© 2012 SAI Platform & IMD International. Not to be used or reproduced without permission. Building the business case for sustainable agriculture Dr. Aileen Ionescu-Somers, Director, Corporate Sustainability Management Platform, IMD
© 2012 SAI Platform & IMD International. Not to be used or reproduced without permission.
Building the business case for sustainable agriculture
Dr. Aileen Ionescu-Somers, Director, Corporate Sustainability Management Platform, IMD
© SAI Platform & IMD 2012
Borneo – palm oil, timber
East/Southern Africa – biofuels,
tuna
Arctic – cod and pollack, carbon
Amazon – soy, cotton,
livestock, timber
Coral Triangle – tuna, live reef fish, aquaculture
Indus Delta – rice, cotton, sugarcane
seriously impacts ecosystems…..
…….leading to global threats………….
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human beings…….
Human rights abuses
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….and our climate
Global warming
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But it also threatens the supply base of companies
The business case equation:
NO SUPPLY = NO BUSINESS
ITS NOT ROCKET SCIENCE
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Lets recap on the economics
Negative externalities in the form of sustainability issues arise as a result of market failures Market failures are related to the non-internalization of costs.
For sustainability issues, the cost is to society and the planet. If costs are not internalized, companies become “free riders”
leading to the “tragedy of the commons” (Hardins)
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And….
Overexploitation of common property resources, or the Tragedy of the Commons.
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Our baseline for business cases
There are various ways of internalizing these costs: Regulation, taxes, other economic instruments…… In the absence of regulation, companies have to find other “business
cases” for internalization of their negative externalities. Companies will internalise social and environmental issues and
include them in business strategy when: 1) Regulations demand it
2) A competitive advantage, thus a business case, justifies it
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Compliance level of activity under
consideration
Level of environmental and social performance
Economic value generated
Company creates economic value by improving environmental and
social performance beyond compliance
The Smart Zone: Economic gain is high
Further improvements of environmental and social performance lead to decreases in economic performance
Further improvements are associated with an economic loss
Seeking the “Smart Zone” or the business case
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When business cases for sustainability are weak/weakly exploited, it can be due to:
Multiplicity and high level of fragmentation of sustainability issues
Increasingly complex and long value chains Issues ranging in complexity from micro to macro and affecting companies at various stages in the value chain
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How companies build business strategy
Start with analysing the business context. Understand: The macro business environment Forces that determine positioning within the
markets they serve Governmental Socio-cultural Economic Competitive
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Porter’s model: the five forces of industry competition
Degree of rivalry: Cutthroat competition, oligopoly, dispersion….
Threat of substitutes: Other products or services, placing the company in a weaker position
Supplier power: to ask for and receive higher prices in their sales negotiations
Buyer power: to obtain better deals through comparison shopping, threat of desertion, or other ways of weakening producer bargaining power
Barriers to entry: Preventing new firms from competing and weakening the position of existing firms
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Guess what? Sustainability is no different……..To build a business case companies must….
Seek the economic relevance of sustainability
issues
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Stakeholder pressure
Which stakeholders are pushing the issues onto the corporate radar screen?
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Stakeholder pressure
Employees
SuppliersShare-holders
Customers
„Contextual Environment“:Public Stakeholder
„Transactual Environment“:Marketal Stakeholder
„Contextual Environment“:Political Stakeholder
Cor
pora
tions
Regulators
Governments
PoliticalParties
Associations
ConsumerOrg.
FinancialInstit.
NGOsEmployees
SuppliersShare-holders
Customers
„Contextual Environment“:Public Stakeholder
„Transactual Environment“:Marketal Stakeholder
„Contextual Environment“:Political Stakeholder
Cor
pora
tions
Regulators
Governments
PoliticalParties
Associations
ConsumerOrg.
FinancialInstit.
NGOs
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Which transmission belts are stakeholders using?
NGOs/Consumer Organisations
Communities/ Cities
Governments /Regulators
Media
International
Agencies
Employees/
unions
Scientific Community
Shareholders/ Investors/ customers
Business and Industry
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Example: Retailers
“Retailers are actively asking direct questions about what we are doing on sustainable agriculture” (Environmental Strategy Manager, F&B company)
“WalMart and Tesco are currently pushing very hard for more sustainable
products.” (Manager, CSR reporting. Supplier of F&B industry)
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Input Industry
Trade
Processor
Food Industry
Restaurants
Consumer Farming Systems
Catering
Retailer
How do stakeholders act as transmission belts for SA issues
Stakeholders
SA ISSUES
SA ISSUES
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Map and prioritize the issues
Which issues are the most relevant and why?
How do you prioritize the issues?
Strategy means choice
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Issues in the food and beverage industry
Pesticides Pollution Labor issues Traceability
Traceability Obesity Nutrition/Health Allergies Responsible marketing Alcohol abuse Advertising to children Packaging Waste Recycling
Pollution - chemicals/pesticides Soil degradation Long term raw material supply Human rights Poverty Child labor Worker health and safety
Eco-efficiency/Energy Water security Food safety/traceability Emissions (air and water) Packaging waste /Recycling Health and safety of employees Diversity Long term raw material supply
Human rights Work conditions Corruption/Bribery Fair trade Animal welfare
Corruption/bribery Quality Food safety/traceability Packaging waste Recycling Transport (‘food miles’)
Sustainable agriculture Prices/Farmers income Animal welfare Water security Sustainable aquaculture Fair trade Slavery Traceability
InputIndustry
TradeProcessor
Food Industry
Restaurants
ConsumerFarmer
Catering
RetailerInput
IndustryTradeProcessor
Food Industry
Restaurants
ConsumerFarmer
Catering
RetailerFarming systems
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The value of value drivers: Contribution of managing sustainability issues to value creation?
Product excellence or profit focus is no longer “does it”
Figures are not enough
Share prices are increasingly dependent on intangible concepts such as Brand value or Intrinsic corporate competence and knowledge
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What’s needed?
individual assessment of problems
application of managerial knowledge of global as well as local context of business decisions
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The added value of sustainability
Sustainability is about finding a balance between economic, social and environmental factors
Social engagement
Environmental performance
Economic viability
Superior value
creation
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So managing sustainability issues makes a clear contribution to shareholder value
* Adapted from Rappaport (1986)
Value Drivers Stakeholder satisfaction
Operational readiness Strategy
& vision
Innovation in product & services Others…
Dividends and share prices
Shareholder Value
Cost management
Sales growth
duration Capital deployed
Value Contribution
Employee motivation,
Working relation with regulators
EHS management
systems, Resource efficiency
Openness to society and new markets,
Brand value and reputation
More incentives for innovation, especially de-materialization services
Sustainability contribution (examples)
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Competitiveness
VALUE DR I VERS
Bottom line
« We can improve our brand value. »
« We can cash in on opportunities (new
products/services). »
« We can be a first mover.»
« We can save money by reducing costs. »
« We can attract talent.»
« We can reduce risk. »
Stakeholder Pressure
Water Obesity Animal welfare
Natural resources
Farmers livelihoods
Climate change
Sustainability Issues
Changing dynamics Food & Beverage Industry Business Context
A business case is not found. It has to be built.
RIGHT T H I N G T O D O
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“Sustainability means thinking ahead in terms of possibilities.”
Example of business case narrative: Heineken
Heineken has taken the initiative to promote sustainable farming with the objective to keep barley farming an attractive proposition to farmers. The initiative evolved to a partnership between growers, buyers and processing industry. The focus is on the complete rotation plan rather than on a single crop. Farmers are empowered to make smart choices regarding rotation scheme, soil scan, fertilisation plan and crop protection keeping in mind where they want to be in 10 years.
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Example of business case narrative: DeLaval
“Sustainable Dairy Farming is about reducing the environmental footprint of farms, while improving milk production, farm
profitability and the well-being of the people and animals involved. ”
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Example of business case narrative: Nestlé
“Creating Shared Value is a fundamental part of Nestlé's way of doing business that focuses on specific areas of the Company's core business activities – namely water, nutrition, and rural development – where value can best be created both for society and shareholders.”
Nestlé launched in August 2010 an initiative to create value across the coffee supply chain, from farmers to consumers to Nestlé own coffee brands.
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Example of business case narrative: Delhaize
“Sustainable sourcing must take account of how goods are produced and procured, as well as where. Our responsibility therefore ranges across issues of fair trade and fair conditions of work .”
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SA contribution (examples):
Reputation and brand value
Efficient use of resources
Employee motivation
Influence on regulatory regimes
S H A R E H O L D E R
V A L U E
Value Drivers Cost of Capital
Value Growth Duration
Operating Profit-Margin
Sales Growth Rate
Income Tax Rate
Working Capital Investments
Fixed Capital Investments
Value drivers
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SA issues affecting strategic risks and opportunities
Radical innovation for new products and markets
Economic performance
Social performance
Environmental performance
Incremental improvements in
SA issues affecting operational risks and opportunities
Economic value
• Brand value and reputation • License to operate • Attract and retain talent
Net cost decreases through incremental innovation
Net revenue increases through radical innovation
Systemization of sustainability issues, value drivers and relevant corporate activities
• Local air pollution • Biodiversity
• Health • Safety
• Human rights • Monetary flows
Obesity / Malnutrition Sustainable Agriculture
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Example: Ben & Jerry’s
27.5 31.6 31.9 34.9 37.9 42.8 47.66 52.94
43.2 38 36.7 35.5 33.633.6
32.31 26.4
22.8 20.616.6 14.4 14.4
10.910.8
1.2 2.34.1 7.3 7.4 6.2
5.52 4.571.4 1.8 2.11.2 1.15.4 7.5 10.7 6.4 4.9 4.4 2.51 2.6
10.2
0
10
20
30
40
50
60
70
80
90
100
2002 2003 2004 2005 2006 2007 2008 2009
Ben & Jerry's Haagen Dazs Own Label Green & Blacks The Skinny Cow Others
Ben & Jerry’s is a pioneer in supporting environmental and social causes with the direct engagement of consumers,
suppliers and local communities and results in the market are
consistently good.
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BARRIERS: to progress in sustainable sourcing
Reported pain points Engagement, change,
reward Knowledge
Resource leverage
Lack of middle management buy-in
Short-term mindsets Difficulties in integrating into
business models Organizational silos Difficulties in making the
business case across departments and BUs
Non-integration of CSM targets within rewards and evaluation systems
Lack of systematic performance measurement and benchmarking
Difficulties in building effective networks to support innovation
Barriers to transforming markets/educating customers
Lack of quantification tools of specific business cases and emerging risks
Lack of adequate KPIs
Poor cost effectiveness of
activities related to sustainable sourcing
Difficulties in pushing energy/resource savings to the next level
High cost of innovation Low impact on brand
leverage
Responses from 22 global organizations participating in CSM workshop in April 2009
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Example: Competitive disadvantage
Lower environmental and social standards in sourcing within emerging markets creates a ‘non level playing field’ Amongst other factors, this impacts competitiveness of
for ex. Europe-based manufacturing and services Where legislation either does not exist or is not complied
with, global companies are sometimes required to adopt a quasi-governmental role to legitimize themselves
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Managers shying away from complexity Fragmentation of demand for internalization of issues
Business relevance has not been thought through or
highlighted in the company strategy Value drivers for sustainability action unidentified and
unconsolidated in the minds of managers
Weak/weakly exploited business cases are due to:
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The food and beverage industry value chain: Issues
Pesticides Pollution Labor issues Traceability
Traceability Obesity Nutrition/Health Allergies Responsible marketing Alcohol abuse Advertising to children Packaging Waste Recycling
Emissions – Air, water, soil Soil degradation Long term raw material supply Human rights Poverty Child labor Worker health and safety
Eco-efficiency/Energy Water security Food safety/traceability Emissions (air and water) Packaging waste /Recycling Health and safety of employees Diversity
Human rights Work conditions Corruption/Bribery Fair trade Animal welfare
Corruption/bribery Quality Food safety/traceability Packaging waste Recycling Transport (‘food miles’) Health - obesity
Sustainable agriculture Sustainable aquaculture Animal welfare Water security Fair trade Slavery Traceability Biofuels
InputIndustry
TradeProcessor
Food Industry
Restaurants
ConsumerFarmer
Catering
RetailerInput
IndustryTradeProcessor
Food Industry
Restaurants
ConsumerFarmer
Catering
Retailer
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Value Drivers Food security/Health
Sustainability issues affecting strategic risks and opportunities
Climate Change
Radical innovation for new products and markets
H&S performance
Social performance
Environmental performance
Incremental improvements in
• Local air pollution • Biodiversity
• Human rights • Monetary flows
Sustainability issues affecting operational risks and opportunities
• Health • Safety
Economic value
• Brand value and reputation • License to operate • Attract and retain talent
Net cost decreases through incremental innovation
Net revenue increases through radical innovation
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Current focus of stakeholder pressure
Attention on known branded global US or European companies Small and medium-sized companies produce between
two thirds and three quarters of nation’s GNP and are often linked to similar social and environmental issues Large, often state-owned companies in emerging
markets are more ruthless in behavior but rarely in the spotlight
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Drivers and response
Processes determining actions Companies come under direct pressure from NGOs/media to take
responsibility for risks in the supply chain Companies decide that they need to include suppliers in their due diligence
to reduce risk An observed event with other companies/industries drives the agenda (i.e.
NIKE)
Drivers Reputation/brand/license to operate
- Risk management - Retaining or increasing brand value
Criteria determining actions Level of perceived corporate exposure to supplier behaviour Compliance requirements
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The Responsible Corporate Customer: Influencing suppliers
Clearly defined mission Ensure responsible environmental and social behaviour of suppliers
Set and enforce standards in the way suppliers do business
Ensure compliance with EHS regulation
Ensure production according to a number of set sustainability principles
Highly focused on “first tier” suppliers
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So what type of tools do companies use to source sustainably?
Assessment criteria Very industry specific Environmental criteria clear (EU a highly regulated environment) Social criteria much less defined
Actions, processes and tools Questionnaires Part of supplier qualifying process and audit approach (checklists), Supplier guidelines Monitoring/enforcement (beyond 'tick-box’ exercise) – “going and
seeing” Sign-offs on business principles Pilot projects Partnerships with suppliers/coaching companies (particularly in Asia)
– Preferred supplier relationships
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What do we mean by a partnership?
A sustainability partnership as a form of collaboration that includes one corporation and any other combination of actors (government, civil society and corporate sector) aims to create social and/or environmental benefits
Partnership “Hub”
Partner 2 Partner 3
Partner 1
Drivers Formation and utilization Effects
• Complexity • Stakeholder
pressure • Key individuals • Organizational
cultures
• On Companies • On other
partners • On Individuals • Social and
environmental • Industry and
business systems
Replication
• Scope • Barriers • Success
factors
• Composition • Mission • Barriers and success factors • Key processes and activities • Key events • Key strengths and weaknesses
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Examples of Roundtables/Dialogues/partnerships/ Certification Schemes
Aquaculture Dialogues
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To Value Creation
Sustainability Transparency Doing more good Changes to the core business
NGOs as partners Cost of doing business Supply/value chain focus
From Risk Management Corporate Social Responsibility
Public Relations
Doing less harm
Changes around the edges
NGOs as threats
Philanthropy
Internal corporate focus
Business response has changed
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A value proposition of sustainability for global companies
Sustainable agriculture is about securing long-term supply of strategic resources allowing companies to stay in business and keep producing what their customers and consumers need
Sustainability is NOT ONLY a differentiator, but
a potential entry point to markets and a key to securing existing markets
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Unilever’s business case for sustainable sourcing - agricultural
“Changing weather patterns, water scarcity and unsustainable farming practices are putting pressure on agricultural supplies.
Food security is increasingly under threat as standards of living improve around the world and demand for food increases.
Sustainable agricultural sourcing is therefore a strategic priority for our business and brands.
Building on many years of work in this area and as part of our Sustainable Living Plan, we have set ourselves a new target to source 100% of our agricultural raw materials sustainably by 2020”.
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State of the art in sustainable sourcing – 1
• Global companies concentrating on first tier suppliers –pressured industries (food/textiles/fish/luxury) going further
• Managers perceive that developed country suppliers listen and act quickly and efficiently. BUT regulatory compliance is still a dominant criteria
• Different non-regulatory initiatives going on , indicating corporate concern with risk/reputation – (redesign of guidelines/testing of pilot projects in the supply chain/ roundtables with suppliers)
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State of the art in sustainable sourcing – 2
• Asian supply chain challenges – cultural differences (EHS/human rights issues), non enforcement of regulation by government, monitoring and evaluation difficulties
• Long-term relationships based on trust/partnerships viewed as most effective strategy
• Overall, a step-by-step continuous improvement rather than a ‘leap-frog’ approach
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State of the art in sustainable sourcing – 3
Supplying companies are generally meeting expectations in Europe/US – if they do not, they lose business (‘open and shut’ business case).
Difficulties remain in Asia but…….. Corporate customers are very aware of where the power sits and
outside of compliance issues, can define own standards. although this has led to sometimes excessive diversity in
expectations and demands from suppliers Corporate suppliers are reactive rather than proactive unless
there is a product responsibility risk
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State of the art in sustainable sourcing – 4
What supplying companies should do differently Formalize management systems so as to manage customer
requirements Look back in the supply chain at own suppliers (‘domino effect’)
Be more proactive in asking for help – take on more of a
partnership/collaborative stance
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State of the art in sustainable sourcing – 5
• Success factors • Threat of impending legislation • Fewer suppliers facilitates monitoring and overview: For some industries,
numerous suppliers make it difficult to ‘keep tabs’
• Close, long-term, ‘trust’-laden relationships
• Stumbling blocks
• Non-enforcement of environmental and social legislation in Asia creates a non-level playing field, a competitive issue on a global level
• Lack of consumer willingness to pay: When consumers demand, business case is strengthened
• Prohibitive costs of going up further in the supply chain beyond first tier suppliers
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State of the art in sustainable sourcing – 6
Companies can expect…….
• Increasing stakeholder pressure transmitted up the value chain
• Over the next ten years, exponentially higher expectations leading to more stringent requirements
• Increased push for legislative solutions and enforced standards from NGOs (including consumer organisations) and unions
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State of the art in sustainable sourcing – 7
More homogeneous approaches, i.e. sharing of
questionnaires/checklists Implement of industry standards where feasible
Rationalization of lists of suppliers/reducing numbers to
increase level of overview
And more streamlining of requirements……….
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Burning issues
Should cradle to grave transparency be the ultimate goal?
• Are current corporate approaches really making a positive difference on the ground?
• What’s the solution to disparity between for example, European and Asian corporate social & environmental standards?
Cradle to grave transparency still a dream…….but managers say ‘We should still have that ambition’