A Qualitative Proposal to the CPG CFO

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Photo Source: Inford.org

How indirectly investing in green jobs and a circular economy can increase revenue and returns

This qualitative proposal is intended to reach an imaginary Chief Financial Offer of a Consumer Packaged Goods (CPG) company. The purpose of this proposal is to engage conversation regarding these ideas to drive value. While I’ve never formally worked inside of a CPG company, I recognize that these recommendations may (or may not) be realistic nor feasible, dependent on the company. I’d invite you to tell me where you feel this might be the case.

The way in which most CPG companies are producing results in a linear consumption model by way of consumers. A linear consumption model is comprised of taking resources, making products and dumping as waste. We are evidently seeing this model becoming strained as our natural resources (as such, raw materials) become depleted as inputs with this dangerous model.

In Europe during the year of 2010, 2.7 billion tons of waste was generated with just 40% reused, recycled or composted and digested (MacArthur). That’s 60% of waste that has ended up elsewhere, and a portion of that presumed to have further financial value as cascaded use for input. We can compare that to the United State’s recycling, reuse and compost rate of 35.2% in 2017 (EPA). The question becomes, how much of that waste could have been used as input for production processes with a lower cost than the virgin material?

Furthermore, if we continue to rely on nonrenewable resources such as petroleum to produce plastic, CPGs are at risk from a scarcity standpoint, and thus, from a price volatility standpoint. We can see this happening given that price volatility measures for metals, food and non-food agriculture output in the first decade of the 21st century were higher than any single decade in the 20th century (MacArthur).

PepsiCo announced that they expect input costs for the fiscal year to rise by 1.4 to 1.6 billion due to commodity price increases (MacArthur). This exposes the financials of major CPG companies to both short term and long terms risks dependent on the strength of our systems and how much they can handle with regard to extraction and climate change.

According to Ellen MacArthur, “By switching to the circular economy, you can mitigate the risk of price volatility and supply. Such a shift would move us away from the steep right-hand side of the cost curve, thus likely reducing demand-driven volatility.” CPGs can begin to mitigate these risks by integrating specific circular economy principles where both our energy and inputs are derived from renewable resources. By switching to renewable energy for manufacturing and administrative functions, it will decrease our resource dependence and increase our system dependence.

This transition will also indirectly introduce additional jobs into our economy, which will presumably increase the amount of discretionary income that consumers are able to spend on CPG products. Fast Company recently reported on the viability of such an opportunity with regard to jobs, stating that a “$1 million investment in energy efficiency creates around eight full-time jobs, nearly three times as many as an investment in fossil fuels.” With a job comes presumed discretionary income. Is it realistic to assume that such discretionary income would increase respective CPG revenues, given the scale?

CPGs must also begin to audit the products and packaging designs to identify input that is not biological, and thus, nonrenewable. The CPG must then review biological (renewable) substitutes, and perhaps consider biomimicry, to see how nature holds food or creates comparable “packaging” characteristics.

CPG Research & Development teams must then work together with financial teams to pinpoint new biological materials that are cost effective to work with compared to the initial nonrenewable. If the biological input deems to be more expensive, the CPG company should execute an internal carbon tax (otherwise known as carbon pricing) for the next five years to allocate capital to invest in making these biological materials financially beneficial for the long term.

Perhaps this capital is used to buy a stake in a startup that has established the production for use of these biological materials and needs funding and CPG expertise to know how to bring the cost down. We can see the this model in action by way of Patagonia’s Venture Capital firm, Tin Shed Ventures. Patagonia audits to understand where there are emission “hot spots” throughout their supply chain and invests in companies who can solve to ensure the same utility with far less emissions. Once this issue is solved for a supply chain emission hot spot, as a result of the capital provided by Tin Shed Ventures, the entire apparel industry can then benefit from the new and improved processes should they choose to also work with that supplier.

This may be challenging for the CPG company in the short term as we cannot guarantee that every alternative will have a model that is more cost effective compared to nonrenewable resources. The aim is however that we uncover sustainable savings from a financial standpoint in the long term that the entire industry can benefit from. If and when this happens, and the initial CPG company has a stake in the company that they’ve invested in to improve their supply chain, they will presumably experience greater returns.

Upon implementation of these changes, the CPG company will measure success by identifying the number of indirect jobs that they have added to the economy given the newfound demand of renewable energy. At a massive scale, we can anticipate seeing CPG sales and velocity figures grow ever so slightly with additional discretionary income amongst the American population.

CPG companies can also begin to measure and monitor the ratio of nonrenewable inputs used for their manufacturing process compared to that of biological inputs, expecting the percentage of biological inputs to increase by 5% by 2025 and by 10% by 2035. One caveat is that there is additional research required to understand the current ratio of nonrenewable to biological inputs as they are today. The CPG company can then cross-reference this with Science Based Target recommendations to solidify their goals.

I will end this proposal with one final quote from an Ellen MacArthur reading,

“the fittest will be who fit the system best, not those who aim to be the last one standing.”

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