Addressing External Costs in Retail and CPG Industries

Accounting for external costs in supply and value chains helps organizations make better informed decisions on how they manage their sustainability initiatives, improve ESG performance, and mitigate environmental, social, and financial risks. Given their significant impact to the environment and consumers, retail and CPG industries are in a crucial and advantageous position to drive this transformative change. Data and analytics can help organizations gain fuller and clearer visibility into the impact of their outputs and activities to the planet, people, communities, and their business. 

Global sustainability efforts have attempted to assign financial values to external costs to demonstrate how unsustainable practices cause losses to the global economy and the environment. In 2013, the environmental external cost was estimated at US$2 trillion. Now, the cost of continued inaction on climate change could reach US$178 trillion by 2070. On the positive end, transitioning to net zero for the next 50 years could add up to gains of up to US$43 trillion.

External costs in the retail industry  

Retail companies have a major stake in sustainability. The global retail industry constitutes about 9% of the global GDP, with an additional 20% contributed indirectly through related industries such as food processing, light manufacturing, warehousing, and distribution. It also employs more than 150 million people. It is therefore not surprising that the retail supply chain has extensive external costs: 

• Greenhouse gas (GHG) emissions: A report by the World Retail Congress and Boston Consulting Group revealed that the retail industry accounts for 25% of GHG emissions due to scope 3 emissions (indirect emissions in the supply chain). Light manufacturing for private-label products, transportation of goods by third-party logistics, and energy consumption of brick-and-mortar stores also contribute to air pollution. In turn, the overall health of the population is affected.  
  
  
• Wastes: The sheer amount of products sold and distributed by retailers also generate waste, whether through packaging materials or sold and unsold products. If unaddressed by a business, the cost of waste management gets passed on to local governments and communities. Food waste, in particular, poses major challenges to the environment as food waste in landfills contributes to GHG emissions too. In the US alone, up to 40% of the food supply is wasted.  

• Social issues. The scale of the retail value chain provides millions of jobs globally, but it also means a risk of labor and human rights violations that can go undetected. Third-party producers in underdeveloped countries may mean lower costs for businesses but mean lower labor and health standards. Notably, fast fashion retailers found this the hard way when suppliers were investigated for running sweatshops or engaging in violence against women. Suppliers of raw materials could also be employing children. The ever-changing trends in retail have also encouraged an unsustainable consumption habit among consumers, leading to more wasted materials. 

External costs in the CPG industry 

The consumer-packaged goods (CPG) industry has a vast value chain from production to consumption, making its impact on the environment substantial. Aside from the emissions and resource use for in-house operations, CPG companies’ supply chain makes up for more than 80% of their GHG emissions and over 90% of effects on air, land, water, and biodiversity.  

• Natural resources depletion: The production of goods like food and beverage, cosmetics, and household products requires constant input of raw materials. An unsustainable and inefficient supply chain leads to overuse of materials while contributing to waste. Industrial agriculture and manufacturing processes also contribute to water scarcity.  

• Wastes: In terms of waste, the CPG industry has to deal with the impact of plastics in products and packaging. Plastics have found their way to oceans, causing harm to marine life and biodiversity. Packaging waste increases the cost of waste management, including recycling efforts, on local governments. Food waste in the CPG industry, much like in retail, affects the world food supply. About 1 billion tons of food is wasted or lost across the value chain despite 10% of the world population being malnourished. 
  
  
• Health risks: The effect of unsafe or unhealthy consumer goods on public health is another cost to society with the use of toxic chemicals and a culture of overconsumption. The overall reduced quality of life and increase in sick citizens will put a strain on economic productivity and government health services. 
  
  
• Social issues: The CPG industry has to reckon with the same social costs as the retail industry, with potential labor and safety issues in the supply chain, including in the harnessing of raw materials. The need for more materials and desire for profit margins have led local suppliers to employ child labor, particularly in cotton and cocoa farms. 

Tackling external costs through analytics 

Green enterprise analytics solutions provide visibility and insights into various areas that have external costs so businesses can identify and manage risks:  

• Track GHG emissions from direct operations and from the value chain to pinpoint opportunities to offset carbon, reduce energy consumption, among others. 

• Monitor data on cost, availability, and traceability of production inputs and raw materials, including practices of suppliers. 

• Reinforce reduced emissions with sustainable transportation by improving delivery times and increasing efficiencies in loading and shipping processes.

• Monitor real-time data of product inventory and plastic and packaging use to reduce waste and identify recycling opportunities. 

• Monitor water footprint from processing of raw materials and production of goods, integrate water reusing and recycling impacts, and even assess water supplier practices. 

• Customize dashboards to benchmark wages across the organization and throughout the supply chain. 

Companies pursuing or implementing circular business models to reduce waste can also use analytics to track the flow of materials and goods. For example, a dashboard can be created to facilitate exchange among suppliers that have an oversupply and other suppliers. Initiatives that encourage consumers to return/exchange old or used products can use analytics to monitor impact and success. 

Furthermore, automated analytics tools streamline compliance with sustainability reporting. In the case of GHG emissions alone, companies struggle with measuring and meeting Scope 3 emissions. With the International Sustainability Standards Board (ISSB) and SEC soon to require Scope 3 reporting, businesses will need a comprehensive data strategy.  

From a marketing perspective, greenwashing has been an issue that most customers disapprove of. Consumers are increasingly conscientious when supporting businesses that claim to be sustainable, with more showing preference for products that indicate more specific ESG goals. Having capabilities in data and analytics ensures that impacts communicated to customers are real. It also allows businesses to identify areas where sustainability initiatives are making a difference, beyond the eco-friendly targets.  

Through analytics, businesses can account for external costs of operations. A robust green analytics strategy not only enhances operational performance but also enables advances towards more sustainability objectives. Organizations can revamp the management of costs and goods, minimize health, safety, and environment risks, and minimize their negative impact while gaining customer loyalty. 

Lingaro Group provides end-to-end data intelligence that enables enterprises to achieve sustainability and improve the triple bottom line. Lingaro’s supply chain analytics practice works with global brands and enterprises in strategically utilizing data and modern technologies to realize sustainability goals and comply with regulations in ESG reporting. Backed by industry-recognized expertise and powered by AI, Lingaro helps organizations optimize business processes, identify opportunities for improving operations, and mitigate environmental, economic, and social risks in their supply and value chains.