Managing Director & Partner
CPG companies will fall short of their net-zero goals unless they move from reengineering existing products, services, and business models to reimagining them.
Scores of consumer-packaged goods (CPG) companies have set net-zero commitments. The problem? Extensive interviews with executives across the CPG industry and a BCG survey of their downstream customers in the retail sector indicate that most companies are not on track to meet their pledges to nearly halve their greenhouse gas (GHG) emissions by 2030.
Although companies are deploying decarbonization technologies to reengineer their existing products, services, and business models, they are not yet reimagining their business. Critically, doing so does not require developing new breakthrough technologies. No doubt such advances will come and will create significant new opportunities. But companies can scale existing solutions on the basis of existing technologies over the next eight years by embracing new sustainable business models and building new markets—and thereby meet their 2030 net-zero goals. This article explores the broad approach that CPG companies must take to develop these new business models or new markets; future publications will take a deeper look at existing solutions that offer the greatest potential for advancing sustainability.
Understandably, CPG companies committed to environmental sustainability are struggling to advance this sort of change. In many cases, driving a true sustainability transformation requires a new approach grounded in systems thinking, along with a willingness to make ambitious moves that come with a high-level of uncertainty. In addition, in an environment characterized by disrupted supply chains, high inflation, and significant geopolitical uncertainty related to the war in Ukraine, companies may find it very tempting to focus primarily on addressing near-term challenges.
But inaction on the climate front carries a steep price. Companies that do not move aggressively now may have trouble accessing critical green resources later. They will also cede the lead in burgeoning markets to others and will miss out on capturing significant efficiencies. In contrast, those that seize the lead will establish meaningful competitive advantage.
Global greenhouse gas emissions have continued to rise over the past two decades, and global CO2 emissions rebounded in 2021 to match and then surpass their highest previously recorded level. To limit global warming to an increase of 1.5°C above pre-industrial levels, global emissions must peak during the next three years and then fall by 45% by 2030. The CPG industry will play a central role in the ultimate success or failure of that effort because the agri-food supply chain—in which CPG is a prominent player—currently accounts for an estimated 31% of annual greenhouse gas emissions.
Despite the urgency of the situation—and some promising initial steps that industry leaders have taken—most CPG companies are not yet moving aggressively to deliver on their climate ambitions. For example, a BCG survey of nearly 1,300 large companies in nine industries (including CPG) conducted in 2021 found that while 96% had set a goal of reducing emissions, only 11% had successfully cut emissions in line with those targets over the previous five years.
For CPG companies, decarbonization must be part of a true sustainability transformation. Those that move slowly on this front face increasing risks. For one thing, companies that fail to secure the green resources needed for a sustainability transformation will likely find that those assets are in short supply in the near future. For example, according to BCG estimates, 45% of demand for recycled plastics is likely to go unmet in 2025 as a result of supply shortages. In addition, companies that lag on sustainability will miss out on a major value creation opportunity and the chance to generate significant efficiencies. In six industries, including fast-moving consumer goods, BCG research found that the compound annual growth rate for green products was 4 to 25 percentage points higher than for nongreen products. And companies that fail to deliver on their net-zero promises will undermine their credibility with consumers and investors.
A sustainability transformation starts with a clearly defined ambition, strategy, and roadmap. Building from that foundation, companies must integrate sustainability throughout the existing business, including by establishing sustainability KPIs and embedding them in business reviews. In our work in the industry, we see that many companies with a focus on sustainability have set their strategy and have begun to integrate sustainability into the core of the business. But progress is still too slow.
The problem is particularly evident in decarbonization work. Efforts to decarbonize can be viewed as a matrix based on technology and business model or market. (See the exhibit.)
To reach net zero, companies today are focusing on reengineering. This involves leveraging current business models and markets to deploy existing solutions that are based on proven, scalable low-carbon technologies. But such moves will not deliver the dramatic reductions in carbon emissions needed by 2030. And promising new decarbonization technologies that may be capable of rebooting the existing business or supporting the invention of entirely new models and markets will not be scalable in time to help drive sustainability in CPG and reduce emissions over the next eight years.
That’s why CPG companies working toward sustainability must reimagine their business, creating new business models or markets to help them scale novel solutions based on proven low-carbon technologies. Such efforts will be critical to reducing scope 3 emissions—which are extremely difficult to address and account for the bulk of CPG companies’ carbon footprints—along the entire value chain. This reimagining can drive decarbonization in two critical areas: inputs and packaging.
Inputs. The inputs that CPG companies use to produce their products offer a number of potentially powerful decarbonization solutions.
Consider regenerative agriculture. Agribusiness systems today account for roughly 30% of global anthropogenic GHG emissions (roughly 30%). Regenerative agriculture—which includes such practices as no-till farming and the promotion of diversity in crops, noncrop plants, and pest predators—makes soil healthier and increases its effectiveness as a carbon sink. It also makes farmed land less susceptible to drought, flooding, pests, and climate change, thereby improving the overall resilience of the supply chain.
Alternative proteins pose another significant opportunity. Production of these proteins generates a fraction of the emissions of traditional meat such as beef. By 2035, according to BCG research, alternative proteins could account for 11% of all the meat, seafood, eggs, and dairy eaten around the globe.
At the same time, CPG companies can use new inputs and ingredients that have a better emissions profile. Consider seaweed. The current stock of seaweed around the world can store around 175 million tons of carbon annually, an amount equivalent to about 10% of the emissions from all the cars in the world. And seaweed has a diverse set of applications, allowing companies to use it as a low-emissions-ingredient in products such as fertilizer.
But while companies are making progress in regenerative agriculture and alternative proteins, and are beginning to explore new inputs such as seaweed, such efforts are stuck in pilot phases, and progress toward achieving scale is slow. To move them forward at scale, companies need to adopt new sustainable business models that involve rethinking their supply chains, procurement approaches, and relationships with suppliers. This is the next frontier.
Packaging. Circularity—an approach based on reusing and recycling resources, in contrast to the traditional “take-make-dispose” economic model—can be a major driver of emissions reductions in packaging. Today, however, just 9% of the global economy is circular, according to the Circularity Gap Reporting Initiative. Among the constraints that CPG companies are encountering in their efforts to improve circularity are challenges related to accessing sufficient recycled materials for their packaging.
This is hardly a surprise, given that circularity depends on complex systems that encompass raw material producers, manufacturers, consumers, and recycling companies. To advance, companies must adopt a systems approach that assesses the full range of connections and interdependencies associated with the initiative and then prioritizes a catalytic series of actions and interventions to make them possible. Success at scale at this stage cannot come without embracing new business models.
Companies across the CPG industry are trying to reduce emissions and embrace sustainability. And that is good news. But many do not fully appreciate the need to accelerate their efforts, focusing instead on matters that may seem more urgent and assuming that sustainability in CPG can evolve gradually.
That is a mistake for the planet and for business. The window is closing on the world’s ability to avert the worst impacts of climate change, and the time available to companies to transform successfully is narrowing. Companies that push for speed by reimagining their business will be the winners in a world where sustainability drives advantage.