Addressing the financial constraints in the Consumer Packaged Goods (CPG) industry

Robert Brown MIET , Senior Director, Sales & Marketing and Stéphane Rapoport , Managing Director, Sustainability Solutions at ENGIE Impact examine how CPG companies can overcome financial barriers to decarbonisation and meet their sustainability targets with innovative solutions and strategies.

Having experienced exponential and continuing growth over more than two decades and being one of the major contributors to global carbon emissions, the consumer packaged goods (CPG) industry plays a pivotal role in combatting climate change. CPG companies recognise the imperative to reduce greenhouse gas emissions and are among the leaders in adopting Net Zero targets. Despite their carbon commitments, however, the industry’s decarbonisation progress has been slow.

Motivational factors should not be a problem, as CPG companies are closer to consumers than upstream companies in other major industries. They face greater pressure to meet changing consumer expectations and to enhance their reputation by acting. In fact, as our research shows, most business leaders are optimistic that they can meet their decarbonisation goals. Nevertheless, when it comes to translating strategy into implementation, concerns arise about lacking the resources to make it happen. This situation often stems from strategic choices that fail to prioritise carbon reduction measures, resulting in a lack of funding for sustainable initiatives

Decarbonisation challenges

CPG companies face unique challenges that can slow their decarbonisation efforts. They must meet changing consumer expectations and are exposed to reputational risk if they fail to act sustainably. For example, consumer groups demand reductions in plastic use and more sustainable packaging, distribution models, and materials. Addressing such demands requires continual innovation.

Furthermore, CPG companies have diverse product lines that require different raw materials and production processes. While synergies may emerge between product lines, enabling the streamlining of green manufacturing practices across multiple sites, a segmented approach is often required. This approach may benefit product development but can necessitate changes in sourcing, suppliers, and production methods to accommodate varying product specifications or quality standards. The need for continual innovation and investment in new products, production lines, and marketing can absorb available budgets, leaving less for sustainability initiatives.

The core issue is that decarbonisation projects often compete for funding with essential business activities. If funding has not already been allocated for decarbonisation, there is a risk that companies may delay carbon reduction projects to focus on immediate business needs, even though climate target dates are approaching rapidly. 2030 is a major milestone on the sustainability agenda. Companies shouldn’t assume they can wait until 2029 to start decarbonising. Impactful carbon projects take two or three years to assess, define, and initiate. Meanwhile, the longer companies wait, the more CAPEX will be required to meet emissions targets and the bigger the mountain becomes.

Innovative financial solutions

To avoid the risk of missing decarbonisation targets and facing potential reputational damage or loss of competitiveness, companies could consider various strategies to navigate their financial constraints, such as implementing internal carbon pricing and adopting as-a-service financing models.

Internal carbon pricing is a method whereby companies assign an implicit monetary value (shadow price) to their carbon emissions, reflecting the environmental cost of their carbon footprint. This price can guide decision-making about carbon avoidance measures by quantifying the cost of emissions, clarifying the value of emission reduction efforts.

Here’s how it works: a company sets a price per tonne of CO2 emitted. When the company reduces its emissions through renewable energy or energy efficiency improvements, it avoids that cost. These cost savings can be integrated into financial calculations, highlighting the benefits of sustainability measures and encouraging their implementation. Aligning economic incentives with environmental goals promotes a more sustainable business model, makes decarbonisation attractive from an investment perspective, and clearly identifies the cost of inaction.

‘As-a-service' financing models for decarbonisation investments involve a shift from an ownership-based to a performance-based model. Instead of a company using its own capital to acquire and implement decarbonisation measures, a third party installs and operates sustainable technologies and services and is remunerated through energy performance.

This model allows businesses to start decarbonising their operations immediately and provides savings without significant upfront expenditure, spreading the costs over time. Because this model helps avoid debates about CAPEX allocation between core products and decarbonisation measures, it lowers the barrier to stakeholder buy-in by easing the strain on their budgets.

While both methods are designed to diminish the cost burden of decarbonisation measures, many of the solutions they enable are intrinsically beneficial and deliver return on investment regardless of the level of a company’s ambition. On-site solar solutions, energy conservation measures, and implementing circularity and sustainability principles in product design are measures that can be taken immediately and will always pay off from a sustainability, economic, and reputational perspective.

A third possibility is that companies will need to manage stakeholder expectations. If financial constraints prevent companies from meeting their publicly announced targets, they may need to scale down those targets. This carries significant risk. If the first two strategies aim to keep carbon targets intact, the third approach acknowledges that the company cannot remain profitable while meeting its carbon ambitions in the coming years. It may be better to announce this earlier rather than later.

The implications of delaying decarbonisation are that the company will no longer contribute to the 1.5°C climate target, may suffer competitively compared to peers, and may harm their reputation in the long term. Such an approach raises the bar on finding alternative ways to demonstrate a social and climate commitment.

No time to waste

Decarbonisation is a key driver of value creation for CPG companies, reducing costs, increasing market share, and cultivating opportunities for green businesses and product lines. Corporate leaders must recognise decarbonisation as a strategic investment, and not just an expense. They can use several solutions to mitigate the financial constraints on decarbonisation and facilitate progress.

Still, the challenges facing CPG companies are myriad, and there is limited time to delay robust decarbonisation measures. The urgency is driven not only by the need to meet targets in the coming years but also by end-user expectations – the pressure from consumers who want to see real progress on sustainable products, packaging, and their delivery, and want to see it now.

Companies that wish to stay competitive may benefit from finding a sustainability partner that combines decarbonisation expertise with economic solutions and has extensive experience in assisting companies with the change management needed to finance their climate efforts.

To learn more about how ENGIE Impact works with their clients to transform their portfolio decarbonisation and optimisation programmes from strategy to reality, please reach out to [email protected] (London) or sté[email protected] (Belgium).

This article appears in Buying and Using Utilities Autumn 2024 issue

Read more ??Buying and Using Utilities Autumn 2024