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Sunday, May 19, 2024

The value of zero

How can FMCG companies create value in the net-zero transition, asks Sascha Lehmann?

With fast moving consumer goods accounting for a significant amount of global emissions, there is a growing demand from investors, customers, and regulators for clear plans that outline how these companies will reduce net emissions of greenhouse gases (GHG) to zero.

For years, many FMCG companies have responded to the prospect of a net-zero transition by introducing sustainability programmes that address regulatory mandates and the basic expectations of shareholders and non-financial stakeholders. But the reallocation under way to achieve net-zero goals is spurring demand for climate-friendly goods and services.

We’ve already started to see examples of where certain markets for green products and services are proving to be more lucrative than markets for conventional offerings. Certain categories in FMCG, such as food and nutrition, are seeing heightened consumer demand as green premiums start to kick-in. Far from creating a drain on the bottom line, sustainable products present an opportunity to generate a return on green investments. Our research shows that these fast-growing niches, such as meat substitutes, are also among the most profitable. Margins can be 15 to 150 percent higher than usual as demand for traditional products softens.

So how can growth-conscious executives start to consider the possibilities for sustainability-driven value creation and make credible efforts to pursue them?

The financial imperative of getting it right

Consumer companies can move towards ensuring a return is generated on green investments by understanding the value of green policy to end-customers. Are you willing to pay a higher price for the knowledge of a sustainably run supply chain? And is there a need to re-think pricing strategies with that in mind? If so, there may be a need to think more long-term than usual on ROI – a switch to sustainable practices may pay out in increased customer loyalty a few years down the line.

Communication is also key – customers need to know the green value you’re enabling, and understand how buying from you benefits more than just them.

Embedding new capabilities

To implement these kinds of sustainable policies, you should consider what abilities you will need in-house. As technologies and practices change to meet the requirements of net zero, there will be a need for cross-team skills that enable businesses to build their capabilities in a wide range of environmental, social and governance (ESG) commitments. That could mean improving the ability to calculate your carbon footprint or developing carbon accounting and tracking systems that let you share your products’ CO2 footprint with customers to highlight green value.

Going straight for a circular FMCG model

Looking to the future, FMCG companies need to develop a longer-term perspective on how their business model can be adapted to meet the net-zero transition, identifying and unlocking new opportunities for growth. Creating a detailed understanding of how different demand-supply scenarios might play out, how regulation could play into that, and what will drive consumers’ willingness to pay for sustainable products are prerequisites for success in the long term. 

Understandably, many CEOs worry that their company will get ahead of its customers, investing in new assets and incurring production-cost increases before those customers demand low-emissions offerings or are willing to pay green premiums. However, initial experience suggests that in many sectors, companies that are among the first to pursue net-zero opportunities may enjoy greater success.

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