Building the business case for sustainable agriculture Dr. Aileen Ionescu-Somers, Director, Center for Corporate Sustainability Management, IMD
© 2009 SAI Platform & IMD International. Not to be used or reproduced without permission.
Crash course in economics: It’s all about externalities! An externality (or transaction spillover) is a cost or benefit, not transmitted through prices, incurred by a party who did not agree to the action causing the cost or benefit. A benefit is called a positive externality or external benefit, While a cost is called a negative externality or external cost.
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Examples of positive externalities
A side effect or externality associated with beekeeping is the pollination of surrounding crops by the bees. The value generated by the pollination may be more important than the value of the harvested honey. Fire-proofing a home will also indirectly improve the fire safety of neighbours Landscaping a garden improves the vista for all concerned, but may also increase the value of properties around it A company producing wealth in the community will have all sorts of positive payoffs for multiple beneficiaries
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Examples of negative externalities Water pollution by industries that add poisons to the water, which harm plants, animals, and humans Massive social impacts of recent banking activities and policies Anthropogenic climate change is attributed to greenhouse gas emissions from burning oil, gas, and coal.
Harvesting of fish by factory ships belonging to one fishing company may deplete the stock of available fish for the other companies and overfishing may be the result.
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Externalities are MARKET FAILURES Externalities result in outcomes that are not socially optimal. Those who suffer from external costs do so involuntarily, while those who enjoy external benefits do so at no cost.
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Leading to the FREE RIDER problem
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And….
Overexploitation of common property resources, or the Tragedy of the Commons.
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INTERNALISING EXTERNALITIES
For companies to internalize environmental or social externalities, there are ways. ONE – regulation and economic instruments can go a long way…….. And/or TWO – find the business case or business logic that allows the company to incorporate action on the corporate strategic agenda © SAI Platform & IMD 2010
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Seeking the “Smart Zone” or the business case 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
Level of environmental and social performance
Compliance level of activity under consideration © SAI Platform & IMD 2010
Further improvements are associated with an economic loss
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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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Corporations
Stakeholder pressure
Customers Employees
Suppliers Financial Instit.
Regulators Shareholders
Governments NGOs
„Transactual Environment“: Marketal Stakeholder „Contextual Environment“: Political Stakeholder
Political Parties
„Contextual Environment“: Public Stakeholder
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Associations
Consumer Org.
Which transmission belts are stakeholders using?
Shareholders/ Investors/ customers
Employees/ unions NGOs/Consumer Organisations
Media
Business and Industry
Communities/ Cities International Agencies
Governments /Regulators © SAI Platform & IMD 2010
Scientific Community
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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Example: detractors - attacks to brands and to the industry image
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How do stakeholders act as transmission belts for SA issues
Stakeholders
SA ISSUES
Restaurants Input Industry
Farming Systems
Food Industry
Trade Processor
Retailer Catering
SA ISSUES © SAI Platform & IMD 2010
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Consumer
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
Pollution - chemicals/pesticides Soil degradation Long term raw material supply Human rights Poverty Child labor Worker health and safety Restaurants
Pesticides Pollution Labor issues Traceability
Input Industry
Sustainable agriculture Prices/Farmers income Animal welfare Water security Sustainable aquaculture Fair trade Slavery Traceability
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Farming Farmer systems
Trade Processor
Food Industry
Retailer
Traceability Obesity Nutrition/Health Allergies Responsible marketing Alcohol abuse Advertising to children Packaging Waste Recycling Consumer
Catering
Eco-efficiency/Energy Water security Human rights Work conditions Food safety/traceability Corruption/Bribery Emissions (air and water) Packaging waste /Recycling Fair trade Health and safety of employees Animal welfare Diversity Long term raw material supply 20
Corruption/bribery Quality Food safety/traceability Packaging waste Recycling Transport (‘food miles’)
The value of value drivers: Contribution of managing sustainability issues to value creation?
Product excellence or profit focus is no longer “does it” nowadays Share prices are increasingly dependent on intangible concepts such as Brand value or Intrinsic corporate competence and knowledge
Figures are not enough
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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 Economic viability
Superior value creation Social engagement
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Environmental performance
So managing sustainability issues makes a clear contribution to shareholder value
Shareholder Value
Value Contribution
Value Drivers Strategy & vision
Sustainability contribution (examples) Openness to society and new markets, Brand value and reputation
Sales growth duration
Operational readiness
Dividends and share prices
Cost management
Stakeholder satisfaction
EHS management systems, Resource efficiency
Innovation in product & services
Employee motivation, Working relation with regulators
* Adapted from Rappaport (1986)
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Capital deployed
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Others…
More incentives for innovation, especially de-materialization services
A business case is not found. It has to be built. Food & Beverage Industry Business Context
Competitiveness
R I G H T
Changing dynamics
Stakeholder Pressure Sustainability Issues
T H I N G T O D O
Animal welfare
Water
Farmers livelihoods
« We can improve our brand value. » « We can cash in on opportunities (new products/services). » « We can be a first mover.»
Natural resources V A L U E D R I V E R S
Obesity
« We can reduce risk. »
« We can save money by reducing costs. »
Bottom line © SAI Platform & IMD 2010
Climate change
« We can attract talent.»
Back up slides
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Example of business case narrative: Heineken
“Sustainability means thinking ahead in terms of possibilities.” 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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Value drivers
SA contribution (examples): Working Capital Investments Reputation and brand value
Fixed Capital Investments Sales Growth Rate
Value Drivers Efficient use of resources
Employee motivation
Operating Profit-Margin
Income Tax Rate
Influence on regulatory regimes
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Cost of Capital
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Value Growth Duration
S H A R E H O L D E R
V A L U E
Systemization of sustainability issues, value drivers and relevant corporate activities SA issues affecting strategic risks and opportunities Sustainable Agriculture Obesity / Malnutrition
SA issues affecting operational risks and opportunities • Local air pollution • Biodiversity
• Health • Safety
• Human rights • Monetary flows
Radical innovation for new products and markets
Incremental improvements in Economic performance
Environmental performance
Social performance • Brand value and reputation • License to operate • Attract and retain talent
Net cost decreases through incremental innovation
Net revenue increases through radical innovation
Economic value
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Example: Ben & Jerry’s
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. 100 90 80
5.4 1.2
7.5 2.3
22.8
20.6
10.7
6.4
4.9
4.4
4.1
7.3
7.4
6.2
16.6
14.4
14.4
1.4
1.8
2.1
10.9
2.51 1.2 5.52
2.6 1.1 4.57
10.8
10.2
70 60 50
43.2
38
36.7
35.5
33.6
33.6
32.31
26.4
40 30 20 10
31.6
31.9
34.9
37.9
27.5
2002
2003
2004
2005
2006
42.8
47.66
52.94
0
Ben & Jerry's
Haagen Dazs
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Own Label
2007
Green & Blacks
2008 The Skinny Cow
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2009 Others
