Sustainability is good business

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As consumers realize that the world’s resources are finite, sustainability plays an increasingly larger role in their purchasing decisions. According to the International Food Information Council’s 2023 Food and Health Survey, 34% of Americans say that environmental sustainability is “highly impactful” in their food and beverage buying decisions. Millennials were mostly likely to care about sustainability (46%), followed by Gen Z (39%), Gen X (38%), and Boomers (22%).¹

According to this same survey, “climate friendliness” made a particular difference in meat and poultry (62%), fresh fruits and vegetables (55%), and dairy (50%). Additionally, 40% of American consumers said that knowing a food and beverage product was produced in a way that minimized carbon footprint was an important factor in their purchasing decision. Among these consumers, the top indicators were recyclability and reusable packaging. Somewhat paradoxically, only 12% of consumers said they regularly bought products labeled as having a small carbon footprint.

In this way, marketing products as sustainable can be challenging for consumer packaged goods companies. While demand is there, consumer behaviors can be difficult to predict, and these products don’t always translate into sales. However, a recent study by McKinsey and Company, in collaboration with NielsenIQ, shows that products with environmental, social, and governance (ESG)-related claims are trending higher in sales compared to products without ESG-related claims.² The market researchers analyzed five years of US sales data, from 2017 to June 2022 that covered 600,000 individual product SKUs representing $400 billion in annual retail revenues. The products analyzed represented 44,000 brands across 32 food, beverage, personal-care, and household categories.

According to that research, products with ESG-related claims grew disproportionately in that five years with a compound annual growth rate of 6.4% compared to 4.7% in products with no ESG-related claims. In food, 11 out of 15 categories experienced outsized growth due to ESG-related claims, with the best performance in snack foods, yogurt, cheese, fully-cooked meat, candy, gum and mints, as well as seafood. Interestingly, only two of the nine beverage categories saw growth due to ESG-related claims, with those being kombucha and sports drinks.

The research from McKinsey and NieslenIQ show that both small and large brands benefit from making these claims, and that established brands may even benefit more than new brands making these claims. They explain that newer brands making ESG-related claims outperformed non-claim counterparts in 32% of categories while large brands making ESG-related claims outperformed non-claim counterparts in 68% of categories. They explain that this may be due to the fact that consumers expect new brands to make these claims but are pleasantly surprised when established brands do so.

The types of claims used also matters. According to McKinsey, less common claims tended to have a larger impact on sales. For example, products making less prevalent claims such as “vegan” or “carbon zero” saw 8.5% greater growth than those that did not. Products making medium-prevalence claims such as “sustainable packaging” and “plant-based” grew 4.7% more than those that did not and products with the most common claim such as “environmentally sustainable” only grew 2% more than those that did not. Analysis of household panel data from NielsenIQ saw that there was a positive association between the depth of the claim and the loyalty it engenders. This is important for repeat sales. For example, brands that made more than half of their sales from ESG-related claims saw 32-24% repeat rates. Additionally, the more ESG-related claims on a product, the better the sales.

While there are a lot of factors that impact the success of brands that make ESG-related claims, the numbers show that there is the potential for significant growth, and sustainability is therefore good business. That said, it’s not easy. True ESG initiatives require a lot of investment and dedication.

Putting in the work

One example of a difficult but important sustainability initiative is the push for regenerative agriculture. According to the Rodale Institute, which has its own Regenerative Organic certification, regenerative agriculture prioritizes soil health through practices like cover crops, crop rotation, and conservation tillage to promote biodiversity in the soil and the ecosystem, while also avoiding synthetic inputs. Additionally regenerative agriculture addresses animal welfare as well as social fairness to farmworkers.

Regenerative agriculture is crucial because current farming practices are rapidly eroding soil health, with some estimating that there are only 60 years of topsoil left if degradation continues. That means, no more farming.³ Some of the reasons for the degradation is chemical-heavy farming techniques, deforestation that causes erosion, and global warming. Preserving soil health is therefore important for preserving our future. Regenerative agriculture has higher standards than even organic agriculture, which can make it difficult for some farms to transition into regenerative. Companies like ADM (Chicago) are incentivizing farmers to take the leap.

“As stewards of the land, farmers understand that regenerative agriculture is critical to driving new value and securing the future of their businesses and the planet. No two farms are the same, which is why we offer an array of programs that suit all farmers, meeting their varied needs and empowering them in the ways that work best for their individual situations. As such, incentivizing growers to successfully execute regenerative agriculture practices requires a multi-faceted approach,” says Michelle French, director of global sustainability programs for ADM. “First, it’s essential to offer a diverse portfolio of incentives that meet farmers where they are and align with their specific needs and operations. Specifically, our re:generations program incentivizes farmers to implement cover cropping, nutrient management, conservation tillage, and other regenerative agriculture practices. The program includes the flexibility to incentivize farmers based on either their use of those practices, or the beneficial outcomes stemming from them.”

ADM also provides technical assistance and advisory support to help guide farmers, partnering with organization such as Farmers Business Network, Practical Farmers of Iowa, Nebraska Association of Conservation Districts, Minnesota Soil Health Coalition and the American Farmland Trust. The company also emphasizes the importance of having downstream partners in food, fuel, and feed industries that will support regenerative agriculture programs by buying crops from regenerative farms.

This is hugely important in the nutraceutical space where there is a steady demand for herbs and other agricultural commodities. Additionally, as more consumers embrace a plant-based lifestyle and try to reduce their meat consumption in an effort to be more environmentally friendly, the burden on commodities like soy and peas will only increase. Therefore, producing these products in environmentally sustainable ways not only helps ensure a steady supply long-term but also maintains that ideal of environmental sustainability for the consumer. In this vein, there is also a push for upcycling to reduce waste and find new ways to use waste.

The brand Evergrain, for example, is making plant-based protein from spent brewer’s grain, and Brightseed used AI to find develop a fiber ingredient, called Bio Gut Fiber, made from upcycled hemp hulls. Organizations such as the Upcycled Food Association are helping to bring awareness to upcycled products and give consumers confidence in purchasing these products with its Upcycled Food Certification.

Advancement in technology is really pushing sustainability to the next level as well. Fermentation is allowing companies to extract omega-3s from microalgae, as an alternative to fish, and some brands are even growing meat through cell cultures to eventually help people divest from animal agriculture without having to give up meat.

With so much innovation happening to enhance sustainability on multiple fronts, it behooves manufacturers to begin investing in sustainable ingredients and manufacturing. Consumers are already expecting brands to at least make an effort at sustainability. As the space becomes more sophisticated and consumers understand the many ways their purchasing behaviors impact the environment, they will prioritize spend on products that they believe will help create a healthy planet and future.

References

1. 2023 Food and Health Survey. International Food Information Council. May 23, 2023. https://foodinsight.org/2023-food-health-survey/ 
2. Consumers care about sustainability—and back it up with their wallets. McKinsey & Sons. February 6, 2023. https://www.mckinsey.com/industries/consumer-packaged-goods/our-insights/consumers-care-about-sustainability-and-back-it-up-with-their-wallets#/ (accessed 2024-04-28).
3. Arsenault, C. Only 60 years of farming left if soil degradation continues. Reuters. December 5, 2014.https://www.reuters.com/article/us-food-soil-farming-idUSKCN0JJ1R920141205/ (accessed 2024-04-29).