According to GlobalData’s ‘ESG (Environmental, Social & Governance) in Consumer Goods’ report, published last month, brand owners need to take a holistic approach to tackling the ESG issues facing them – because good work in one area can all too easily be overshadowed by poor performance in another.
The fast-growing importance of ESG in business is based not only on the increasingly obvious climate emergency facing the planet, but also on increasing pressure from consumers: GlobalData’s Q1 2021 global consumer survey found that three-quarters of consumers now demand more ethical or environmentally-friendly products.
“Some CEOs have been reluctant to embrace sustainability principles because of the age-old view that it will hurt profits,” the report says. “However, stakeholders are becoming more conscious of ESG, and companies taking significant action now will be rewarded in the long term … Immediate ESG action will future-proof businesses and create tomorrow’s winners.”
GlobalData identifies a new market mechanism that is driving progress in ESG across consumer goods companies. “We call this the ESG action feedback loop,” the report explains. “Companies take action on climate, win stakeholder support (eg from customers, partners, employees and investors) that drives reputational and competitive advantage, incentivising further action and drawing more participation.”
It is vital that companies excel across all three aspects of ESG, the report says, since “being a laggard in one ESG area will taint brand image and influence consumer decisions, despite progress in other areas”.
GlobalData cites the example of BrewDog, which established its environmental leadership credentials by becoming the world’s first carbon-negative beer business in August 2020 – only to see this undermined by its reputation as a “social laggard”, with ex-employees accusing the business of having a “toxic” office culture in June 2021.
“Being a laggard in one area of ESG discredits the whole company’s image,” the report points out. “Consumers will judge FMCG businesses holistically when making purchasing decisions.”
To help businesses to take a comprehensive approach across all three aspects of sustainability, GlobalData has designed an ESG framework, which can be used to assess sustainability policies, performance and progress. The framework identifies a number of key areas across ESG, as follows:
- Environmental – climate change, pollution, biodiversity, natural resources
- Social – human rights, diversity & inclusion, health & safety, community impact
- Governance – corporate structure, risk management, corruption & bribery, ethics
Businesses face a number of social and environmental issues within FMCG supply chains. Pleading ignorance of what happens at every stage of product sourcing and development is not acceptable to socially- and environmentally-conscious consumers, says the report.
“Lack of traceability is no longer an excuse, and FMCG companies will be judged based on supply chain ethics,” GlobalData says. “Real industry change must involve collaboration between players throughout the supply chain. Strategic player partnerships and technologies like blockchain and AI help with supply chain management and transparency … Supply chain management is the most important strategic initiative an FMCG company can take to avoid environmental or social scandal.”
The report also analyses the ESG reputations and performances of a number of leading FMCG businesses, identifying “leaders” and “laggards” in each ESG area – including the following beverage brand owners:
- Environmental leaders – Diageo, Molson Coors, BrewDog
- Social leaders – PepsiCo, Nestlé
- Social laggards – BrewDog
- Governance leaders – Anheuser-Busch InBev
- Governance laggards – Diageo, Coca-Cola, Heineken, Danone
Particular praise is given to PepsiCo’s “prompt and comprehensive” response to the Black Lives Matter movement, including a US$400m, five-year investment in diversity and inclusion, focusing on initiatives such as expanding recruitment from historically black colleges and universities, funding scholarships and increasing the company’s black managerial population by 30%.
In governance, GlobalData examines A-B InBev’s use of AI to expose and eliminate corruption and fraud within the company. “Its analytics platform, called BrewRight, uses machine learning anomaly detection to track and identify compliance risks and money laundering within the organisation and related business partners,” the report says.
“The technology accesses data across the company’s enterprise resource planning (ERP) systems and identifies the patterns in regular transactions to spot anomalies and the risk of fraudulent activities.”
The report also highlights A-B InBev’s “local for local” business model, which reduces the emissions associated with lengthy global supply chains by producing most beer for local consumption, as well as its SmartBarley platform, launched in 2013, which uses data and analytics to help farmers and suppliers improve their productivity and environmental practices.
Diageo’s work as an environmental and social leader is praised – particularly the 25 goals identified in the company’s ‘Society 2030: Spirit of Progress’ report, a ten-year sustainability action plan, and its pledge to reach 1bn people with messages of alcohol moderation via its brands.
However, Diageo is also criticised over its history as a “governance laggard”. “In February 2020, it was fined US$5m after ‘materially misleading’ investors by concealing sales to distributors of unwanted stock,” the report says. “In 2017, Diageo was ordered to pay GBP106m (US$146m) by the UK tax authority as part of an investigation into the movement of profits between its global businesses.”