1. Sustainable Sourcing as Leadership and Value Creation

Whilst it is not “rocket science” to work out that there are limits to growth on a finite planet, most managers face pressure every day to respond to a growth oriented business model. This is because the objective of “creating shareholder value” is, in many companies today, an almost exclusive mantra. To create shareholder value,  managers are obviously under ever-increasing pressure to meet their firm’s  economic objectives in the short term and report these gains on a quarterly basis. Managers also receive incentives to focus on these immediate gains. Short-termism therefore pervades our business thinking, often to the detriment of longer-term social and environmental considerations.  Firms do this at their own peril, since by focusing purely on short-term financial objectives, they may actually be putting the long-term financial sustainability of their business at risk. 

Aware of significant looming tensions across a number of key systems that threaten business into the long-term, an emerging vision amongst leading companies a more expanded concept of  “creating shared value”, that is, the idea of addressing environmental and social problems in ways that expand the pie for more market participants and where more stakeholders benefit overall.

Example 1. Nestlé: Creating shared value to assure food security and sustainable sourcing

For business to be successful long-term, Nestlé believes that it must create value not only for shareholders, but also for society. This includes farmers who supply raw materials, but also employees, consumers and local communities. Nestlé refers to this as “Creating Shared Value” or CSV. In its core strategy, Nestlé strives towards CSV by focusing efforts in three key areas: nutrition, water and rural development.

Although Nestlé is not vertically integrated (owning agricultural land), it has rolled out a substantial program to help supplier farmers to become more productive and avoid poverty. Nearly 600,000 farmers, including many women, can access free technical assistance and microcredit to help them produce greater yields of higher quality crops while saving water resources, reducing impact on the environment, and increasing their overall income. In this way, multiple rural areas benefit from wider employment and further economic development opportunities.

There are many stakeholders implicated in the area of food security. Convinced that it cannot achieve food security worldwide on its own, Nestlé is increasingly working with government, NGOs, the Food & Agriculture Organization, agricultural institutes and farmer’s organizations to address some of the serious and basic problems posed by the challenge of feeding 10 billion people by 2050.

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There are good reasons for this shift in business thinking. Firms simply cannot do business on a failing planet. Our global society is at a critical tipping point. On the one hand, there has been extraordinary economic progress and innovation leading to ground-breaking technological solutions to some of the world’s biggest problems.  On the other hand, there are regions in the world that are unable to benefit from such progress owing to severe megatrends affecting their capacity for resilience. 

Here are some of the issues pertaining to resources that may ultimately also affect supply of agricultural raw materials:

Population:

Demographic pressure: Population growth rate and density, as well as availability of agricultural land per capita;

Education: Availability of skills and human capital, including women’s access to education;

Employment: Levels of unemployment, particularly the youth, in a given country;

Land:

Deforestation: Loss of forest cover and biodiversity due to development and monoculture;

Degradation: Erosion of the resilience and fertility of the land owing to soil erosion, salinity and deforestation;

Institutional weakness: Ability of governments in a given country to formulate and adequately implement policies as well as the human rights and liberties of its citizens;

Tenure: Lack of institutional security around land rights;

Water:

Availability: 70 percent of the world’s water is used in agricultural production, threatening the Continuous availability of water resources in a country for all users;

Quality: Contribution of agriculture to levels of water quality and of pollution in a given area of operation;

Food:

Scarcity:  Food availability to meet the needs of the population in the area of operation, through own production and/or importation (including the level of reliance on imports;

Affordability: Ability of poor households in the country of production to purchase the food they need locally;

Nutrition gap: Access to safe and nutritious food;

Climate:

Resilience: Capacity of a given country (infrastructure, food, water, health systems as well as its ecosystems) to cope with adverse changes in weather, and related  risk of human losses.

Energy:

Accessibility: Local people’s access to electricity and power and a country’s ability to meet its energy needs through domestic production or imports;

Fiscal:

Price volatility: Increases in consumer prices, or increases/decreases in commodity prices;

Inflation: Decline in purchasing power;

Instability: Management of the public debt and potential for financial crisis;

Every day, global demand for food increases while growth in agricultural productivity decreases. Given global demographics and the move of transition countries to Western-type consumer lifestyles, ever-increasing pressure is being put on the planet’s natural resources.

Of course, an increase in numbers of consumers means that companies have an opportunity for new markets. However, how do we ensure that resources will be available in the future to cater for this rising demand? How do we create more from less, more and better food using the same land surface for substantially more people?

Put simply, the equation is this: no supply=no business.  Companies need to build their brands, retain their competitiveness, and manage risks by looking after their resource base.  Hence there is a critical need to address sustainability issues in sourcing raw materials.  

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