2Sustain

Degraded ecosystems. Climate change. Population growth. Increased consumption levels. These mounting pressures on natural resources are bound to drive higher costs along corporate supply chains in the future. However, have you ever wondered about the financial relevance of those higher costs? And, five or ten years from now, whom do you think will be bearing those costs –society or corporations?

These are certainly thought-provoking questions, and if you’re at all curious about issue like these, I strongly encourage you to check out “Rattling Supply Chains: The Effect of Environmental Trends on the Fast Moving Consumer Goods Industry,” a new report from the World Resources Institute (WRI) and A.T. Kearney. The study predicts that environmental costs will increasingly be born by private firms, and it takes a careful look at how this ecological-inflation, or “ecoflation,” will affect corporate revenues.

The details presented are fascinating. For instance, the report predicts that if businesses in the fast-moving consumer goods (FMCG) industry do not implement sustainable strategies throughout their supply chains, these companies could see earnings fall 13-31% by 2013 and 19-47% by 2018.

Of course, to arrive at estimates like these, WRI and A.T. Kearney had to make several assumptions about environmental trends. For example, the study assumes that, in the future, environmental costs will be driven by four specific factors: climate change policy, climate change impacts/water scarcity, deforestation, and bioenergy policy. Then, it assesses how these four drivers might affect prices on certain commodities, such as energy (oil, natural gas, coal), cereals and grains, soy, sugar, palm oil, and timber.

In addition to looking at how each of these commodity prices will be affected by environmental pressures, the report also offers strategies for companies to mitigate their ecoflation risks. When developing solutions, WRI and A.T. Kearney suggest that firms: 

• Recognize existing environmental impacts and dependencies.

• Thoroughly inventory current sustainability initiatives in-house, and with suppliers and partners.

• Rank environmental issues and opportunities based on their current and future potential impacts on costs, revenues, and reputation.

• Design a sustainability action plan that includes externalities and principal performance indicators.

Based on the ecoflation scenario described in “Rattling Supply Chains,” it’s clear that environmental pressures will present corporations with significant revenue risks soon –over the next five to ten years. But, the report also points out that companies can take action now to reduce those risks. Successful companies will be those who incorporate sustainability as a core business practice. As natural resources become scarcer, they’ll be the businesses best positioned to meet the environmental challenges of the future.