For decades, consumers, investors, government bodies, and others have voiced growing concerns about energy, waste, water, deforestation, and a host of social issues related to food production and distribution—across issue areas as wide-ranging as child labor and farm practices. Many companies involved in food production and selling have responded to the call. Seven of the 10 largest global consumer goods companies have set carbon emissions reduction goals that include reductions in other parts of their supply chains, and eight have ambitious sustainability targets that require engaging significantly with upstream suppliers.
But achieving those high sustainability targets is proving much harder than anticipated. Many of these companies now face a barrier. Retailers and consumer goods companies may have adapted their own production and logistics to lower-resource requirements, for example, and they want to do more. Yet they have discovered they cannot reach higher sustainability objectives without deep collaboration with their agricultural suppliers, who often set less-aggressive goals (see chart below). The primary reason: Suppliers fully understand the on-the-ground challenges. They are much closer to where system-wide operating practice changes must actually happen.
As a result, consumer goods companies and retailers that have worked solely within their own four walls, with only their immediate suppliers (or those that have just flatly asked suppliers to assure them their products and practices are sustainable), now realize they need to get deeper into the details of how those products are produced (see chart below).
Indeed, true progress is hard to achieve. Only two of the seven consumer goods companies with “scope 3” emissions targets (a category of indirect emissions that include both upstream and downstream emissions) reported reductions from purchased goods and services in 2016, with an average reduction of just 1 percent, according to the global environmental platform CDP. Furthermore, even as they tackle climate-related concerns, companies still face other issues. For example, even those with reputations for leading progress on sustainability may still struggle with child- and forced-labor issues.
The situation is highly complex, raising tough economic and regulatory concerns with no easy answers. For example, there is no “most sustainable beef,” as interventions for one given benefit may worsen other issues. Grazing and grass feeding may seem the more natural and sustainable way to feed cattle. But when cows digest grass, they let out more methane, a harmful greenhouse gas many times worse than carbon dioxide, than when they eat grain-based feed in a pen. Getting to the heart of such issues requires that we go beyond making boardroom decisions, and zero in on the numerous micro-decisions and trade-offs people make on farms and throughout the value chain.
Expectations by consumers, investors, NGOs, and other stakeholders are steadily rising. So is the burden of proof. Companies now need third-party auditing in supply chains and detailed transparent reporting on progress, as well as the barriers within large global food systems. Companies may feel that the path to sustainability has become more frustrating and unattainable. Yet, despite these obstacles, there is a promising way forward. Some companies are managing to make real strides in improving upstream agricultural sustainability. These companies’ leaders have learned they cannot simply push the sustainability imperative onto their suppliers and raw material producers. Instead, they take a wider view, engaging a broad set of stakeholders in their efforts, and embracing the complexity and collaboration required.
While this research has focused on consumer goods and retail companies with upstream agricultural supply chains, the lessons we’ve gleaned apply across industries, including apparel, mining, and forestry. Organizations that take a three-step approach can make a meaningful difference in their upstream supply chain:
Step 1: Map out sustainability challenges throughout the supply chain and identify who should address them.
Companies may struggle to take the first step in the long journey toward sustainability, worrying about the prospects of bearing additional costs. While they generally understand the magnitude of the social and environmental challenges, many business leaders don’t actually understand those issues with enough nuance or clarity in terms of what it will actually take to achieve their sustainability goals. Those furthest ahead on the sustainability journey invest in mapping and quantifying issues throughout the value chain. For example, a mapping and quantifying analysis would help retailers understand that while pole-and-line-fished tuna addresses some sustainability concerns when compared with methods such as purse seine (net caught), the required human and capital resources prevent it from scaling.
Companies also may think they are moving in the right direction by responding to sustainability demands raised by NGOs or other groups, but without examining the impact and feasibility of those demands on the entire system, they risk spinning their wheels on actions that are ineffective or have unintended consequences. Mapping and quantifying requires that companies analyze a range of issues and decisions to determine their impact and magnitude, and then evaluate how those issues and decisions relate to one another.
Before taking any actions, companies should develop a deep understanding of the industry structure, economics, and drivers of profits, as well as the broad incentives that promote sustainability and those that could be deterrents. New insights that emerge through this process will enable companies to identify leverage points, have the necessary conversations with suppliers, undertake only the most effective interventions, and chart out the next steps needed to change the system, rather than just take initiatives within their own value chain. They can work with regulators on regulations or with competitors to create new standards, for example.
In the animal protein industry, our mapping and quantifying process revealed that producing and transporting feed accounts for 60 to 80 percent of the emissions in pork and poultry. Feed inputs like corn and rice tend to have a higher carbon footprint than other options like soybeans. This basic knowledge enables producers to make different choices about feed composition to improve sustainability. For example, it led Cargill Meats Europe to focus on improving the sustainability of feed in its supply chain, working with and building on tools such as FeedPrint, which calculates the carbon footprint of feed blends and helps the company incorporate sustainability trade-offs into decision-making.
It is important to remember that while initiatives that emerge from a supply chain analysis are often a sustainability win, the path to success is rarely quick and easy. The process of mapping the value chain of each commodity takes significant time and resources, but ultimately, this kind of long-term investment can help companies ensure their sustainability initiatives pay off.
Step 2: Develop a portfolio of actions with systemic reach
Mapping and analyzing supply chain complexities helps clarify the nature and magnitude of the actions required to reach a sustainability goal. Doing so also generally shows that individual actions are not sufficient. Instead, the most successful companies create a portfolio of actions that creates a virtuous cycle and motivates diverse stakeholders to change the system. They acknowledge that transforming their upstream value chain requires that they put their own house in order to build the credibility they need to ask for industry changes.
That said, companies do not need to wait until their supply chain is 100 percent sustainable before offering sustainable products. Introducing a sustainable variation of a product can help a company determine which sustainability characteristics to highlight and how to present those claims, as well as what price is optimal. It can also create incentives to pay current suppliers more if they deploy sustainable practices, or enable a company to form relationships with, and learn from, new suppliers—all while developing a portfolio of actions for a broader range of products. There are also financial benefits. A single sustainable variation of a product could provide proof points to persuade the business to do more. Indeed, ethical and sustainable food segments are growing much faster than the overall market. In the United Kingdom, sales of ethical food and beverages grew by 9.7 percent in 2015 compared with 2.1 percent for the rest of the market. This is true within individual corporations as well. For example, Unilever’s “Sustainable Living” brands are growing 50 percent faster than the rest of the company’s portfolio.
The experience of agribusiness company Olam’s line of spices illustrates the multiple benefits companies can achieve by working directly with upstream suppliers on targeted sustainability programs. Olam acquired a spice processing facility in Cochin, India, and in August 2011 received a $120 million loan to enhance employee safety, quality control, food safety, and capacity. A large part of its efforts focused not only on the 400 workers employed in the processing facility, but also on the 900 small-scale farmers supplying the factory. Olam deployed a 52-member team to train farmers in areas including labor practices, land use, pesticide and fertilizer requirements, and crop-drying techniques. Two and a half years after the acquisition, farmers had cut costs by 15 percent, reduced pesticide use by 30 percent, and increased outputs by 10 percent.
Companies should also collaborate with other participants in the value chain, including competitors, processors, producers, and NGOs. Joining forces goes a long way toward ensuring that pursuing sustainability puts no company at a competitive advantage. In addition, working with a variety of stakeholders can enable the development of new solutions. Precompetitive collaborations that work on knowledge or standards development, with outputs far from commercialization, can create more power to influence suppliers. It also eliminates the situation in which a company has no incentive to cooperate and where a company that moves first bears more cost than those that follow. The nature and scale of the most-effective collaborative approach depends on the outcome of the mapping efforts in step one.
Trustea, a sustainable tea program in India, was formed to foster collaboration among the country’s largest tea producers and retail brands, including Hindustan Unilever and Tata Global Beverages, which together have a 57 percent market share. It launched a certification program to improve the social and economic conditions of the tea industry while protecting the environment. The initiative led to sustainability gains for companies like Unilever, a founding member, which now acquires 75 percent of its tea from sustainable sources—up from 36 percent in 2013.
In many situations, philanthropy and advocacy help increase the effectiveness of a portfolio of actions. Working with NGOs or government regulators is a way to align incentives to address more-challenging parts of the system, and create effective partnerships that will help push for and implement change. The Walmart Foundation, for example, has awarded grants related to supply chain sustainability, funding areas such as the development of a comprehensive set of data-and-analytics tools for assessing the nature and prevalence of forced labor and trafficking in the Thai seafood sector. The foundation’s grant to Issara Institute is helping elevate workers’ voices though education and access to hotlines. These types of innovations benefit not only workers but also retailers and consumers, who can feel more confident in the integrity of the workforce. Such advances address a part of the system where it is hard to make change happen.
Step 3: Build on successes—and repeat.
The first wave of actions always looks hard, but companies are learning that when it comes to sustainability efforts, success breeds success. The best companies rely on quick wins to create momentum for further change, establishing systems for celebrating those achievements and building on them. They transfer what they learn, improving one supply chain to inform changes to other supply chains, markets, and business units. For example, Olam found that the tools and frameworks it developed to track, monitor, and communicate sustainability attributes of spice products are applicable across its diversified portfolio of commodities.
The German-based retailer Metro started a consultancy called Star Farm to help Chinese producers fulfill international quality standards and implement traceability in the food supply chain. The success of this initiative solidified Metro’s reputation for food safety in China. Based on that, the wholesaler has adapted the program for Pakistan, where it likewise met with great success.
Once companies get started, they generally see a positive shift in the relationship with their customers and consumers, who value purchasing from companies they trust. The momentum also helps boost employee engagement and facilitates buy-in from internal stakeholders such as the C-suite and board.
It isn’t easy to make major gains in pursuit of supply-chain sustainability. If companies have learned anything from their efforts, it is that it takes a systematic approach and a host of engaged participants, all aligned and working together toward the same end goal of positive system changes. No single company can get there alone.