The Costs of Ecoflation
Preparing business for a changing environment
Soaring prices for commodities from 2006 to 2008 brought renewed
attention to the scarcity of natural resources and the economic impact
of these shortages. In “Rattling Supply Chains,” a new study from
A.T. Kearney and the World Resources Institute that examines the
effects of environmental change on business, research indicates that
failure 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 environment—which we call Ecoflation—and make
it an integral part of their business.
The world’s natural resources are under earnings in 2018 if they do not imple- New government
pressure. Human consumption has ment sustainable strategies through-
compromised, diminished or destroyed out their supply chains. policies and grow-
ecosystems, rising temperatures are Sustainability initiatives will cost
threatening plant and animal species, more in the near term, as businesses ing constraints on
and freshwater use in many areas far transform their processes to meet new
exceeds the long-term supply. Climate requirements, but in the long run the natural resources
change and growing populations are investment will be worth it — poten-
leading to roiled markets and new tially even crucial to survival. Tech-
will force compa-
government regulations. Global busi- nological advances, increased effi-
nesses are already dealing with the ciency and better-allocated resources
consequences. will not only allow companies to pro-
nies to acknowledge
A new study by A.T. Kearney tect the environment but will also
and the World Resources Institute help them reduce costs and limit their
the environment as
(WRI) indicates that these environ- exposure to increasingly scarce natu-
mental trends and their consequences ral resources.
one of the core costs
could have even wider ramifications These trends present an unprece-
for businesses in the coming years. dented challenge for businesses, which of doing business.
According to the study, “Rattling must remain profitable while also pro-
Supply Chains: The Effect of Envi- tecting the fragile environment upon
ronmental Trends on the Fast Moving which they depend. Our findings sug-
Consumer Goods Industry,” busi- gest that the winners in this new world
nesses in the fast-moving consumer order will be those firms that under-
goods (FMCG) industry could see stand the consequences and transform
earnings fall by 13 to 31 percent by their business models to meet environ-
2013 and 19 percent to 47 percent in mental needs.
FMCGs and Ecoflation We applied these scenarios to the FMCG companies that do not devel-
In “Rattling Supply Chains,” WRI and price implications for eight important op strategies to mitigate the risks posed
A.T. Kearney investigate the impact of commodities—oil, natural gas, elec- by environmental pressures — 13 to
“Ecoflation.” Ecoflation is a future sce- tricity, cereals and grains, soy, sugar, 31 percent decreases in earnings before
nario that combines existing economic palm oil and timber. We selected these interest and taxes (EBIT) by 2013,
forecasts—government estimates on resources because they represent large and 19 to 47 percent EBIT decreases
population, consumption and gross expenses for FMCG firms, are used by 2018 if costs cannot be passed on
domestic product, which we call the to consumers.
“base case”—and adds in projected The study broke down the Ecofla-
environmental trends and potential tion price forecasts for the eight com-
public policy responses. It then mea- modities. Following are the findings.
sures their combined effects on the Leaders in this new Energy (oil, natural gas and
FMCG industry, including producers electricity). If the United States and
of food, beverages and various house- landscape will be other major economies implement
hold items. new public policies, including caps
Ecoflation describes how four companies that and taxes on carbon emissions and
major policy and environmental issues mandates on efficiency, infrastructure
play out over the next 10 years in a make environmental and alternative fuels, it will lead to
hypothetical, yet distinctly possible increased prices for energy compared
future.
sustainability one of with the base case projections. Climate
• Climate change policy. The United change will cause increasing short-
States implements a comprehensive
their core business term disruptions and price spikes, and
climate-change policy, which spurs principles. water scarcity will affect existing
international cooperation and results hydroelectric power plants. Biofuel
in a global price for greenhouse- policies could drive prices either posi-
gas emissions. tively or negatively: Increased biofuel
• Water scarcity. Climate change consumption would lower the demand
causes more drought and water scar- throughout the supply chain, are at and price for oil and gas, but a roll-
city throughout major agricultural risk for price volatility, are influenced back of biofuel mandates would bring
regions and leads to increased pro- by policy changes, and are vulnerable prices back up. In all, by 2018, Eco-
duction costs and declining yields. to water scarcity and other environ- flation is expected to bring sharply
• Deforestation. Consumer products mental factors. higher energy costs compared with
companies in the United States and We then examined the effects the base case: increases of 22 percent
the European Union voluntarily these commodity prices have on the for oil, 40 percent for natural gas and
agree to source all wood and fiber earnings of a set of FMCG companies. 45 percent for electricity.
from sustainability-certified forests, This industry was selected because Cereals, grains and soy. Rising
and to increase the use of recycled of its size ($1 trillion), susceptibility oil prices from government-enforced
fiber for all paper packaging and to environmental pressures, exposure carbon fees would increase transport
products. to a wide range of commodities and costs and drive the demand for biofu-
• Biofuels. Major biofuel-producing familiarity to a wide audience. els, raising these crops’ prices in com-
countries retreat from existing man- parison with the base case. At the same
dates and apply sustainability require- The Findings time, a discontinuation of existing
ments to all relevant government Based on our findings, we estimate biofuel policies would lower demand
policies. a sharp reduction in earnings for and prices. Climate change and water
scarcity could have an impact on pro- expected to have the greatest impact grow the sugarcane to make one liter
duction of crops, although soy, wheat on timber prices. Climate change also of soda. This is significantly more than
and corn are not heavily irrigated and has a price impact, as it has led to more the 2.5 liters of water required to pro-
need less water than other crops. Soy- forest fires, pests and viruses, threaten- duce a bottle of soda in a bottling
bean fields have proliferated in Brazil, ing the timber supply in many parts of plant. Companies that want to reduce
and a strengthening of deforestation the world. Wood and paper products their impact on the environment must
policies there would raise prices for soy. are expected to have 13 percent higher first understand the depth of their
Grains and cereals are expected to be prices during Ecoflation than in the dependencies.
13 percent higher than existing 2018 base case. Take inventory of current envi-
price forecasts, while soy is expected to ronmental initiatives throughout
be 3 percent more expensive. the value chain to see what your
Sugar. Like other crops, new car- company, suppliers and partners are
bon policies would have an effect already doing. Previous A.T. Kearney
on transport costs and the demand for surveys indicate that many companies
ethanol, and hence, sugarcane prices Although the do not have a central group to coordi-
would go up. Water scarcity issues are nate sustainability initiatives. Strong,
not expected to affect sugar prices, earnings risk companywide communication is need-
as Brazil is not at high risk for water ed to assess needs, discover gaps in
shortages. Sugar production may be from Ecoflation the value chain and reduce the time
less exposed to climate change, because it takes to better meet changing
sugar beets, grown in northern coun-
is serious, it is requirements.
tries, can be substituted for sugarcane. Prioritize environmental issues
also avoidable.
Palm oil. Palm oil is widely used and opportunities according to their
in food and personal care products potential impact on costs, revenues
and, increasingly, as biodiesel, which and reputation. This is where sustain-
would mean a rise in demand (and ability initiatives can offer cost-saving
prices) if carbon policies are imple- opportunities. For example, General
mented. Because it is grown almost Four Steps to Environmental Mills reduced its Hamburger Helper
exclusively in Malaysia and Indonesia, Awareness packaging by 20 percent, lowering the
palm oil prices would be susceptible to Although the earnings risk is serious, cost for materials and eliminating the
localized floods, droughts and fires it is also avoidable. Companies have need for 500 distribution trucks per
caused by climate change, as well as to the ability to find solutions inde- year. ConAgra Foods incorporated
any local changes in deforestation pol- pendently and collaboratively, and to recycled plastic in its frozen meal trays,
icy. Its use as a biofuel is increasing, transform their operations to mitigate removing 8 million pounds of plastic
but that demand may go down because this risk and take advantage of growth from landfills.
of concerns about deforestation. opportunities. The following are steps Chart a new course by incorpo-
Timber. The production of pack- to take immediately to address the rating sustainability principles into
aging material is heavily dependent emerging environmental risks: an action plan. Whether it’s a factory
on energy prices, and would be vul- Understand environmental im- retrofit to increase energy efficiency,
nerable to policy changes that affect pact and dependencies by examining a packaging redesign to reduce costs
the price. In fact, while deforestation how environmental trends drive costs or a product reformulation to decrease
policies could become of increasing and, when possible, seeking more sus- dependency on commodities, smart
importance as more pulp is imported tainable substitutes. For example, it companies will incorporate sustain-
in coming years, fees on carbon are takes more than 200 liters of water to ability as part of a clearly defined plan
founded on sound principles. The and place greater demands on finite
portfolio should include short- and resources.
long-term strategies that can have Leaders in this new landscape
a lasting impact. will be companies that make environ-
mental sustainability one of their core
Winning in a Changing business principles. These companies
Landscape will not only be able to anticipate the
The world’s dependence on natural changes, but also to collaborate with
resources is fragile. As the econo- suppliers and other stakeholders to
mies of developing countries grow, address them.
worldwide consumption will increase
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