Why brand owners are choosing their packaging partners on ESG terms
According to GlobalData’s 'ESG in Packaging' report, packaging firms should see issues around ‘Environmental, Social & Governance’ (ESG) as an opportunity to steal a march on their competitors - but inaction could see them put out of business as a result.
“Citizens, governments, regulators and the media are demanding action from corporations to address ESG challenges,” the report says. “Social inequality, corruption, tax avoidance and a lack of action on climate change are issues companies must address head-on, in full public view.
“Packaging companies that fall behind the competition in ESG will see an exodus of customers moving to a more sustainable packaging provider and a drop in profits far sooner than they imagined.”
The report highlights the growing importance of the circular economy in packaging, with regulations in this area “gathering significant momentum” - including recent initiatives such as the European Commission’s 'Circular Economy Action Plan', the UK Government’s 'Circular Economy Package' and, in the US, growing support for the 'Realizing the Economic Opportunities & Value of Expanding Recycling' (RECOVER) bill.
However, GlobalData warns, it is not enough for companies merely to react to external pressures and regulations. “Despite the industry focus on recycling and the circular economy," the report warns, "CEOs cannot take their eye off the ball when it comes to social and governance performance.”
“Effective ESG performance must start from the boardroom. In the wake of COVID-19, corporate boards need to ensure their company performs financially while ensuring ESG remains top of the agenda.”
Economist Milton Friedman’s view that companies have no broader responsibility beyond the interests of their shareholders has come under increasing fire since the economic crisis of 2008, the report argues. “A new market mechanism is emerging that promises to drive progress," it adds.
“We call this the ‘ESG action feedback loop’. Briefly stated, companies act on ESG, win
stakeholder approval (eg from customers, partners, employees and investors) that drives reputational and competitive advantage, which incentivises further action and draws more participation.”
The report also pinpoints the sustainability winners and losers in materials terms, with
winners including recycled/recyclable packaging, paper and board, aluminium, glass, bio-derived plastics, mono-materials, and polyethylene terephthalate (PET) and high-density polyethylene (HDPE). Losers include complex non-recyclable materials and laminated plastics.
Addressing ESG challenges look daunting but the right approach will reap rewards
A number of trends are driving ESG issues, from technological advances such as the role of the Internet of Things (IoT), AI, blockchain and advanced materials, to broader macroeconomic trends, including pressure from activist shareholders and from 'Generation Hashtag' (younger Millennial and Gen-Z consumers, born 1991-2005), as well as the impact of COVID and increased M&A activity. Meanwhile, influential regulatory trends include the effects of circular economy plans and packages in the EU, the UK and China, as well as widespread international bans on single-use plastics.
Addressing ESG challenges may look daunting but, the report says, the right approach will reap rewards in the longer term. “Packaging companies need to make environmental sustainability a priority," GlobalData says. "Those that fail to keep pace will suffer the consequences.
“Companies should not view ESG as something that will damage profits. In fact, the opposite will occur, and companies that take ESG seriously will be the best performers in the market.”
However, this in turn can lure companies into overstating their sustainability credentials, leaving them open to accusations of “greenwashing”, particularly as ESG issues gain more momentum. This is true of carbon offset schemes, which are notoriously difficult to monitor and which are open to manipulation and abuse.
All stakeholders are pushing for the same thing - net-zero carbon - and this pressure will only increase
Nonetheless, there are a number of ways in which companies can credibly and effectively tackle carbon and greenhouse gas issues, from emissions reduction to carbon capture and storage. “Every company must understand that all stakeholders are pushing for the same thing - net-zero carbon - and this pressure will only increase, not relent,” the report warns.
It highlights examples of a number of household brand-owners, including The Coca-Cola Co, PepsiCo, Danone and Nestlé, that have already committed to the use of 100% recycled plastic in their packaging, as well as introducing reusable or recyclable packaging.
However, ESG is about much more than tackling climate change, encompassing a number of social challenges around the treatment of workers, customers, suppliers and local communities; and governance issues such as boardroom diversity, shareholder representation and remuneration packages for senior executives.
Net-zero targets without a credible plan is greenwashing - shareholders must hold them to account
The report cites examples of good practices, including metal packaging corporation Ball, which it describes as a leader in the fields of diversity and inclusion – but also highlights “laggards”, such as O-I Glass, a bottle supplier to beverage companies including Anheuser-Busch InBev, Heineken, MillerCoors, Constellation, Coca-Cola, Diageo, PepsiCo and Pernod Ricard. O-I Glass subsidiary Owens-Brockway, says the report, was fined US$1m by the Oregon Department of Environmental Quality for repeated air quality violations, incurring nine fines since 2004 and exceeding opacity limits (pollution reducing visibility) at least 50 times since 2009.
Such examples illustrate the need to go beyond the setting of ESG targets to establish a “comprehensive” sustainability plan. The report quotes billionaire UK hedge fund manager Chris Hohn, who said: “Net-zero targets for 2050 without a credible plan including short-term targets is greenwashing, and shareholders must hold them to account.”
The report concludes that ESG is the most important theme of the decade for packaging companies: “Packaging executives have a choice: let ESG run them out of business or use it as an opportunity to become tomorrow’s leaders.
“Companies need to act immediately and decisively to make this a reality, outlining a comprehensive ESG action plan and creating a dedicated sustainability team to deliver it.”
For full details of GlobalData’s 'ESG in Packaging' research, click here.