UK: Sustainability For Tomorrow’s Consumer - The Business Case For Sustainability

Last Updated: 10 November 2009
Article by Deloitte Consumer Business Group

Most Read Contributor in UK, August 2017

Report was prepared in collaboration between Deloitte Touche Tohmatsu and the World Economic Forum, January 2009

PREFACE

The World Economic Forum's Consumer Industries community is pleased to present this report as part of the Sustainability for Tomorrow's Consumer initiative. The Consumer Industries community comprises leading companies from the agriculture, food and beverage, retail and consumer goods industries. This initiative was kicked off in response to the mandate of consumer industry chief executives at Davos in January 2008. These chief executives had the vision to view sustainability as an opportunity for innovation and growth, and with support from the consumer industries community, this initiative has spent the past year exploring these opportunities in more depth.

The three pillars of this initiative are:

  1. The Business Case for Sustainability: Understanding the implications of increased consumption and resource volatility on cost structures and business models and establishing the need for disruptive innovation
  2. Design Innovations for Consumer Industries: Exploring breakthrough lifecycle innovations towards a sustainable consumer basket
  3. Shaping the Framework Conditions: Having an impact on the future playing field for sustainability by engaging stakeholders such as investors and regulators

This report aims to present the business case for sustainability for consumer industries. The analysis conducted as a part of this project suggests that supporting sustainability is not only responsible, but also makes good business sense. In addition to presenting the change imperative for businesses, the report shares learning explored through this initiative to guide companies along the path to sustainable consumption and growth.

A broad network of partners has contributed to the ongoing success of this project. We express appreciation for the Project Board and Advisory Board for their input to the initiative and specifically their attendance at the workshops held throughout the year. Along with numerous meetings and calls, three workshops were conducted, in Beaverton, Oregon, in May (hosted by Nike); New York City in September as part of the Forum's Industry Strategy meetings; and New Delhi in November in conjunction with the Forum's India Economic Summit. This report represents the collective input of more than 100 individuals who attended these and other meetings to discuss this issue. Partner companies also provided input to the in-depth life cycle analyses conducted for a basket of consumer products as part of background research and analysis.

The initiative's Project Board includes: Best Buy Co., Estée Lauder Companies, Nestlé, Nike Inc. as chair, PepsiCo, S. C. Johnson & Son, Sealed Air Corp., The Coca-Cola Company and Unilever. Special thanks to Kraft Foods, Nestlé, Nike Inc. and Unilever for providing specific data to support business case analyses.

The Advisory Board includes Aron Cramer of Business for Social Responsibility (BSR) as chair, Susan Burns of the Global Footprint Network, Brian Collins of Collins Design, David Cook of The Natural Step, Helio Mattar of The Akatu Institute for Conscious Consumption, Malini Mehra of Center for Social Markets (CSM World), Ted Howes of IDEO, Mindy Lubber of Ceres, Simon Zadek of AccountAbility, Jimmy Wales of Wikipedia.org and Bill McDonough of McDonough & Partners.

This report was produced in partnership with Deloitte – our project adviser for this initiative – and special thanks are due for their support of both content and the year-long process that has produced this new insight on business and sustainability.

Robert Greenhill
Managing Director, Chief Business Officer
World Economic Forum

Sarita Nayyar
Senior Director, Consumer Industries
World Economic Forum

EXECUTIVE SUMMARY

The Issue

There will be a tripling of the global middle class1 by 2030. Each year, at least 70 million people will be entering this income bracket in purchasing power parity terms. If this projection plays out, almost two billion people will have joined the global middle class by 2030, bringing almost 80% of the world's population into a middle income bracket.2

On the other hand, three planets Earth would be required were everyone to adopt the historic consumption patterns and lifestyles of the average citizen in the United Kingdom; and five planets if they were to live like the average North American.3.

This conundrum creates a systemic challenge to our world economic system and the business community: how is it possible to create wealth for tomorrow's consumer and value for tomorrow's businesses in an environmentally sustainable manner?

The Dialogue

This question inspired chief executives of the Consumer Industry community at the World Economic Forum Annual Meeting 2008, to launch a 12-month discussion: What does sustainability for tomorrow's consumer mean? What is the business case to start meeting tomorrow's consumer demands today?

The community developed four hypotheses for consumer industry executives and experts to challenge:

  1. Global consumption patterns are out of balance, with demand for resources and commodities growing more rapidly than supply despite the current recession
  2. Resource use intensity of the consumer industries and associated supply chains is commensurate with underpricing of natural resources, and not reflective of true resource costs
  3. The financial sensitivity of consumer industry companies to resource volatility and constraints is severe
  4. New business opportunities will emerge through a fundamental rethinking of what successful business models may look like in the future

Over the course of 2008, a series of workshops was held in the US and India to explore these themes. Over 100 consumer industry executives and experts in sustainability, business strategy and product design took part in the discussions. Additionally, quantitative analysis of resource intensity and business impact of resource scarcity on business profitability was conducted to evaluate the scale of the challenge faced by companies.

During the 12 months of discussion, the financial crisis took hold and the threat of economic slowdown became a reality. Executives remain convinced of the underlying growth potential of consumption from the new middle class, but felt that the financial crisis held critical lessons for the sustainability agenda: 1) there is a need to address systemic risks (financial, social, environmental) before they fracture the imperfect institutions and governance that currently restrain them; 2) the crisis creates an opportunity to build back new and different business management approaches; 3) in today's global system, wider collaboration, although difficult, is the only effective way to address a systemic crisis.

Findings

Four business imperatives for a more sustainable tomorrow emerged from the dialogue:

  • Meaningfully engage consumers – Consumers are confused about sustainability, and new ways to reshape the role of consumers will be required to proactively engage them in an experiential relationship, beyond the purchase of a product. As consumers remain price sensitive, the onus will be on business innovation to meet tomorrow's demands.
  • Innovation is the only way forward – There is a long-term need to dematerialize the economy and shift to new value-driven relationships which focus on meeting consumer needs, and selling value rather than just selling more "stuff". Incremental improvements will not be adequate to meet the challenge of sustainability.
  • Rethink core business models – With more value placed on externalities, a change from a build, buy, bury mentality is inevitable. There will be no "going back to normal" as the relationship between product, service and consumer irreversibly evolves.
  • Collaborate along the value chain and close the loop – New forms of collaboration such as open sourcing will be required with supply chain partners and consumers, based around resource efficiency, product take-back, and reverse logistics. Information sharing will become more common, for example, through standardization of packaging materials to boost recyclability.

In addition, shaping the policy to support and align incentives acts as a fifth imperative and a catalyst for these four.

Next Steps

The implications of these findings are clear: there are systemic risks to sustainability which are embedded in the current economic structure, which will need to be addressed in a breakthrough manner rather than through incremental improvements. It is up to the consumer facing industries to be proactive, and they will need to engage with their entire markets and supply networks. New forms of collaboration will be required to create a competitive commercial environment that enables room for innovation and value creation for all.

During the World Economic Forum Annual Meeting 2009, the Project Board which has led this work is discussing its implications with a wider group of chief executives in the Consumer Industries. The aim is to gain feedback and support to design and launch a major new initiative for the Forum, centred on the business innovations that will be required to meet the demands of tomorrow's consumer and tomorrow's stakeholders in a sustainable manner.

A working proposition for the new sustainability initiative: Tomorrow's Consumer

  • What does a good future look like? Create a normative vision of a sustainable world in 2030, and the systems that will enable it, building on economic and environmental trends to challenge current assumptions
  • Explore in depth the new business models that will be needed to deliver this breakthrough system, the new collaborations required, the new types of consumer relationship to develop, especially in different cultural contexts
  • Engage key stakeholders (business, government, investors, consumers) to illustrate how this new system will create wealth for tomorrow's consumer, value for tomorrow's company and lower systemic risks in tomorrow's economy
  • Based on the evidence above, use the collaborative power of collective stakeholders to pull the structural levers which will change industry, financial sector and governmental agendas to prepare for tomorrow's needs

A further session at the Annual Meeting 2009 is inviting executives from other industries to discuss this issue, exploring whether these imperatives resonate with leaders from consumer facing industries such as automotives, aviation, ITC, media; and from industries within the supply chain such as chemicals, mining and metals, logistics and transport. Is there appetite from other companies in the value chain to help build such an initiative?

Companies that take the lead on sustainability will be market makers rather than market takers. By showing the consumer that there is no need to sacrifice price and quality for sustainability, tomorrow's successful businesses will meaningfully engage the next two billion consumers, the largest new market the world has ever known. In doing so, they will secure stronger markets and a better business tomorrow. Politicians and governments are looking for ways to regulate a better world and price externalities without compromising development or living standards. If business can build sustainability without compromise to the consumer and voter, they will pave the way for better and more welcome regulation.

Getting involved

As this initiative expands through 2009, interested partners should please contact:

Sarita Nayyar, Senior Director, Consumer Industries, Sarita.Nayyar@weforum.org

Randall Krantz, Associate Director, Environment Initiatives, Randall.Krantz@weforum.org

Marcello Mastioni, Associate Director, Retail & Consumer Industries, Marcello.Mastioni@weforum.org

"This is not the same old sustainability challenge. This is not a fringe discussion any more about using soft power. We're beyond that. Sustainability is no longer a 'nice to have'. It has become a human security and survival issue. We need a progressive risk management agenda to help improve the lives of everyone who participates in tomorrow's global economy."

Environmental and sustainability cluster summary report (incorporating the viewpoints of 120 international sustainability experts from public, private and academic sector), Inaugural Meeting on the Global Agenda, Dubai, November 2008

BUSINESS CASE RATIONALE

Sustainability As An Issue Of Relevance

Sustainability has received an unprecedented amount of attention over the last several years. Chief executives have aggressively set priorities and goals; companies have issued sustainability reports and undertaken numerous initiatives focused on enhancing environmental performance; and new reports and articles are released on the topic every week. Given this focus and attention, why the need for yet another initiative and report highlighting the risks and opportunities associated with sustainability?

Consumer industry chief executives, in partnership with the World Economic Forum, undertook this initiative, "Sustainability for Tomorrow's Consumer", because they recognize the need to view sustainability as an opportunity for innovation and growth rather than a new campaign or a response for the purpose of regulatory compliance. This initiative represents the recognition by industry leaders that there is a need to go beyond the historical response to sustainability – largely focused on incremental improvements – to achieve a desired future state where human consumption is in balance with natural systems.

Sustainability in the context of this initiative is focused primarily on environmental impact, but not at the expense of the social or economic fundamentals. As such, it is important to take a broader view than just environmental sustainability. The 1987 UN Brundtland Commission developed one of the first definitions of sustainability: "Sustainable development is development that meets the needs of the present without compromising the ability of future generations to meet their own needs."4

Several factors are contributing to heightened interest in sustainability by business: increasing volatility in commodity and energy prices, more public and investor scrutiny of the traditional supply chain, the flattening world of information and complexity of value webs, and the inevitable long-term need for the economy as a whole to innovate to improve resource use efficiency in order to both deliver wealth for tomorrow's consumer and sustain value creating companies. These factors mean that some forward-thinking business leaders are becoming more interested in sustainability as an issue right across the economic system, and how they can collaborate to make this shift, rather than just how they each might be able to reduce cost or meet regulatory requirement within their own company.

The Immediate Economic Environment

"This is not the same old sustainability challenge; this is not a fringe discussion about soft power: we're beyond that. This now requires hard power. It is a security and survival issue." This was the conclusion of more than 120 environmental and sustainability experts who met across 12 Global Agenda Councils at the World Economic Forum's global brainstorming event held in Dubai in November 20085. The current refrain, "a crisis is a terrible thing to waste", seems particularly apt.

Given the current state of the global economy, many consumer industry company leaders will have no choice but to focus in the short term on cost cutting and even business survival. However, the sustainability challenge is a shakeout in the making. The current economic environment offers a wonderful opportunity for companies to reflect on how they are run today, and what needs to be different to be prepared for the future. As the framework conditions that govern business are not within the direct scope of just one company, a collaborative setting provides not only the leverage of scale, but also the opportunity to redefine how performance is measured.

Economies moving out of the downturn and into a recovery cycle will present very compelling situations for sustainable technologies and products, though some challenges may remain, particularly in developing economies. As companies plan ahead, there is the question, "When will things return to normal?" It is increasingly likely that there will never be a return to the "normal" of the past two decades. Prices will stabilize over time and parts of the economy will be picking up again bit by bit, but it may take years before economies return to previous levels and when they do, the landscape will look very different than it does today.

Guiding Hypotheses

The realization by industry leaders that there is an increasingly strong business case for sustainability set the tone and agenda for this work. This premise resulted in the development of a guiding set of hypotheses which are addressed in this paper:

  1. Consumption imbalances: Despite the current economic downturn, global consumption patterns are out of balance – with demand growing more rapidly than supply – and this imbalance is likely to grow exponentially in the future
  2. Resource efficiency: The resource intensity of consumer industry products and business models is significant, not well understood, and not reflective of "true" resource costs
  3. Bottom line: The financial sensitivity of consumer industry companies to resource constraints is severe and will likely be exacerbated in the future when resources begin to be priced more accurately
  4. New opportunities: There is a remarkable opportunity associated with fundamentally re-valuating and innovating how we do business and who we do business with as significant new markets open up globally

New business models are needed to respond to these challenges. Companies that embrace these emerging realities will be best positioned to succeed over the medium and long term.

Need For Systemic Change

We are a consumption-oriented society. The success of individuals, businesses and societies as a whole has historically been linked with growth in consumption since the industrial revolution. Supply and demand patterns, fuelled by current economic paradigms and continued population growth, put into serious question the long-term viability of continued growth in consumption-oriented behaviour. Even though currently there is a significant drop in global demand in response to the economic slowdown, consumption levels are expected to pick up again once economic activity resumes.

Two influences or triggers have the potential to shift behaviours: scarcity and value creation. Whether it is shortage of oil, water, financial liquidity or imagination, we are entering a new era where scarcity will influence the architecture of society and business. As business increasingly looks at meeting the future needs of consumers, there is a new shift towards value creation and innovative business models that extend available resources. This combination of "sticks" and "carrots" will result in increasing wealth and value for tomorrow's consumers and businesses in an environmentally sustainable manner.

These influences and triggers are not future events for deliberation; they represent the reality to be dealt with today – a journey on which leading innovators are already embarking. Consumer industry companies are experiencing an unprecedented period of change and volatility; even the underlying assumptions on which current business models were built are changing. Access to cheap resources and labour, predictable consumption growth, stakeholder expectations, and traditional business roles and accountabilities represent dynamic business conditions that require new thinking.

Globalization, developing market demand, resource constraints and broader environmental concern have created a higher level of inter-connectedness between business and society. The evolution of this global, interconnected model, combined with the volatile business conditions we face today, is challenging the business strategies of many companies.

Volatile input costs, greater societal expectations and evolving policy directions are possible early signals of a transition from a historically consumption-based model to one of sustainable production and consumption. Work through this initiative is intended to facilitate (and hopefully accelerate) the industry's movement through this transition.

The analysis, recommendations, and insights in this report are intended to represent a balanced view of risk and opportunity and highlight the need for companies to fundamentally rethink their value proposition. While it is unlikely that this work will serve as the tipping point for achieving sustainable growth, it is hoped that it will serve to accelerate industry's understanding of the key issues required to shift environmental concerns into the core of business.

The long-term trends of resource scarcity along with rising consumer markets in emerging economies will endure the current economic crisis, and so it is critical not to allow the urgent overtake the important. Much as business adapted quickly to globalization, the challenges of sustainability present an opportunity for new investments, new businesses and new business models. Collaborative innovation and a common understanding can increase momentum towards a new future for consumer industries.

MACROECONOMIC VIEW OF SUPPLY AND DEMAND

It is useful to look first at the economic elements that are shaping the argument for sustainability.

Globalization

Until the current global economic crisis, the world economy had grown for 20 years at a pace unprecedented in economic history. Unlike previous economic cycles, this growth was driven by rapid development in emerging economies, allowing many of them to narrow the historic gap with the developed world. It also enabled hundreds of millions of people to move from poverty into a new global middle class with material disposable income.

The primary cause of this growth was the integration of several major emerging countries into the global economy – China, India and Russia, among others, went from self-sufficient economic policies to embracing globalization. This meant freer movement of goods, capital and even people across international borders. It also marked the adoption of market-oriented policies, the end or reduction of internal and external trade restrictions, a reduction in subsidies and price controls, and even the encouragement of entrepreneurship.

This economic growth was additionally driven by a number of specific events: the collapse of communism in Eastern Europe, privatization trends of the 1980s and 1990s which started in Margaret Thatcher's United Kingdom, "demonstration effects" of the success of market-oriented policies in developed countries, and success of export-oriented policies in the newly industrializing countries of East Asia.

These changes had a huge impact on the larger global economy. With roughly a billion new workers, globalization put downward pressure on wages and costs – and also downward pressure on prices. This contributed to the low inflation of the past 20 years and increased purchasing power globally. Those billion new workers also became a billion new consumers in the global economy. This increased the size of the market into which global companies could sell and also contributed to their efficiency gains.

Globalization, it seemed, was a very good thing. Some, however, have now suggested that the benefits of globalization are waning and costs are increasing, signalling perhaps that the era of low inflation is coming to an end. Nevertheless, there are, and will continue to be, consequences to globalization.

First, and most notably, the huge increase in demand in emerging countries has put upward pressure on global prices of commodities such as petroleum and many types of food and minerals (Figures 1 and 2). This has caused redistribution of global income, rising inflation and, in the case of food commodities, potential hunger. The recent drop in commodity prices is in response to a dramatic decline in economic growth globally. When economic activity begins to pick up again, so will the demand forces that are expected to drive up the commodity prices.

Second, globalization has contributed to increasing income inequality in developed countries. The increased supply of low-wage labour has reduced the demand for such labour in developed countries, thereby increasing the gap in pay between skilled and unskilled workers. This has given some basis to protectionist sentiment in developed countries.

Third, rapid economic growth in emerging countries has placed enormous pressure on the physical environment. Pollution in many emerging countries has become exceptionally bad and is already adding to public health costs and reduced life expectancy. In China, it has been estimated that a "Green GDP", which incorporates the health and social costs of the environmental degradation, ends up costing 3% of China's 2004 economic output – more than half a trillion yuan6. Environmental damage is often exacerbated by subsidies to food, fuels and energy use designed to create jobs, increase consumption and encourage economic growth.

It is estimated that one third of China's emissions are due to exports.7 Can the global economy continue to reap the enormous benefits of globalization while simultaneously dealing with the increasingly evident environmental and social costs? Society wants to sustain economic growth and lift billions more out of poverty, especially given that we will have one billion more consumers by 2020. They will expect to drive cars, travel by airplane, buy major electric appliances, and live in larger homes with air conditioning8,9. But we cannot afford to be as inefficient in the future in how we use resources and create waste as we have been in the past. We need to create new technological and management approaches, and entire new ways of doing business.

The Rise of Washing Machines in India

As women's roles have changed in Indian society and as the middle class has grown, washing machines have increasingly found their way into Indian homes. The washing machine industry grew by 22% in 2007, with sales of approximately 2.2 million units. The fully automatic category is particularly attractive to manufacturers and retailers because of its 40% growth rate in 2007. One large consumer electronics company has introduced a US$ 66 washing machine that caters to the unique preferences of Indian families by eliminating the drying cycle and also programming the machines to automatically resume the washing cycle after power returns from an outage.

As appliance manufacturers refine their product offerings and marketing activities, more and more middle class Indians will likely purchase washing machines, which will have significant impact on the environment. Almost every washing machine replaces hand-washing of clothes, requiring more water and more energy. There are opportunities as well, as countless hours of women's time will be liberated, offering a potential to increase economic output and productivity.

By 1940, 60% of the 25 million wired homes in the United States had an electric washing machine. By contrast of scale, India currently has over 100 million homes with televisions, and washing machines are rapidly catching up. In 2008, the University of Leeds created a washing machine that uses only a cup of water to carry out a full wash. The machine leaves clothes virtually dry, and uses less than 2% of the water and energy otherwise used by a conventional machine. The challenge that presents itself is how to embrace the lifestyle aspirations of these new consumers, while incorporating the next practices and technologies the world has to offer in the interest of the local and global environment.10

With increased information flows and greater transparency brought about by the spread of information technologies, the rising middle class will be perhaps less tolerant of societal failures. They will likely rebel against environmental pollution, be more attentive to the health and safety of the products they purchase, and be more focused on issues of public health and societal well-being in general. Thus, a process of globalization that does not address these issues will likely be deemed a failure not only to policy-makers, but by consumers as well.

Consumption patterns

Historically, energy and resource use have been strongly coupled with economic and population growth. In the coming years, a disproportionate share of both economic and population growth will take place in developing countries as their economies strive to catch up with traditionally Western technology and lifestyles. Figures 3 and 4 show the projections for population growth and GDP growth for key economies. As these economies grow, consumer markets will rise rapidly as a result – as will consumer spending, which will rise as a share of GDP in many emerging markets, especially China.

As disposable income continues to increase, traditionally exporting economies like China will likely shift away from growth based on exports and towards growth based on domestic consumer spending.

Figure 5 compares consumer spending as a percentage of GDP and indicates the current gap between developed markets and emerging markets. This variation in consumer spending as a percentage of GDP will converge as the economies of the emerging markets grow further and mature. Note that the drop in consumer spending as a percentage of GDP for China in the last decade confirms that its GDP growth is not the result of growth in local consumption; however, this will change as China's middle class expands further.

As consumption growth takes place, the number of households moving from poverty to middle class will rise faster than the growth of the economy itself. When households grow out of poverty towards a new middle class with disposable income, the resource intensity of consumption – including food, energy, and raw materials – increases dramatically.

Thus, as emerging countries grow rapidly, the corresponding demand for basic resources – such as water, food and energy, as discussed below – also rises rapidly.

Water

Water security is the gossamer that links together the web of food, energy, climate, economic growth and human security challenges that the world economy faces over the next two decades. In many places around the world, water has been consistently under-priced, and has been wasted and overused as a result. Stocks of groundwater have been unsustainably depleted at the expense of future water needs. In effect, the world has enjoyed a series of regional water "bubbles" to support economic growth over the past 50 years or so, especially in agriculture. A number of these regional water bubbles are now bursting in parts of China, the Middle East, south-western US and India; more will follow. The consequences for regional economic and political stability will be serious.

From 1900 to 2000, global freshwater withdrawals grew ninefold against a population increase of factor four.11 According to the OECD, 2.8 billion, or 44%, of the world's population lives in areas of high water stress. This figure is expected to rise to 3.9 billion by 2030 under a business-as-usual scenario. If present trends continue, the livelihoods of one-third of the world's population will be affected by water scarcity by 2025, and could impact annual global crop yield to the equivalent of losing the entire grain crops of India and the US combined (30% of global cereal consumption)12.

With agriculture remaining a thinly-traded good, gains from trading so-called "virtual" water are limited. Agriculture as a share of exports in international trade decreased from 46% in 1950 to 9% in 2000. Changes in the geopolitical landscape will start to occur, as water-scarce countries seek their own water solutions. The global water forecast for the next two decades, if no reform actions are taken, is chilling; water scarcity will have a profound effect on global and regional systems, whether from an economic growth, human security, environmental or geopolitical stability perspective.

Food

Food production needs to rise by 50% by the year 2030 to meet the rising demand, according to a speech by Ban Ki-moon, calling on world leaders to increase food production and revitalize agriculture to ensure long-term food security.13

When households in emerging economies enter the middle class, they often shift from grain-based diets to diets dominated by foods that are more resource intensive such as meats, fruits and fresh produce. Given, for example, the large grain requirements for meat production, this leads to a disproportionate increase in the demand for grain, one factor affecting grain prices in recent years.

Additionally, the dynamics of food are inextricably linked to water use, as more than 70% of global freshwater withdrawals are used for agriculture,14 but inefficiencies in water use are high. Traditional irrigation, in most water-scarce countries, consumes only a fraction of the water it withdraws (about 50%); the rest is wasted or evaporates. Trade is also a complicating factor, and as society looks to biofuels and biomass for a solution to energy security, food supplies are likely to be affected. Domestic reform of water for agriculture is therefore urgently required in many water-stressed countries to produce "more crops with fewer drops". Engaging in global trade can also help countries to manage water security issues, but the global trade system for agriculture is outdated and in urgent need of reform. Systems thinking will be required to ensure that strategic long-term solutions are developed and implemented.

The volume of food production depends on a number of key factors – market pricing, protection of private property rights for farmers, availability of energy and water, cross-border trade, and impacts of climate change. Despite advances in agricultural technologies and land productivity, most of these factors augur low increases in food production in developing economies.

Long-term economic growth will result in continuing increases in the demand for grain and other agricultural commodities, creating upward pressure on food prices, despite the current recession. To feed tomorrow's consumers, there will be a need for freer trade, transparent pricing, encouraged investment in agricultural infrastructure, and more efficient use of the food that is already grown.

Energy

Today, energy usage is inefficient in many emerging markets, as well as in most of the OECD with the notable exception of Japan. Although developed nations may use more energy per capita, many developing nations use more energy per dollar of GDP. Using the most recent available data, the US (not generally the world's role model on efficient energy policy), is nearly five times more efficient than China in terms of energy consumed per dollar of GDP.15

These inefficiencies are often the result of subsidies, which discourage conservation and investment in efficiency,16 creating, in many cases, an unsustainable economic burden while exacerbating environmental damages. Energy subsidies in the 20 largest non-OECD countries reached US$ 310 billion in 2007. In the past, efforts to change such policies have been politically very unpopular; meaning, it is often difficult to shift towards market pricing of energy. Still, such pricing of environmental and social externalities is a necessary ingredient in shifting to clean energy supply and more efficient use of all energy.

In coming years, energy demand is expected to grow rapidly, especially as the effects of higher prices are not permitted to influence demand, often the case for energy used in transportation. Energy supplies will rise, although not necessarily commensurately with demand, in part because many countries with large potential supplies of energy are not actively encouraging investments in new capacity. The lack of encouragement for efficient energy use and demand-side management will compound supply shortfalls. This gap will lead to long-term increases in energy prices worldwide, despite current oil prices reflecting the economic downturn. If unregulated, this higher energy usage will likely drive continued price volatility and have negative effects on both business and the environment.

While energy demand increases globally, the US and EU will be simultaneously seeking to improve energy security. Energy policy decisions have strong connections to water, climate and food security policy, which can spin negatively or positively, and energy policy must take into account these interlinkages. To add a level of complication, domestic energy security can be seen as a decision to switch from relying on foreign oil to relying on domestic water. Fast-growing economies, especially in the Middle East and Asia, will likely allocate less water to agriculture over the next two decades and more to the growing demands of their urban, energy and industrial sectors. Under business-as-usual, water consumption for energy production is expected to grow by as much as 165% in the US and by as much as 130% in the EU over the same period, with serious consequences for water and food security.

The business imperative

Considering that resource prices have recently dropped dramatically, many business and political leaders may wonder why they should now bother with investing in resource efficiency. The current drop in resource prices is related to extreme weakness in demand given the downturn in the global economy, and many leading economists expect the global economy to begin recovery by the end of 200917. Once a sustained recovery is under way, it is likely that resource prices will rise quickly. Investments in efficiency can begin to pay off immediately and will position a company better as the global economy recovers.

Resource prices are likely to rise even higher and remain more elevated than in the past. If improperly addressed, policy decisions for resource security could lead to resource crises or even collapse. Business and governments will need to act together to ensure systemic solutions are put in place for the long term. Additionally, changes in pricing and the perception of environmental risk will likely change consumer behaviour, especially in developed countries.

Consumer industry businesses can act preemptively to meet such uncertainties by making some fundamental and mutually reinforcing changes such as:

  • Investments in improved efficiency of resources
  • Diversification of resource sourcing
  • Changes in packaging and waste management
  • Changing supply chain patterns to minimize transport costs
  • Efforts to emphasize environmentally positive actions in brand positioning

To address these challenges and to avoid an escalation of personal interests at the expense of public goods, there is a need to have a clearer view of shared resources and interests. In game theory, this is referred to as the Prisoner's Dilemma, while in environmental circles it is commonly known as the "tragedy of the commons", in reference to a 1968 paper by ecologist Garrett Hardin.18 Companies across different sectors will need to work together to shift the boundaries of their thinking from single companies and products or lifecycles to systems and interlinkages along the whole value network and beyond.

Consumer response

Consumers play a big part in the calculus, especially since they tend to respond to economic incentives more than moral arguments. Looking at recent history, it will primarily be higher resource prices that lead to changes in consumer behaviour. Businesses tend to respond to consumers – if consumers change, then businesses will change. The challenge for business is to know when best to anticipate consumer behaviour and lead accordingly, and when to follow existing trends. The complexity of this dilemma from a sustainability standpoint is highlighted in the struggles of the North American automotive industry in recent months.

Looking forward, it is likely that permanently higher commodity prices will alter consumer behaviour in favour of lower energy consumption, fewer material purchases, and more efficiently grown food. This happened before in the 1970s, when consumers shifted to smaller cars and more energy-efficient homes. Similar shifts in consumption patterns are likely to happen again, only permanently this time, reflecting that the world is a very different place than it was 30 years ago. When oil prices spiked in 1973 and 1979, global demand decreased by 2% and 7%, respectively. By contrast, during the unprecedented oil price increases in 2008, global demand continued to rise, driven in part by demand in China and India.19

While the degree to which consumer and business behaviour shifts will depend largely on regulatory policies, farsighted companies need to help shape political will and consumer opinions. Ultimately, there is a common benefit in acting with long-term interests – for the consumer, business and government.

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Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.

Disclaimer

Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.

Registration

Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.

Cookies

A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.

Links

This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.

Mail-A-Friend

If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.

Security

This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.