© 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
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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.
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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
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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.
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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.
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Leading to the FREE RIDER problem
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And….
Overexploitation of common property resources, or the Tragedy of the Commons.
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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
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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
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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
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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
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Guess what? Sustainability is no different……..To build a business case companies must….
Seek the economic relevance of sustainability
issues
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Stakeholder pressure
Which stakeholders are pushing the issues onto the corporate radar screen?
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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
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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
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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)
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Example: detractors - attacks to brands and to the industry image
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InputIndustry
TradeProcessor
Food Industry
Restaurants
ConsumerFarming Systems
Catering
Retailer
How do stakeholders act as transmission belts for SA issues
Stakeholders
SA ISSUES
SA ISSUES
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Map and prioritize the issues
Which issues are the most relevant and why?
How do you prioritize the issues? Strategy means choice.
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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
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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
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What’s needed?
individual assessment of problems
application of managerial knowledge of global as well as local context of business decisions
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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
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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)
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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
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Back up slides
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“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.
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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. ”
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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.
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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 .”
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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
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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
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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.