallow for sustainable consumption by tomorrow’sconsumer, reflective of environmental, economic andsocietal points of view.

Consumer engagement

While consumers are increasingly sensitive tosustainability issues, many do not comprehend theimpacts of their individual actions and consumption.Bridging this gap in understanding will be critical associety shifts into a more sustainable track, and inparticular with consumer industries that have theopportunity to influence demand. In learning tobetter understand and better meet the needs ofconsumers, there is also an opportunity to reshapecorporations.

Consumers are often confused or find sustainabilityconsiderations important only until money, availabilityor convenience gets in the way. Do consumers likeethical spending, for example? Or fair tradepractices? The answer is certainly yes to both – aslong as it doesn’t cost too much more. The reality isthat consumers remain very price-sensitive despitethe fact that, for all practical purposes, they have inmany markets already delivered a sustainabilitymandate to consumer companies. Exceptions tothis rule might provide interesting lessons inbehavioural shifts: for example, more than half of allbananas purchased in Switzerland are Fair Tradecertified, compared to less than 5% in many otherOECD markets.25

Sustainability is increasingly influencing the brandimage and consumer perceptions of consumerindustry companies themselves. An informedconsumer can also be good for business – there isevidence that motivated consumers are willing toshift their brand loyalties to “green” companies. Andas green product availability and environmentalawareness increase, sustainability may become akey consideration factor in choosing a brand, inaddition to price and performance.

A leading retailer in the United Kingdom was able toachieve a 6% increase in sales in its stores byimplementing a sustainability programme. Carefulanalysis attributed this increase to an improvedbrand image, centred largely on sustainability, in theeyes of the consumer.26 On the other hand,heightened media attention on negative publicitystemming from unsustainable practices (e.g.unethical sourcing, human rights issues, oil spills and

Emerging Solutions for Business

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other environmental damage) have adverselyimpacted consumer perceptions of some companiesand dampened sales for others.

In spite of the increased sensitivity and awareness,consumer companies still need to encourage asustainability transformation in consumer behaviour.Consumers may indicate a willingness to takeactions to reduce their environmental impact, butvery few act accordingly. The reasons for this aremultiple: lack of education on how to act, confusionon where to prioritize efforts, understanding of thecost benefits of living more sustainably. From thisperspective, it becomes clear that individualconsumers face many of the same hurdles ofbusinesses looking to act more sustainably.

As companies continue to learn about sustainability,there is an ongoing need to educate consumers onthe implicit and explicit value of consciousconsumption. This virtuous circle of learning will helpmeet the social imperative of sustainable society.Consumers themselves play a very important part insupporting sustainable consumption, and will needto be engaged beyond the purchase of a product.At the same time, new incentives can changebehaviour around product usage and end-of-life,which contribute significantly to the overall resourceintensity of a product. This presents certainchallenges, but also an opportunity to redefineconsumer loyalty and the experience ofengagement.

To be successful in the future, the consumerindustry will need to balance growing consumerdemand for sustainable products with demands forconvenience and price sensitivity. The onus ofsustainable markets must not lie entirely on theconsumer, as companies will need to continue toinnovate to meet the demands of tomorrow’sconsumers in a sustainable manner.

Breakthrough innovation

It is apparent that incremental improvements alonewill not deliver the step change required to meetincreasing demand with the limited resource baseavailable worldwide. Historical evidence shows thatincremental improvements have been able to initiatechanges in consumption patterns but notnecessarily bring about fundamental shifts to offsetincreases in global consumption. It is important tonote that this is not an issue of diminishedconsumption, but rather of increasing value to theconsumer with less impact on the environment.

Though often counter-intuitive, the role ofcollaborative innovation has proved successful incertain technology markets and shows potential toshare critical solutions towards achieving sustainableconsumption and production. Exploring win-winstrategies whereby collaboration offers critical mass,reduces risk to first movers or helps set standardssuddenly starts to make business sense.

Innovation does not need to be limited to the“invented here” edict. Companies should beembracing open-sourced innovation – choosingfrom and giving back to the open-source pool ofideas and resources. One concept that receivedsome attention in a recent workshop was the use of“copyleft” – as opposed to copyright – to open newideas for common use and further improvement.

While copyright licensing generally prevents othersfrom copying, adapting or reproducing a piece ofsoftware, document or art, copyleft, a play on theword copyright, gives everyone the right to copy andadapt a work as long as the result is bound by thesame copyleft scheme. Copyleft is a type of opensourcing and such examples can be used to learnhow to share ideas and progress on sustainability.

For many businesses, sharing information is againstthe competitive instinct, but when it comes tosustainability, there are new lines being drawn as towhat is a competitive advantage and whatinformation is a greater public good. Consumercompanies are particularly sensitive to sharing ideas,as much of the industry has been built on protectingbrands and products across all premier consumercompanies. While sharing knowledge is a new

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concept for consumer industries, the industry cantake the lead from information technology and otherindustries where the open sourcing of ideas hasaccelerated development.

For example, shared information on packagingmaterial technology may help standardize materialsused across the industry and value chain, which inturn would help increase recyclability.

Often, innovation is just the application of an existingpractice in a new situation or environment. The caseof improving fuel efficiency in automobiles, forexample, demonstrates how an existing product –the battery – put to a novel use by adding anelectric motor to a car in hybrid technology, providedthe step change necessary to improve the fuelefficiency of vehicles. This innovation candramatically increase the mileage of cars (Figure 19).

Further, although innovation is explicit in thebusiness solution going forward, it does notnecessarily require “new technology”. Manytechnology solutions exist today that couldinnovatively be put to use towards sustainableconsumption. For example, many consumer industrycompanies have started to use their waste as fuelfor generating energy. Kraft Foods now uses whey, aby-product of cheese production, to supply 30-35%of the fossil fuel needed to produce it.27 Not only isthe cost of energy saved, but the company does nothave to manage whey disposal. In this case,anaerobic digestion, a technology available for sometime, has been put to innovative use.

Reinventing business models

Consumer industry companies should also be readyto reinvent themselves in order to meet consumerneeds in a more sustainable manner. By focusing onmeeting consumer needs rather than on deliveringproduct, there are opportunities to fundamentallychange the global business models being used today.

Forward-thinking companies will be prepared tochallenge themselves and encourage disruptiveinnovations, even if these may appear to threatenexisting revenue streams. Leading companies canembrace the challenge of sustainability as anopportunity to design outdated products intoobsolescence and replace them with new businessmodels. Moving a step further, companies can beginto explore dematerializing the consumer experience.While this might not work for many food andbeverage products, it certainly applies to theirpackaging and associated waste.

It is important for companies to be prepared fortomorrow’s economic paradigm that is already on itsway. By offering products and services supportedthrough new business models, companies can setthemselves up to become more viable in a resource-constrained world. Tying together some of the ideasgenerated in a recent innovation workshop, thebusiness model of a clothing company could changefrom selling products to services.

For example, a typical T-shirt today is predominantlymade of cotton. As noted, the supply chain for thisT-shirt extends beyond the manufacturing companyto the cotton-grower on the supply side, and theconsumer who washes the T-shirt on the productuse side. The total embedded water of a T-shirt canbe up to 10,700 litres. Even a point-in-time analysisby Nike projects that at least 7,000 litres of waterare required to make a T-shirt.

The T-shirt could potentially be made of post-consumer waste instead of cotton: Consumersmight bring their refuse to a store where their T-shirts are made to their specifications while theywait. The experience can be more than a financialtransaction, but also a learning experience aboutsustainability for the consumer and an opportunity tolearn more about trends for the business. As such,

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Figure 19: Average improvements in fuel efficiency for US passenger cars

0

10

20

30

40

50

60

1980 1985 1990 1995 2000 2005 2010

Average car: 1.3% annual increase

Imported new: 0.01% annual increase

Domestic new: 1.1% annual increase

MPG for most efficient hybrid available

Ave

rag

e F

uel

Eff

icie

ncy

of

U.S

. P

asse

ng

er C

ars

(MP

G)

Gap difficult tocover with

incrementalimprovements

on existingtechnology

Source: U.S. Department of Transportation


the consumer is directly involved in supportingsustainable consumption while drastically reducingthe impact of a new product.

Though some of this may sound futuristic, thetechnologies to spin new fibres from post-consumerwaste are already in use28. In this case, hurdles towider implementation are associated less withtechnology than with availability and pricing ofmachinery and recycled materials. With a criticalmass creating appropriate demand, deployment oftechnologies such as these can be accelerated.

Closing the loop

A systems view of resource efficiency confirms theneed for collaboration along the value chain.Everyone along the chain of sourcing,manufacturing, consumption and end-of-life willneed to be coordinated for optimization of rawmaterials, product design, packaging, product useand end-of-life. Ultimately, there needs to be anaspiration to retire the traditional supply chain andthe “build, buy, bury” ethos to be replaced by acollaborative model which enables resources to gofull circle.

The current model of a one-way stream of rawmaterial to factory, user, then landfill, “build, buy,bury” is fundamentally unsustainable. Since productuse and waste reduction are key levers in loweringthe resource impact of consumer products, theconsumer experience will be key in shifting tosustainable consumption. One role consumers willplay in the future will be getting the product back forrecycling and reuse at the end of its natural life. Forexample, Best Buy has been expanding its e-wasterecycling programmes and in-store recycling kiosks,making consumers an ally in the sustainabilityprogramme.29 The concept of “take-back”, althoughsimple, is very powerful in closing the loop onproduction to consumption and back again.

Building on waste minimization is an easy priority forbusiness and does not threaten conventionalbusiness paradigms. Recycling and re-use are keysteps that can help reduce the demand for inputs bymaking a system more self-sustaining. Companiesshould also support product and business modeldesign whereby meeting consumer needs is not tiedto direct resource consumption or environmentalimpact in traditional ways. Utilizing take-backmechanisms, the consumer can become a part ofsustainable consumption.

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A living experiment on collaboration

A potential platform for collaboration identifiedduring one of the workshops of the project was aplatform for the exchange of products, ideas,challenges and solutions. Sharing could also helpminimize overlap in research and developmentcosts of new technologies. One small company,Innocentive, serves as a clearinghouse forcompanies looking for solutions to specificproblems, often solved by independentresearchers or scientists from completely differentfields.

Another example of sharing information is beingseen in a new database of chemicals which willbe made public, attempting to document all thehealth, safety and environment characteristics fortens of thousands of chemicals in much the sameway that Wikipedia has done this for informationon the Internet. Technology solutions like thisshould help facilitate collaboration in a moretransparent manner.

Taking a lead to create such a platform, Nike andCreative Commons are leading the initiative tocreate a system for “open collaboration”. Thisproject will develop strategies for using patentsand know-how, within a community networkframework, to facilitate and promote openinnovation. Other contributors can also join thenetwork by committing their patents orunpatented knowledge to the network.Collaborations with Science Commons andothers will ensure that the network grows in waysthat promote community-based innovation andsustainable research policies.


Role of policy

Sustainability is a complex issue, and in addition tothe compelling arguments of the business case,many actions by business will be guided by policysignals. Business will need guidance in terms of amore consistent and predictable regulatoryenvironment, and governments will need theinvestments and infrastructure financed by theprivate sector. As externalities such as waste, waterand emissions are gradually priced into businessmodels, there will be a need for betterunderstanding of the true costs of society’sconsumption. Currently, the burden of sustainabilitylies in the indirect degradation of public health,goods and services, and shifting this will requiresystems thinking and stronger cooperation betweenpublic and private sectors.

Past experiences of efficacy of environment-relatedpolicy to achieve the desired business response maynot be used as the indicator of future reaction in aworld with changing paradigms. As the landscapechanges rapidly, successes in environmentalsolutions will need to be scrutinized and adapted tothe new business environment. The challenges ofmaintaining the thin balance of human existencewith the resources of the planet are increasinglyapparent and the need for action is hard to ignore.

At the same time, policy intervention will be neededto pre-empt a system failure and irreparabledamage. The damage is not just to the environment,but also to businesses reliant on natural resourcesand ecosystem services, affecting the lives ofemployees, families and communities. Policy will beimportant in establishing tools to provide incentivesfor business and consumers to move in the rightdirection. The failure of policy-makers to allow pricesto respond to changing supply and demandconditions is already leading to resource shortages,excess consumption, and continued environmentaldamage.

Regulation can have a positive influence in levellingthe playing field for businesses engaging in activitiessupporting sustainability. New tools may includestructures for pricing of externalities using marketmechanisms, new markets for environmentalservices, promotion of infrastructure for renewableenergies and recycled materials, subsidy correctionand implementation of new incentives.

One of the foundational pieces for policy andregulation is common metrics for measuring directand indirect environmental impacts. Leadingbusinesses and NGOs have worked together tovoluntarily develop their own norms formeasurement, disclosure and reporting onsustainability actions and progress. However, therecontinues to be a lack of uptake and consistency inthe definition, measurement and monitoring of thesemetrics. This has a direct impact on the financialviability of investments in sustainability as these arenot generally acknowledged by financial marketsand investors that are generally focused on short-term results.

Each of these tools may be voluntary, mandatory ora mixture of both “carrots” and “sticks”, and all willrequire support from both business and governmentto create tools that work for the environment and forthe economy. By working together with policy-makers, business leaders can gain the support oftheir stakeholders on sustainability issues andaddress them with support from their executiveboards, their shareholders, employees andcommunities. More importantly, regulation canleverage these tools to create a level playing field, inwhich businesses taking the long-term view in termsof sustainable behaviour are not competitivelydisadvantaged versus those that take a shorter-termview.

Structured properly, regulation can ensure that allbusinesses, not just foresighted companies, get onthe right trajectory for sustainable consumption andproduction. It is the leading companies that will helpshape future policy and create the new businessesthat will thrive in tomorrow’s economy.

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Integrating sustainability into thebusiness model

In a world defined by resource constraints andchanging consumer behaviours, leading companiesare exploring sustainability as a catalyst oftransformational change towards credible newgrowth perspectives. For businesses to innovate,leaders need to collaborate in creating a commonvision of possible solutions.

Beyond a common vision, the crux of successultimately lies in execution and it is imperative thatbusinesses incorporate sustainability as a principleinto their core practices and decisions. Within acompany, building blocks that are needed are:incorporating sustainability in the strategic intent,giving it teeth in the form of targets and metrics,monitoring progress and rewarding successes.

Companies need to evaluate every step of theirsupply chain against the sustainability criteria – is theproduct designed to use minimal resources, is themanufacturing energy efficient, is the packaging lowimpact, is the product use efficient, and can it all berecycled at the end? Furthermore, is my businessmodel aligned to support such a set-up? And thebottom line – does it meet consumer needs?

Ultimately, consumer businesses are successful notby making and selling products, but by anticipatingand meeting the needs of their consumers.Businesses need to re-evaluate how they meetconsumer needs in the light of sustainability, and notbe limited by existing paradigms.

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Consumer industry leaders are rapidly adapting theirbusinesses to a very different economic situation inwhich we now find ourselves. At the same time,business leaders must also align the long-termcomponents of their business models, includingcritical sustainability dimensions, for the future. Thebusiness-case framework for sustainabilitydemonstrates the imminent financial pressure onexisting business models, and the opportunitieswhich can be created for new markets. Building onthis framework, this report can be used as a tool todemonstrate to management teams and otherbusiness stakeholders that actions taken by acompany which are significantly driven and shapedby sustainability requirements do make goodbusiness sense.

Looking forward, there are systemic risks tosustainability which are embedded in the currenteconomic structure. These will need to beaddressed in a breakthrough manner rather thanthrough incremental improvements. It is up to theconsumer facing industries to be proactive, and theywill need to engage with their entire markets andsupply networks. New forms of collaboration will berequired to create a competitive commercialenvironment that enables room for innovation andvalue creation for all.

This broader collaboration will require feedback andsupport from across many industries andstakeholders. There is a need to broaden thediscussion, to explore how these ideas resonatewith leaders from consumer facing industries suchas automotives, aviation, ITC, media; and from thoseindustries within the supply chain such as chemicals,mining and metals, logistics and transport.

In economic terms, sustainable business is anendogenous issue – it is driven by the championsthat shape the issue and the business landscape.Companies that take the lead on sustainability willbe market makers rather than market takers. Byshowing the consumer that there is no need tosacrifice price and quality for sustainability,tomorrow’s successful businesses will meaningfullyengage the next two billion consumers, the largestnew market the world has ever known. In doing so,they will secure stronger markets and a betterbusiness tomorrow.

Politicians and governments are looking for ways toregulate a better world and price externalitieswithout compromising development or livingstandards. Business can make this easier bybuilding sustainable products and services withoutcompromise to the consumer and voter. In doing so,they will pave the way for better and more welcomeregulation. These inevitable business innovations willproactively meet the demands of tomorrow’sconsumer and tomorrow’s stakeholders in asustainable manner, shaping the landscape for thecoming decades.

Concluding Thoughts

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Peter CapozuccaSustainability Practice Leader, Consumer ProductsDeloitte Consulting [email protected]

Lawrence HutterGlobal Consumer Business LeaderDeloitte United [email protected]

Ira KalishDeloitte Research Deloitte Services [email protected]

Shruti Rishi KahlonDeloitte Consulting [email protected]

World Economic Forum Team

Sarita NayyarSenior Director, Consumer [email protected]

Randall KrantzAssociate Director, Environment [email protected]

Marcello MastioniAssociate Director, Retail & Consumer [email protected]

Authors

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Brundtland Report*The report of the Brundtland Commission, formallythe World Commission on Environment andDevelopment, that deals with sustainabledevelopment and the change of politics needed forachieving it. The commission was convened by theUnited Nations in 1983 to address growing concernabout the accelerating deterioration of the humanenvironment and natural resources and theconsequences of the deterioration for economic andsocial development

Closed LoopA self-sustaining system in which any and all wasteand output is recycled back as input

Cradle to CradleAs an opposite to “Cradle to Grave”, the concept ofproduct design, manufacture and use in which“technical” elements are extracted and recycledback at the end-of-use phase and “biological”elements are disposed of in a natural environment

Copyleft*A play on the word copyright and describes thepractice of using copyright law to remove restrictionson distributing copies and modified versions of awork for others and requiring that the samefreedoms be preserved in modified versions

Ecosystem Services*The resources and processes supplied by naturalecosystems that mankind benefits from

Externality*Impact not directly involved in an economic decision,e.g. price of water, pollution

Resource FootprintTerm used to describe the measure of inputsrequired and impact on the environment for making,using and disposing a product

LifecycleA view of all the steps – from creation to disposal orrecycle – for a product – extraction of raw materials,processing, transport, use, reuse, recycling ordisposal

Lifecycle Assessment*The investigation and valuation of the environmental,economic and social impacts of a product or servicecaused or necessitated by its existence. Also knownas LCA

Limits to Growth*A 1972 book modelling the consequences of arapidly growing world population and finite resourcesupplies, commissioned by the Club of Rome andauthored by Donella H. Meadows, Dennis L. Meadows,Jørgen Branders, and William W. Behrens III

Open SourceInitially used to refer to computer software for whichthe source code is freely available. Now being usebroadly to suggest sharing of designs and ideas in acollaborative environment for collective progresstowards sustainable consumption

Public Good*In economics, a public good is a good that is non-rivalled and non-excludable. This means,respectively, that consumption of the good by oneindividual does not reduce availability of the good forconsumption by others; and that no one can beeffectively excluded from using the good

Resource Curse*Refers to the paradox that countries and regionswith an abundance of natural resources, specificallypoint-source, non-renewable resources like mineralsand fuels, tend to have less economic growth andworse development outcomes than countries withfewer natural resources

Resource Intensity*A measure of the resources (e.g. water, energy,materials) needed for the production, processingand disposal of a unit of good or service, or for thecompletion of a process or activity

Sustainability*In a general sense, the capacity to maintain a certainprocess or state indefinitely. In an ecological context,sustainability is defined as the ability of anecosystem to maintain ecological processes,functions, biodiversity and productivity into thefuture. In a social context, sustainability is expressed

Glossary

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as meeting the needs of the present withoutcompromising the ability of future generations tomeet their own needs. When applied in an economiccontext, a business is sustainable if it has adaptedits practices for the use of renewable resources andis accountable for the environmental impacts of itsactivities

Tragedy of the Commons*Describes a dilemma in which multiple individualsacting independently in their own self-interest canultimately destroy a shared resource even when it isclear that it is not in anyone’s long-term interest forthis to happen

Value WebA broader view of “value chain” to represent theinterlinkages across the value chains of differentproducts

Water StressWater stress occurs when the demand for waterexceeds the available amount during a certainperiod or when poor quality restricts its use. There isnot enough water for all potential uses, whetheragricultural, industrial or domestic. Annual availabilityof renewable fresh water is between 1,000 and1,700 cubic metres or less per person

*Source: Wikipedia

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Endnotes

1 Middle class here refers to those with an annualincome between US$6,000 and US$30,000

2 WBCSD Sustainable Consumption Facts andTrends, 2008

3 WWF Living Planet Report 20064 Report of the World Commission on Environment

and Development: Our Common Future,http://www.un-documents.net/ocf-02.htm

5 World Economic Forum Summit on the GlobalAgenda, Dubai, 7-9 November 2008

6 “Green GDP Accounting Study Report 2004issued”, Gov.Cn, http://english.gov.cn/2006-09/11/content_384596.htm

7 “The contribution of Chinese exports to climatechange”, Energy Policy, Volume 36, Issue 9,September 2008, pp. 3,572-3,577

8 “Brazil’s new middle class has growing appetitefor consumption”, Euromonitor International, 13September 2007

9 “The “bird of gold”: The rise of India’s consumermarket”, McKinsey Global Institute, May 2007

10 http://www.dailymail.co.uk/sciencetech/article-1025043/Spin-dry-The-washing-machine-needs-just-cup-water.html?ITO=1490%C3%9Bniversity

11 “The Changing Water Paradigm”, Peter Gleick,2001, pp. 127-138

12 World Economic Forum Global Water Partnership,Davos 2009 Update

13 FAO High Lever Conference on World FoodSecurity: the Challenges of Climate Change andBioenergy, Rome, 3-5 June 2008,http://www.fao.org/foodclimate/conference/en/

14 “Managing Our Future Water Needs forAgriculture, Industry, Human Health and theEnvironment”, World Economic Forum

15 Calculated based on data on energy demandfrom IEA and GDP data from IMF: The USaveraged 7,769 BTU per $ of GDP vs. 37,769 forChina

16 IEA World Energy Outlook 2008

17 “IMF chief sees economic recovery from late2009”, Yahoo News, 15 December 2008,http://news.yahoo.com/s/afp/20081215/pl_afp/financeeconomygrowthforecastworldimf_081215162503

18 Garrett Hardin, “The Tragedy of the Commons”,Science, Vol. 162, No. 3859 (13 December1968), pp. 1,243-1,248

19 IEA, World Energy Outlook, 200820 10 MJ per wash for machine use, including

heating, vs. 4 MJ per wash for ingredient &packaging sourcing, manufacturing & distribution

21 Carbon: http://www.eoearth.org/media/approved/5/52/Textile_total_energy_input2.gif Water: www.wetstyle.ca/en/faq_bathtubs.html Energy: http://www.wupperinst.org/de/publikationen/wuppertal_spezial/uploads/tx_wibeitrag/ws27e.pdf;http://www.sciencealert.com.au/news/20080809-17917-2.html Conversions: http://www.cs.umu.se/~thomash/seapac1.htm

22 Crude oil prices have been used as an indicatorfor commodity price increases. Crude oil priceshave increased 3.5% YoY in real terms fromJanuary 1978 to January 2008

23 “Climate Change and Water”, IPCC TechnicalPaper VI, June 2008

24 www.clubofrome.org/docs/limits.rtf25 http://www.time.com/time/europe/davos2005/

havelaar.html26 “Sustainability: Balancing Opportunity and Risk in

the Consumer Products Industry”, GMA andDeloitte Consulting Research Project, 2007

27 http://www.kraft.com/MediaCenter/country-press-releases/us/2008/us_pr_09172008.htm

28 http://www.environmentalleader.com/2008/11/26/plastic-waste-turned-into-armored-panels-fleece-jackets/

29 “Think Ahead. Corporate Responsibility: OurAspirations and Fiscal 2008 PerformanceReport”, Best Buy Co., Inc.

Endnotes

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The World Economic Forum is an independentinternational organization committed to improvingthe state of the world by engaging leaders inpartnerships to shape global, regional andindustry agendas.

Incorporated as a foundation in 1971, and basedin Geneva, Switzerland, the World EconomicForum is impartial and not-for-profit; it is tied tono political, partisan or national interests.(www.weforum.org)


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