Sustainability priorities of CPG companies
Consumers will favour CPG companies that embrace a sustainable product lifecycle, sustainable packaging, and ethical sourcing.
Increasingly, consumers are making sustainable purchases in support of the environment. A July 2021 study covering more than 10,000 respondents from around the world found that 60 percent considered sustainability in their buying decisions. That number went up slightly to 63 percent in the case of consumer goods. In monetary terms, sustainable consumer goods purchases were expected to cross US$ 150 billion in 2021 in the United States alone.
Consumer goods companies must join customers to lead the fight against climate change and other environmental perils. A key lever in this endeavour is circular commerce. As long as we can remember, businesses have consumed finite natural resources, such as raw materials, water and energy, to produce goods as efficiently as possible. While this linear model, where resources flow only from manufacturer to consumer, is efficient, it is highly unsustainable because of the waste it creates and releases into the environment. Just one sector, industrial textiles, produces 9 million tons of recyclable waste every year. The solution is to prolong the useful life of goods – and therefore their constituent natural resources – by switching from linear manufacturing to circular commerce, which is based on three principles, namely:
Design out waste and pollution.
Keep products and materials in circulation.
Renew and regenerate natural systems.
Predictive Product Lifecycle Management: Integrate circularity throughout the product lifecycle
To transition to the circular economy, CPG (consumer packaged goods) manufacturers would need to redesign products and modify raw material sourcing to extend their useful life in various ways. Here, one of the critical tools at their disposal is predictive product lifecycle management (PLM). Instead of discarding a product/ packaging at the end of its life, predictive product lifecycle management keeps it in circulation by repairing, reusing, refurbishing or recycling it. Predictive PLM practices should be embedded within every stage of the CPG value chain to improve environmental, social and governance (ESG) outcomes.
For example, CPG companies can use predictive forecasting in demand and inventory planning to reduce waste, 40 percent of which results from contamination and over-production due to wrongly estimated demand.
Sustainable Packaging: Dump plastic so you don’t dump plastic
A few years ago, the horrifying visuals of a plastic island floating in the Pacific Ocean sparked public outrage worldwide. But the truth is that we have been dumping plastics into our waters, at the rate of 14 million tons each year, for decades. The degradation of plastic into micro particles ingested by marine organisms is responsible for one of the biggest environmental crises faced by planet Earth. And single-use plastic packaging is at its epicentre. For instance, coffee-brewing American households use billions of single-use plastic coffee pods every year.
Plastic packaging was a gamechanger for the consumer goods industry, as it allowed products to be transported, stored and retailed safely, at low cost. Changing consumer lifestyles, rising e-commerce, and an economic boom in emerging markets took demand higher and higher. But while plastic has its commercial advantages, its poor recyclability has been extremely detrimental to the environment: a mere 16 percent is reprocessed, while the remainder is either incinerated, landfilled, or leaked into the surroundings.
For the CPG industry – a major consumer of plastic packaging – finding a sustainable alternative is a key objective of the ESG agenda. The biggest fast moving consumer goods companies in the world have committed to reduce packaging waste by recycling more (60 percent of companies), reducing plastic usage (26 percent), and increasing the use of alternatives by innovating new materials and influencing consumer behaviour (14 percent).
Some ways of rethinking product packaging include reverting to reusable materials such as glass, wood, or metal, or creating “edible” food packaging from biodegradable biopolymers. The packaging lifecycle can be made more circular by buying back physical packaging from consumers for recycling or reuse. This will require companies to devise a reverse logistics program, integrated with the sales and distribution network. Apart from being environmentally-friendly, buyback enables CPG companies to engage further with consumers by rewarding or recognising those participating in the program. Also, companies that are willing to buy back packaging of other brands will be perceived as more responsible than the rest of the market.
Digital technology can also help to reduce packaging, and waste, in the design and conceptualisation stage. 3D technologies can visualise packaging design and simulate a digital twin that CPG companies can use for visual merchandising in a virtual storefront.
Recently, the United Kingdom announced that starting 1st April, companies that manufactured or imported more than 10 tonnes of plastic packaging components containing less than 30 percent recycled plastic in a 12-month period would have to pay a Plastic Packaging Tax. Since ESG regulation will only get tougher, it is advisable that CPG companies switch to sustainable practices proactively rather than scrambling to comply later.
Provenance and Traceability: Source ethically and responsibly
Besides circularity, CPG companies’ sustainability obligations also include socially responsible behaviour and good governance. Organisations are answerable for the way they manage their relationships with key stakeholders and local communities; they are also obliged to comply with various laws pertaining to the rights and responsibilities of executive leadership, internal controls, shareholder rights, reporting and disclosure, and other matters of governance. Companies must not only behave ethically – practice fair trade, shun child labour, not source from blacklisted countries, etc. – but also ensure that the same standards are respected throughout their supply chains. For manufacturers of food and baby products, unprecedented health and safety concerns in the wake of Covid-19 mean they must also furnish evidence of where their products originated and the route they travelled to get to the point of sale.
This is only possible when there is complete visibility and traceability of the CPG value chain. Let’s take a well-known use case from another industry to understand the magnitude of this challenge. The EU’s Conflict Minerals Regulation requires users of tin, tantalum, tungsten and gold to ensure those minerals come from responsible suppliers and do not help to fund armed conflict or other illegal activities. This means manufacturers of batteries, automobiles, electronics or jewellery must account for the provenance of those minerals in their products, and also track the processes they underwent before ending up as/ in finished goods. The problem is that apart from some visibility at the level of the tier-1 supply contract, a vast majority of companies have no knowledge of where their raw materials are coming from. What little tracking there is, is done using paper and manual audits, which means it is unreliable and open to manipulation.
But now, a technology such as blockchain – or any other distributed ledger – can resolve the challenge of traceability in the supply chain quite easily. Since information is recorded in an immutable distributed ledger with the consensus of a vast network, there is virtually zero risk of tampering or fraud; also, everyone in the network – for example, buyers, sellers, suppliers, logistics partners, banks, testing agencies etc. – has full visibility into the ledger. When a shipment moves from source to destination, network participants can track everything, from manufacturing and storage information to container temperature – recorded by sensors and transmitted to the blockchain – to current location, transit delays, handling procedures, and more. Even the final consumer can see this information by simply scanning a QR code.
With consumer preference for sustainable, ethical products growing stronger, CPG companies need to take decisive steps to meet the demand. The regulatory landscape is also hardening with new rules on provenance, health and safety, and ethical sourcing getting added to a raft of environmental laws. On the industry’s vast ESG agenda, three priorities figure at the top: reducing waste by embracing circular principles, lightening the packaging burden on the environment, and ensuring supply chain visibility and traceability. Digital technology can offer valuable support to help CPG companies fulfil each of these goals.