8/14/2019 The Costs of Ecoflation

1/4

New government

policies and grow-

ing constraints on

natural resources

will orce compa-

nies to acknowledge

the environment as

one o the core costs

o doing business.

The Costs o EcolationPreparing business or a changing environment

The worlds natural resources are under

pressure. Human consumption has

compromised, diminished or destroyed

ecosystems, rising temperatures are

threatening plant and animal species,

and reshwater use in many areas ar

exceeds the long-term supply. Climate

change and growing populations are

leading to roiled markets and new

government regulations. Global busi-nesses are already dealing with the

consequences.

A new study by A.T. Kearney

and the World Resources Institute

(WRI) indicates that these environ-

mental trends and their consequences

could have even wider ramications

or businesses in the coming years.

According to the study, Rattling

Supply Chains: The Eect o Envi-ronmental Trends on the Fast Moving

Consumer Goods Industry, busi-

nesses in the ast-moving consumer

goods (FMCG) industry could see

earnings all by 13 to 31 percent by

2013 and 19 percent to 47 percent in

earnings in 2018 i they do not imple-

ment sustainable strategies through-

out their supply chains.

Sustainability initiatives will cost

more in the near term, as businesses

transorm their processes to meet new

requirements, but in the long run the

investment will be worth itpoten-

tially even crucial to survival. Tech-

nological advances, increased e-ciency and better-allocated resources

will not only allow companies to pro-

tect the environment but will also

help them reduce costs and limit their

exposure to increasingly scarce natu-

ral resources.

These trends present an unprece-

dented challenge or businesses, which

must remain protable while also pro-

tecting the ragile environment uponwhich they depend. Our ndings sug-

gest that the winners in this new world

order will be those rms that under-

stand the consequences and transorm

their business models to meet environ-

mental needs.

Soaring prices or commodities rom 2006 to 2008 brought renewed

attention to the scarcity o natural resources and the economic impact

o these shortages. In Rattling Supply Chains, a new study rom

A.T. Kearney and the World Resources Institute that examines the

eects o environmental change on business, research indicates that

ailure to adjust to changing conditions could cost companies up to

47 percent in earnings over the next 10 years. Companies must adapt

to this changing environmentwhich we call Ecofationand make

it an integral part o their business.

8/14/2019 The Costs of Ecoflation

2/4

FMCGs and EcofationIn Rattling Supply Chains, WRI and

A.T. Kearney investigate the impact o

Ecofation. Ecofation is a uture sce-

nario that combines existing economic

orecastsgovernment estimates on

population, consumption and gross

domestic product, which we call the

base caseand adds in projectedenvironmental trends and potential

public policy responses. It then mea-

sures their combined eects on the

FMCG industry, including producers

o ood, beverages and various house-

hold items.

Ecofation describes how our

major policy and environmental issues

play out over the next 10 years in a

hypothetical, yet distinctly possibleuture.

Climate change policy. The United

States implements a comprehensive

climate-change policy, which spurs

international cooperation and results

in a global price or greenhouse-

gas emissions.

Water scarcity. Climate change

causes more drought and water scar-

city throughout major agriculturalregions and leads to increased pro-

duction costs and declining yields.

Deforestation. Consumer products

companies in the United States and

the European Union voluntarily

agree to source all wood and ber

rom sustainability-certied orests,

and to increase the use o recycled

ber or all paper packaging and

products. Biofuels. Major biouel-producing

countries retreat rom existing man-

dates and apply sustainability require-

ments to all relevant government

policies.

We applied these scenarios to the

price implications or eight important

commoditiesoil, natural gas, elec-

tricity, cereals and grains, soy, sugar,

palm oil and timber. We selected these

resources because they represent large

expenses or FMCG rms, are used

throughout the supply chain, are at

risk or price volatility, are infuencedby policy changes, and are vulnerable

to water scarcity and other environ-

mental actors.

We then examined the eects

these commodity prices have on the

earnings o a set o FMCG companies.

This industry was selected because

o its size ($1 trillion), susceptibility

to environmental pressures, exposure

to a wide range o commodities andamiliarity to a wide audience.

The FindingsBased on our ndings, we estimate

a sharp reduction in earnings or

FMCG companies that do not devel-

op strategies to mitigate the risks posed

by environmental pressures13 to

31 percent decreases in earnings beore

interest and taxes (EBIT) by 2013,

and 19 to 47 percent EBIT decreases

by 2018 i costs cannot be passed on

to consumers.

The study broke down the Ecofa-tion price orecasts or the eight com-

modities. Following are the ndings.

Energy (oil, natural gas and

electricity). I the United States and

other major economies implement

new public policies, including caps

and taxes on carbon emissions and

mandates on eciency, inrastructure

and alternative uels, it will lead to

increased prices or energy comparedwith the base case projections. Climate

change will cause increasing short-

term disruptions and price spikes, and

water scarcity will aect existing

hydroelectric power plants. Biouel

policies could drive prices either posi-

tively or negatively: Increased biouel

consumption would lower the demand

and price or oil and gas, but a roll-

back o biouel mandates would bringprices back up. In all, by 2018, Eco-

fation is expected to bring sharply

higher energy costs compared with

the base case: increases o 22 percent

or oil, 40 percent or natural gas and

45 percent or electricity.

Cereals, grains and soy. Rising

oil prices rom government-enorced

carbon ees would increase transport

costs and drive the demand or biou-els, raising these crops prices in com-

parison with the base case. At the same

time, a discontinuation o existing

biouel policies would lower demand

and prices. Climate change and water

Leaders in this new

landscape will be

companies that

make environmental

sustainability one o

their core business

principles.

8/14/2019 The Costs of Ecoflation

3/4

scarcity could have an impact on pro-

duction o crops, although soy, wheat

and corn are not heavily irrigated and

need less water than other crops. Soy-

bean elds have prolierated in Brazil,

and a strengthening o deorestation

policies there would raise prices or soy.

Grains and cereals are expected to be

13 percent higher than existing 2018price orecasts, while soy is expected to

be 3 percent more expensive.

Sugar. Like other crops, new car-

bon policies would have an eect

on transport costs and the demand or

ethanol, and hence, sugarcane prices

would go up. Water scarcity issues are

not expected to aect sugar prices,

as Brazil is not at high risk or water

shortages. Sugar production may beless exposed to climate change, because

sugar beets, grown in northern coun-

tries, can be substituted or sugarcane.

Palm oil. Palm oil is widely used

in ood and personal care products

and, increasingly, as biodiesel, which

would mean a rise in demand (and

prices) i carbon policies are imple-

mented. Because it is grown almost

exclusively in Malaysia and Indonesia,palm oil prices would be susceptible to

localized foods, droughts and res

caused by climate change, as well as to

any local changes in deorestation pol-

icy. Its use as a biouel is increasing,

but that demand may go down because

o concerns about deorestation.

Timber. The production o pack-

aging material is heavily dependent

on energy prices, and would be vul-nerable to policy changes that aect

the price. In act, while deorestation

policies could become o increasing

importance as more pulp is imported

in coming years, ees on carbon are

expected to have the greatest impact

on timber prices. Climate change also

has a price impact, as it has led to more

orest res, pests and viruses, threaten-

ing the timber supply in many parts o

the world. Wood and paper products

are expected to have 13 percent higher

prices during Ecofation than in the

base case.

Four Steps to Environmental

AwarenessAlthough the earnings risk is serious,it is also avoidable. Companies have

the ability to nd solutions inde-

pendently and collaboratively, and to

transorm their operations to mitigate

this risk and take advantage o growth

opportunities. The ollowing are steps

to take immediately to address the

emerging environmental risks:

Understand environmental im-pact and dependenciesby examining

how environmental trends drive costs

and, when possible, seeking more sus-

tainable substitutes. For example, it

takes more than 200 liters o water to

grow the sugarcane to make one liter

o soda. This is signicantly more than

the 2.5 liters o water required to pro-

duce a bottle o soda in a bottling

plant. Companies that want to reduce

their impact on the environment must

rst understand the depth o their

dependencies.

Take inventory of current envi-ronmental initiatives throughout

the value chain to see what your

company, suppliers and partners are

already doing. Previous A.T. Kearney

surveys indicate that many companies

do not have a central group to coordi-

nate sustainability initiatives. Strong,

companywide communication is need-

ed to assess needs, discover gaps in

the value chain and reduce the timeit takes to better meet changing

requirements.

Prioritize environmental issues

and opportunitiesaccording to their

potential impact on costs, revenues

and reputation. This is where sustain-

ability initiatives can oer cost-saving

opportunities. For example, General

Mills reduced its Hamburger Helper

packaging by 20 percent, lowering thecost or materials and eliminating the

need or 500 distribution trucks per

year. ConAgra Foods incorporated

recycled plastic in its rozen meal trays,

removing 8 million pounds o plastic

rom landlls.

Chart a new courseby incorpo-

rating sustainability principles into

an action plan. Whether its a actory

retrot to increase energy eciency,a packaging redesign to reduce costs

or a product reormulation to decrease

dependency on commodities, smart

companies will incorporate sustain-

ability as part o a clearly dened plan

Although the

earnings risk

rom Ecofationis serious, it is

also avoidable.

8/14/2019 The Costs of Ecoflation

4/4

A.T. Kearney is a global strategic management consulting rm known or

helping clients gain lasting results through a unique combination o strategic

insight and collaborative working style. The rm was established in 1926

to provide management advice concerning issues on the CEOs agenda.

Today, we serve the largest global clients in all major industries. A.T. Kearneys

oces are located in major business centers in 35 countries.

A.T. Kearney, Inc.

Marketing & Communications

222 West Adams Street

Chicago, Illinois 60606 U.S.A.

1 312 648 0111

email: insight@atkearney.com

www.atkearney.com

Copyright 2008, A.T. Kearney, Inc. All rights reserved. No part o this work may be reproduced in any orm without written permission rom the copyright holder.

A.T. Kearney is a registered mark o A.T. Kearney, Inc. A.T. Kearney, Inc. is an equal opportunity employer. 7-08

ounded on sound principles. The

portolio should include short- and

long-term strategies that can have

a lasting impact.

Winning in a ChangingLandscapeThe worlds dependence on natural

resources is ragile. As the econo-mies o developing countries grow,

worldwide consumption will increase

and place greater demands on nite

resources.

Leaders in this new landscape

will be companies that make environ-

mental sustainability one o their core

business principles. These companies

will not only be able to anticipate the

changes, but also to collaborate with

suppliers and other stakeholders toaddress them.