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FLEXO Magazine : March 2009
INDUSTRY INDICATORS of course, scarcity will also cause prices to go up. Over the long term, however, the purpose of the policy is to mitigate some of the environmental effects and incentivize conservation of resources. Technology will go a long way in providing solutions to and oppor- tunities associated with Ecoflation. Furthermore, some companies and industries stand to gain from this changing business landscape if they are more efficient and innovative than their competitors. RESOURCES AT RISK While putting together the report, WRI examined publicly available commodity price forecasts from leading government and academic institutions that account for anticipated demo- graphic and economic changes, such as the growth of the middle classes in China and India. However, these forecasts do not include some of the environmental risks and opportunities that are important to the Ecoflation scenario. Building off leading research and expert opinions, WRI calculated how new environ- mental policies and climate change may lead to changes in the commodity prices of oil, natural gas, electricity, cereals, soybeans, palm oil, and wood and paper products. This information was then applied to six representative firms in the fast-moving consumer goods (FMCG) sector. Each com- pany had a global presence, with the majority of revenues and as- sets in North America and Europe. The study analyzes the firms' total delivered costs (TDC), which includes the cost of goods sold (COGS) and logistics, based on proprietary spending data and public financial statements. The published report finds that, five to 10 years in the future, certain key commodities will face an ad- ditional increase in cost that will translate into a hit on earnings if nothing is done to address the risks of Ecoflation. For example, in the Ecoflation scenario, all paper packaging in the FMCG sector becomes sustainably certified or contain at least 80 percent post-consumer fiber. This is driven largely by the corporate environmental policies of major consumer products companies, regulations such as the new Lacey Act amendment, and green consumer demand. WRI estimates an impact on pulp prices from sustainability certification of up to 5 percent. Although the costs of certification vary greatly by scale, region, and forest, one recent estimate for forests in North America shows that FSC-certified softwoods cost 2 to 3 percent more to produce. The WRI study assumes that this cost is likely to increase slightly in the future as demand drives new forests to become certified, many of which will likely be more expen- sive to certify if lower-cost options have already been certified. The greater impact on paper packaging prices may come from an increase in energy prices resulting from new climate change regulations, especially for mills heavily dependent on fossil fuels. This is especially true for recycled paper markets as recovered fiber is generally more energy intensive to produce than virgin pulp. The energy and resource efficiency of operations will become even more important drivers of competitiveness in an Ecoflation future. THE TURNAROUND In general, the first thing for any firm to do is to look at the major emerging environmental issues and determine which ones may become material in the future. A first place to identify risks is with energy sourcing and consumption, especially as legisla- tive action on climate change becomes more likely in the U.S.. Wherever a company can increase energy efficiency, water effi- ciency, and material efficiency, it will lessen its exposure and thus the potential supply/cost shock in the future. This is common sense and is hardly a new concept for well-run operations. It's also important to understand the supply chain and know where materials are coming from. For example, companies need to ensure that all wood fiber is not coming from forest regions heavily exposed to climate change risks. In a highly publicized case, forests in British Columbia, Canada are being decimated by the pine beetle which is thriving due to warmer winter condi- tions. Responsible and strategic sourcing that appropriately miti- gates potential risks by seeking geographical diversity in com- modity purchasing and allows for materials substitution where possible (e.g. soy instead of petroleum for ink resins) will go a long way to reducing the costs associated with Ecoflation. Ecoflation is not only about costs but also about opportunity. In a case study highlighted in the report, Procter and Gamble built basic efficiency and conservation programs that not only MARCH 2009 - www.flexography.org FLEXO
Sustainable Winter 2009