Building the business case for sustainable agriculture · Ben & Jerry's Haagen Dazs Own Label Green & Blacks The Skinny Cow Others Ben & Jerry’s is a pioneer in supporting environmental

© 2009 SAI Platform & IMD International. Not to be used or reproduced without permission.

Building the business case for sustainable agriculture

Dr. Aileen Ionescu-Somers, Director, Center for Corporate Sustainability Management, IMD

© SAI Platform & IMD 2010 2

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.


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


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.


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.


Leading to the FREE RIDER problem

© SAI Platform & IMD 2010

And….

Overexploitation of common property resources, or the Tragedy of the Commons.


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


Compliance level of activity under

consideration

Level of environmental and social performance

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

Further improvements are associated with an economic loss

Seeking the “Smart Zone” or the business case


How companies build business strategy

Start with analysing the business context. Understand:

The macro business environmentForces that determine positioning within the markets they serve

GovernmentalSocio-culturalEconomic Competitive


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


Guess what? Sustainability is no different……..To build a business case companies must….

Seek the economic relevance of sustainability

issues


Stakeholder pressure

Which stakeholders are pushing the issues onto the corporate radar screen?

http://thesavvylife.nideanet.com/wp-content/uploads/2008/08/radar-screen.jpg


Stakeholder pressure

Employees

SuppliersShare-holders

Customers

„Contextual Environment“:Public Stakeholder

„Transactual Environment“:Marketal Stakeholder

„Contextual Environment“:Political Stakeholder

Cor

pora

tions

Regulators

Governments

PoliticalParties

Associations

ConsumerOrg.

FinancialInstit.

NGOsEmployees

SuppliersShare-holders

Customers

„Contextual Environment“:Public Stakeholder

„Transactual Environment“:Marketal Stakeholder

„Contextual Environment“:Political Stakeholder

Cor

pora

tions

Regulators

Governments

PoliticalParties

Associations

ConsumerOrg.

FinancialInstit.

NGOs


Which transmission belts are stakeholders using?

NGOs/ConsumerOrganisations

Communities/Cities

Governments /Regulators

Media

International Agencies

Employees/unions

Scientific Community

Shareholders/Investors/customers

Business and Industry


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)


Example: detractors - attacks to brands and to the industry image


InputIndustry

TradeProcessor

Food Industry

Restaurants

ConsumerFarming Systems

Catering

Retailer

How do stakeholders act as transmission belts for SA issues

Stakeholders

SA ISSUES

SA ISSUES


Map and prioritize the issues

Which issues are the most relevant and why?

How do you prioritize the issues? Strategy means choice.


Issues in the food and beverage industry

PesticidesPollutionLabor issuesTraceability

TraceabilityObesityNutrition/HealthAllergiesResponsible marketingAlcohol abuseAdvertising to childrenPackaging WasteRecycling

Pollution - chemicals/pesticidesSoil degradationLong term raw material supplyHuman rightsPovertyChild laborWorker health and safety

Eco-efficiency/EnergyWater securityFood safety/traceabilityEmissions (air and water)Packaging waste /RecyclingHealth and safety of employeesDiversityLong term raw material supply

Human rightsWork conditionsCorruption/BriberyFair tradeAnimal welfare

Corruption/briberyQualityFood safety/traceabilityPackaging wasteRecyclingTransport (‘food miles’)

Sustainable agriculturePrices/Farmers incomeAnimal welfareWater securitySustainable aquacultureFair tradeSlaveryTraceability

InputIndustry

TradeProcessor

Food Industry

Restaurants

ConsumerFarmer

Catering

RetailerInput

IndustryTradeProcessor

Food Industry

Restaurants

ConsumerFarmer

Catering

RetailerFarming systems


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 orIntrinsic corporate competence and knowledge

Figures are not enough


What’s needed?

individual assessment of problems

application of managerial knowledge of global as well as local context of business decisions


The added value of sustainability

Sustainability is about finding a balance between economic, social and environmental factors

Social engagement

Environmental performance

Economic viability

Superior value

creation


So managing sustainability issues makes a clear contribution to shareholder value

* Adapted from Rappaport (1986)

Value Drivers Stakeholder satisfaction

Operational readinessStrategy

& vision

Innovation in product & services Others…

Dividends and share prices

Shareholder Value

Cost management

Sales growth

durationCapital deployed

Value Contribution

Employee motivation,

Working relation with regulators

EHS management

systems, Resource efficiency

Openness to society and new markets,

Brand value and reputation

More incentives for innovation, especially de-materialization services

Sustainabilitycontribution(examples)


Competitiveness

V

A

L

U

E

D

RIV

E

R

S

Bottom line

« We can improve our brand value. »

« We can cash in on opportunities (new

products/services). »

« We can be a first mover.»

« We can save money by reducing costs. »

« We can attract talent.»

« We can reduce risk. »

Stakeholder Pressure

Water ObesityAnimal

welfare

Natural

resources

Farmers

livelihoods

Climate

change

Sustainability Issues

Changing dynamicsFood & Beverage Industry Business Context

A business case is not found. It has to be built.

R

I

G

H

T

THING

TO

DO


Back up slides


“Sustainability means thinking ahead in terms of possibilities.”

Example of business case narrative: Heineken

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.


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. ”


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.


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 .”


SA contribution(examples):

Reputationand brand value

Efficient use of resources

Employeemotivation

Influence on regulatory regimes

S H A R E H O L D E R

V A L U E

Value Drivers Cost of Capital

Value Growth Duration

OperatingProfit-Margin

Sales GrowthRate

Income Tax Rate

Working CapitalInvestments

Fixed Capital Investments

Value drivers


SA issues affecting strategic risks and opportunities

Radical innovation for new products and markets

Economicperformance

Socialperformance

Environmentalperformance

Incremental improvements in

SA issues affecting operational risks and opportunities

Economic value

• Brand value and reputation• License to operate• Attract and retain talent

Net cost decreases throughincremental innovation

Net revenue increasesthrough radical innovation

Systemization of sustainability issues, value drivers and relevant corporate activities

• Local air pollution• Biodiversity

• Health• Safety

• Human rights• Monetary flows

Obesity / MalnutritionSustainable Agriculture


Example: Ben & Jerry’s

27.5 31.6 31.9 34.9 37.9 42.8 47.66 52.94

43.2 38 36.7 35.5 33.633.6

32.31 26.4

22.8 20.616.6 14.4 14.4

10.910.8

1.2 2.34.1 7.3 7.4 6.2

5.52 4.571.4 1.8 2.11.2 1.15.4 7.5 10.7 6.4 4.9 4.4 2.51 2.6

10.2

0

10

20

30

40

50

60

70

80

90

100

2002 2003 2004 2005 2006 2007 2008 2009

Ben & Jerry's Haagen Dazs Own Label Green & Blacks The Skinny Cow Others

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.

Documents

Building the business case for sustainable agriculture · Ben & Jerry's Haagen Dazs Own Label Green & Blacks The Skinny Cow Others Ben & Jerry’s is a pioneer in supporting environmental