How to Quantify Sustainability’s Impact on Your Bottom Line
22 September, 2017 / Articles
Humanity has an urgent need to fight climate change, and businesses can play a key role in doing so. But we recognize that, in many businesses, resources are often allocated according to short-term, bottom-line pressures. We thus wanted to figure out a way to help executives quantify the financial benefits of reducing their firm’s greenhouse gas (GHG) emissions.
We chose Brazil’s beef industry as the location of our case study, both for the size and complexity of the industry and for its impact on the planet. We found that sustainable and deforestation-free practices created significant financial benefits for all players in the industry’s value chain.
Specifically, our analysis found that the net benefits to ranchers ranged from $18 million to $34 million (12% to 23% of revenues) in net present value projected over 10 years. For slaughterhouses and retailers (Brazilian operations), we also projected positive benefits: $20 million to $120 million (0.01% to 0.1% of revenues) and $13 million to $62 million (0.01% to 0.7% of revenues). These ranges were wide due to the relative size of the different players in the supply chain (for example, a company that has higher revenues will realize greater benefits than a smaller firm). Nonetheless, the case study demonstrates that measuring the value of sustainable business can be done, and that sustainable business itself can be cost-effective. We hope this will serve as a powerful motivator to improve leaders’ decision making and bring sustainable business practices further into the mainstream.
Brazil’s Beef Industry
Brazil is the world’s biggest beef exporter, with 19.6% of the world market, and the second-largest beef producer and consumer. The industry makes up approximately 6% of Brazil’s GDP. But the impact of the industry on Brazil’s natural resources — and global GHG emissions — has been intense. From 1993 to 2013 the cattle herd in the Brazilian Amazon rain forest — covering most of country’s northern region — expanded by nearly 200%, to more than 60 million head. During this period, over 300,000 sq km of forest (an area about the size of Italy) was cleared, much of it for ranching. Deforestation causes up to 10% of global GHG emissions (trees store carbon, which reduces GHG emissions, and release carbon when they are cut or burned), and reducing deforestation is one of the cheaper and easier ways to tackle global climate change goals.
Nearly 450 companies around the world have committed to reducing or eliminating deforestation from their supply chains, including many in the beef industry. We set about investigating the financial costs and benefits of the uptake of sustainable and deforestation-free beef by ranchers, slaughterhouses, and retailers in Brazil. Quantifying sustainability efforts is often viewed as challenging, given limited data availability, the time and costs involved to conduct credible analysis, and the lack of widespread experience with this approach. Our research has found that embedded sustainability drives financial performance through mediating factors such as innovation, operational efficiency, risk reduction, employee recruitment, engagement and retention, customer and supplier loyalty, competitive advantage, reduced cost of capital, and improved marketing and sales. These values can be estimated credibly and cost-effectively, and we set about applying them to the Brazilian beef sector.
To do so, we worked with AT Kearney, who led the piloting of our methodology; retailers McDonald’s and Carrefour; slaughterhouses JBS (the largest beef producer in Brazil) and Mafrig; Brazilian cattle ranchers, Antea Group, and partner NGOs The Nature Conservancy, Instituto Centro de Vida (ICV) and Imaflora. The Betty and Gordon Moore Foundation provided partial funding for the research.
Since 2010 the Brazilian government, slaughterhouses, retailers, and NGOs have made a concerted effort to reduce deforestation, with public authorities responsible for satellite monitoring of the rain forest. The government agricultural agency teamed up with NGOs to work with ranchers on sustainable agriculture practices, which focused on no deforestation, more cattle per hectare, reforestation, managing water, biodiversity, soil conservation, reducing waste, and helping to improve the welfare of workers and animals.
Measuring Sustainability’s Impact Across the Value Chain
Our team worked with the value chain actors listed above to assess the financial benefits of sustainable and deforestation-free practices through research, data analysis, and interviews conducted over a four-month timeframe.
The main finding from our study is that sustainability practices lead to improved profitability across the value chain. The uptake of sustainable agricultural practices provided the most financial benefit, while the uptake of deforestation-free commitments reduced risk.
Ranchers, who invested the most in adopting new practices, reaped the most benefits as a percentage of total income in our model — between $18 million and $34 million (12% and 23% of revenues) net present value over 10 years. Ranches in the Amazon currently have fewer than one cow per hectare on average; sustainable intensification methods can increase that to three or more by using fencing, rotation, and other methods to increase the number of cows while decreasing the land use impacts. In addition, the cattle raised under this system are larger and higher quality than animals raised using standard practices, and can command a higher price at the slaughterhouse. These and other benefits translate into better cost management, agricultural innovation, and increased land productivity and quality.
Novo Campo, a program launched in 2012 by ICV, helps local ranchers produce sustainable and deforestation-free beef. For our study, we focused in detail on 10 ranches participating in the Novo Campo program and on Fazenda São Marcelo, a large ranch that has been Rainforest Alliance certified since 2012, working with the Brazilian NGO Imaflora.
“There is no price premium for sustainability alone, only for quality,” as one Novo Campo rancher told us. “But when we implemented sustainable practices, our quality immediately increased. Now 70% of beef is sold with quality premium, up from 0% in two years,” referring to the extra $0.11 per kilo of beef Novo Campo producers are paid for meat that meets quality standards. Sustainable practices allowed producers to increase the share of quality beef from 0% to 70%, resulting in $425,000 in additional revenue.
Cost-wise, the ranchers are: (1) reducing the costs of inputs such as fertilizers through better management; (2) reducing the cost per kg produced through better agricultural techniques such as pasture recuperation, water distribution, fencing and rotation of pasture; and (3) eliminating the need to lease additional land for production through sustainable intensification (more cattle per hectare). For example, the total cost per head produced in Novo Campo was 39% lower than on conventional ranches: $283 per head versus $460.
All of these changes led to big gains for ranchers, who experienced an increase in productivity of 2.3x per kg of beef per hectare. Profitability was up by 6.8x. GHG emissions were reduced up to 20%. Morale also improved, as ranchers saw these improvements in quality and productivity as a source of pride, stability, and competitive advantage.
For slaughterhouses JBS and Marfrig, most financial benefits came from enhanced revenues and margins from marketing higher-quality and deforestation-free beef, and reduced risks (particularly reputational, regulatory, and supply continuity) — between $20 million and $120 million (0.01% and 0.1% of revenues) in expected net present value over 10 years. Beef labeled as premium quality can be priced 20% to 30% above average-quality beef in supermarkets, bringing better margins to slaughterhouses.
According to our calculations, JBS stands to gain between $17.8 and $103.1 million net over 10 years — between 0.02% and 0.09% of its revenue. Marfrig stands to gain between $1.3 million and $16.5 million net over 10 years, between 0.01% and 0.13% of its revenue. Both are positioned to benefit through revenue increases, risk reduction, reduced cost of capital, and talent enhancement (better retention, engagement, and recruitment).
If more productivity is the biggest gain to the ranchers, and higher margins are the biggest benefit to the slaughterhouses, beef retailers like McDonald’s and Carrefour find themselves in a very different position. Consumer-facing brands such as these are the most vulnerable to reputational risk. Social media makes supply chains transparent, and consumers will hold the retailers responsible more than ranchers or slaughterhouses. Therefore, retailers are requiring their suppliers to demonstrate compliance with deforestation-free commitments.
“McDonald’s standards in beef sourcing are among the highest in the world; even if our mass consumer is not willing to pay premiums for sustainability, we still have to maintain them,” says Daniel Boer, McDonald’s Director of Protein Supply for Latin America.
Retailers must be willing to pay for sustainability simply because the risk is too great not to — even if there’s a cost to their bottom line. “In 2009, after Greenpeace’s report on beef and Amazon deforestation, we had to reduce our supply base to as few as six different suppliers, which is not an ideal position to be in, in terms of price and volume negotiations,” Paulo Pianez, the Sustainability Director of Carrefour, told us.
Despite these strictures, the Brazilian operations of McDonald’s and Carrefour reaped similar types of benefits as the slaughterhouses — $12.5 to $62.1 million (0.01% to 0.6% of revenues) in expected net present value over 10 years, due to reduced risk and higher quality. According to our calculations, McDonald’s Brazil stands to gain between $5.7 million and $22.2 million net over 10 years — between 0.13% and 0.5% of its revenue. Carrefour Brazil stands to gain between $6.8 million and $39.9 million net over 10 years, between 0.01% and 0.05% of its revenue.
Sustainability’s Link to Financial Performance
This case study found that, in the case of beef production in the Amazon, embedded sustainability does improve financial performance through mediating factors such as innovation, operational efficiency, risk reduction, employee recruitment, engagement and retention, customer and supplier loyalty, competitive advantage, reduced cost of capital, and improved marketing and sales.
In particular, we found that deforestation-free commitments reduce risk, and sustainable agriculture practices create financial opportunity for all value chain actors. It also appears that investments in deforestation-free traceability and other legal requirements can be paid for with the financial gains from adopting sustainable agriculture practices.
We believe that this methodology can be adapted for any industry or value chain by: (1) analyzing the drivers of improved performance (using the mediating factors in our model); (2) identifying key benefits; and (3) quantifying the benefits in financial terms.
The methodology and its application in this case study demonstrate that these financial improvements can be quantified and monetized in a credible and cost-effective manner, and have the potential to serve as a powerful tool with business decision makers.
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