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The world’s top Fast Moving Consumer Goods (FMCGs) companies – including Nestlé, Coca Cola and P&G – are in a race to adapt to rapidly changing consumer trends, including a rise in veganism and increasing activism on plastic packaging.
This is the confusion of a new report, ‘Fast Moving Consumers’, from environmental non-profit and investment research provider CDP.
The report ranks 16 of the largest and publicly listed Food and Beverage and Household and Personal Care companies on business readiness for a low-carbon transition.
The lifecycle environmental impact of products from the industry is significant and FMCGs have a key role to play in curbing over a third of global greenhouse gas emissions. 90% of the sector’s carbon emissions lie in the value chain, leaving companies exposed to raw material risks and product consumption risks. The proximity of the sector to consumers means companies are exposed to changes in consumer preferences, but also have the opportunity to drive behaviour change in order to ensure the longevity of their brands.
Some of the most transformative low carbon innovations delivered by these companies include developing vegan and organic product ranges. CDP’s analysis shows five out of the seven food and drinks companies that originally offered dairy or meat-based products are innovating with new vegan alternatives.
Similarly, Household and Personal Care companies are creating more plant-based, natural options – six out of seven companies including L’Oréal are actively innovating to replace petrochemicals with natural, biodegradable ingredients. Unilever is among the four companies to have developed vegan personal care product ranges.
A tide of consumer activism on plastic packaging has resulted in increased scrutiny and changing preferences for circular, zero-waste business models. This is forcing companies to rethink their approach, with around 60% of companies investing to advance biodegradable plastic and recycling infrastructure, and Danone leading the way.
Despite this innovation in the sector, almost 60% of the top 10 revenue-generating brands for each company have failed to deliver low-carbon innovations in the last 10 years. Given most companies (88%) generate over 50% of their revenues from these key brands, including Nescafé, Budweiser and Dove, they must up their game or risk falling foul of changing consumer demands.
Many FMCGs are responding by acquiring smaller, sustainable brands. 75% of companies have directed M&A efforts towards the acquisition of niche, environmental brands in the last five years and this type of activity has more than quadrupled over that time.
For Food and Beverage companies, this trend is further driven by the alignment of health and environmental trends, demonstrated by Nestlé’s recent acquisition of Sweet Earth and Pepsico’s purchase of Bare Foods. However, this approach will not be sustainable if their fundamental business models – which are based on driving more consumption – remain unchanged.
Beyond reputational risks, impending regulation is also threatening these companies, as more robust rules on packaging and waste are introduced. The EU 94/62 directive’s 2018 amendment has set measures for reducing packaging waste at source as well as improving recycling and recovery, while product labelling and carbon footprinting is on the horizon.
The sector is also highly exposed to the physical risks associated with climate change. For example, heat stress and water scarcity have the potential to disrupt agricultural supply chains and cause price volatility.
This poses a real threat to the sector, especially for diversified food companies like Nestlé and Kraft Heinz that rely on a variety of raw materials. When it comes to physical risks in the consumption phase, personal care and home care companies are most exposed, due to the amount of water it takes to use their products.
Notwithstanding the media scrutiny around palm oil, some companies are being slow to respond. Despite the palm oil exposure faced by all Household and Personal Care companies, less than 45% is supplied from physically certified sources. Of the palm oil users, only Danone and L’Oréal have already achieved a 100% physically certified supply.
The CDP report assesses companies across four key areas aligned with the recommendations from Mark Carney’s Task Force on Climate-related Financial Disclosures (TCFD).
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