Two storylines accounted for a majority of the activity likely to result in impacts for the consumer packaged goods (CPG) industry: 1) supply chain connection to Scope 3 emissions and 2) the need to create climate-financing strategies that enable small and large-scale agriculture to push forward impact-reduction initiatives like the Global Methane Pledge and overcoming deforestation. For now, it appears that the CPG sector will need to go at it alone, as most funding and action appears earmarked to energy and industrials, but supply chains should expect added scrutiny moving forward. Lux breaks down these two storylines across three key areas of impact for CPGs — carbon trading, climate financing, and 1.5 °C is the new 2 °C.
Nationally determined contributions (NDCs) will be important moving forward, but for the CPG sector, outside of transport and logistics, impacts on business will depend on how countries monitor, report, and verify not only Scope 1 and 2 emissions but also Scope 3 emissions [often described as Land Use, Land-Use Change and Forestry (LULUCF)]. Most countries must improve transparency with how NDCs and in particular LULUCF-related emissions are calculated to enable the consumer industries to align; however, as industry supply chains become further scrutinized, companies should expect their business to be impacted by Scope 3 emissions standards and public scrutiny. Industry standards are weak in this area, and thus companies will likely need to find partners to help assess and then implement strategies or technologies to reduce emissions. It is unclear how COP26 will impact voluntary carbon markets, but it is clear that prices of CNC (a proxy for nature-based credits) and CEC (a proxy for CORSIA-eligible credits) are on the rise after the event. Policy development toward standardization is underway but will likely take time given the diversity of stakeholders involved and the large opportunity.
Emerging nations are responsible for a significant proportion of food and ingredient production but struggle to scale opportunities given a large population of smallholder farmers and limited access to technologies that enable communication and market penetration. However, according to a recent report by the United Nations' International Fund for Agricultural Development and Climate Policy Initiative, only 1.7% of climate funding makes it to this critical constituency of the food system. Therefore, companies shouldn't bank on the proposed funding from the Glasgow Climate Pact to reach these groups. Instead, they will likely need to invest through their own supply chain or partner with existing initiatives like the Adaptation for Smallholder Agriculture Program. Major players like Unilever, Nestlé, and Danone have already begun to develop financing initiatives that enable these producers and improve the overall value of their supply chains.
1.5 °C is the new 2 °C
Managing the supply chain is again front and center for CPG through the lenses of prevention and mitigation of deforestation and the Global Methane Pledge. COP26 was a major platform to end deforestation. In fact, 141 countries have now signed on to reverse forest loss and land degradation by 2030. Asia and South America are key targets for this initiative, and many companies in these regions are moving toward deforestation-free supply chains in as soon as the next four years. While currently driven by consumer demand, it is not surprising that policy stemming from COP26 debates will create further incentivization. The challenge that must be overcome is how to support growers and rural communities as consumer demand for reduced impact grows.
The Global Methane Pledge aims to limit methane emissions by 30% compared with 2020 levels targeting oil and gas but also will impact the livestock industry, rice production, and alternative ingredients produced from methane, including alternative proteins. The pledge itself is voluntary and places a considerable degree of interest in the continued development of technologies for monitoring emissions, creating circular opportunities, and linking Scope 3 emissions to sustainability targets. Companies should expect continued interest from the livestock industry to reaffirm goals of improving sustainability, the development of products that reduce emissions but also align with improved animal welfare, and communication of carbon neutrality, especially as disruptive alternatives receive financing to scale rapidly. COP26 itself was surrounded by a range of propaganda from the plant-based sector, but nations did not take sides at this point, instead supporting both industries in growth toward a more diverse protein future.
The Lux Take
While the CPG sector was not a focal point for COP26, it retained a more important role than in past COP events. The CPG supply chain will be under scrutiny moving forward; therefore, expect this area of business to be impacted and in need of improved platforms for measuring, reporting, and verifying mitigation actions. The supply chain will be connected to deforestation, Scope 3 emissions, and agriculture or processing practices. Lastly, it is unlikely that climate funding will reach the food sector easily, so companies should expect to have to enable and finance their own vertically integrated supply chains. Look to connect remote sensing platforms to key agroecosystems as well as to markets. More platforms are emerging, but there are many directions for each platform to go in, so help move the needle by partnering with initiatives that have the tools and are looking for scaled impact.
This blog post is part of a series focusing on key decisions made at COP26 and their impacts on corporate innovation and sustainability. Read the first post in the series here.