Ecoflation could hit companies hard in the future

By Katie Bird

- Last updated on GMT

Related tags: Sustainability

Companies already struggling in the current economic climate will soon have to contend with a new phenomenon, ecoflation, according to a study by ATKearney.

Businesses must prepare for future environmental changes, and the policy initiatives that may ensue, if they don’t want to suffer significant losses in earnings, concluded the management consultancy firm.

Earnings could be halved

According to the study, which was co-authored by the World Resources Institute, consumer goods companies can except to see a fall in earnings of 13 to 31 percent by 2013, and 19 to 47 per cent by 2018, if they do not implement sustainable strategies throughout their supply chains.

The report, ‘Rattling Supply Chains’ explores the effects of a hypothetical future scenario on the profits of fast moving consumer goods companies.

It concentrates on four potential environmental and policy issues:

  • The implementation of a climate change policy ​that would result in a global price for greenhouse emissions
  • Water scarcity​ that would lead to increase production costs and declining agricultural yields
  • A deforestation​ policy resulting in companies agreeing to source from sustainability-certified forests and to use recycled fibre
  • And the introduction of a biofuels​ policy with sustainable requirements

The effect of this future scenario on the prices of eight important commodities was then calculated and the ultimate consequences for fast moving consumer goods companies estimated.

Energy costs are expected to increase sharply under the ecoflation scenario. By 2018 the study estimated an increase of 22 per cent for oil, 40 per cent for natural gas and 45 per cent for electricity, over and above the current predictions for these energy sources.

Wood and paper prices are also expected to rise by 13 per cent as a result of the ecoflation scenario, and palm oil, cereals and sugar crops are also expected to be hit by significant price rises.

Action must be taken now

However, all is not lost for companies operating with these commodities, as the report details a number of ways businesses can cope with these changes and minimise the losses.

It advises companies to take immediate action to understand the extent of their environmental impact and dependencies, to prioritise environmental issues and opportunities depending on their potential impact on costs and revenues and to start a sustainability action plan including short and long term strategies.

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