Inside the big business of investing in supply chains

The following is an excerpt from the State of Green Business 2017 report. Published by GreenBiz in partnership with Trucost, it provides a global view of the year’s trends in sustainable business. The report is free to download here.

Quick: How many gallons of water did it take to make that burger? Better yet, what’s the carbon footprint of that beer you’re about to wash it down with?

Connecting the dots on the lifelong environmental impacts of our favorite foods and consumer products long has been an elusive goal in corporate sustainability. The challenge lies in the difficulty of shifting the status quo within the Wild West of global supply chains, which encompass both manufacturing behemoths and hundreds of millions of small operators with very different incentive structures.

More recently, however, large companies in the agriculture sector and beyond have shifted their supply-chain strategies to focus on finance. Among those that account for the uptick in targeted supply-chain investment are Kellogg, Kashi, Clif Bar and Mondelēz in the food business, plus companies such as IKEA and Interface in other sectors.

Much of the activity in the food business is aimed at the estimated 450 million smallholder producers buried deep in the supply chain. Focused investment on forestry, materials innovation and renewably powered manufacturing are other hotspots that stand to have a major impact on the environmental implications of economic production. Still, the field also raises familiar questions about the tradeoffs between efficiency and sustainability in other areas, such as human rights, community development or animal welfare.

One thing that isn’t in doubt: the massive financial opportunity that hangs in the balance.

Embedding sustainable business practices in the global food and agriculture industry alone could deliver an annual $2.3 trillion windfall, according to one study released last fall by the Business and Sustainable Development Commission.

“All stakeholders can share in the benefits: Smallholder farmers improve their livelihoods; suppliers gain increased security of supply with improved quality; and we reduce volatility and uncertainty with a more secure and sustainable supply chain,” Unilever CEO Paul Polman recently wrote.

As Polman and other forward-thinking leaders know well, the natural resource calculations involved in agriculture are unique in their sheer scale. The sector consumes upwards of 70 percent of the world’s fresh water, according to U.N. estimates — a dual challenge and opportunity spurring investment in emerging tech tools and boots-on-the ground training alike.

PepsiCo’s Sustainable Farming Initiative, for instance, encompasses 28,000 growers in 15 countries and aims to tackle the water used in its ag supply chain, with a goal to “yield more crop per drop,” according to Vice Chairman and Chief Scientific Officer for global R&D Mehmood Khan. The company invested $80 million in water conservation from 2011 to 2015, which spans both efficiency upgrades and replenishing local watersheds.

Within the financial sector, new efforts are also forming to leverage impact investing specifically for supply chains. Livelihood Ventures, for instance, has launched the Fund for Family Farming that will invest $141 million over 10 years to smallholder farmers in Africa, Asia and Latin America.

Other individual companies are footing the bill for supply-chain initiatives. Mondelēz International, the world’s largest chocolate company, has put $400 million toward a 10-year plan to enhance supplier sustainability. One-quarter of the funds were earmarked for the estimated 75,000 smallholder farmers the company relies on in Côte d’Ivoire. The move followed a similar $70 million investment by subsidiary Cadbury, which also focused on suppliers in African nations, including Ghana, where the company reported initial double-digit growth in cocoa yields among participating farmers.

Although going organic isn’t a silver bullet for supply-chain sustainability, companies such as Kashi and Clif Bar are also experimenting with new financial models to weather years that land must lie fallow before crops grown there can bear the organic label. Both food companies are piloting multi-year supplier deals that pay farmers for the lost production time.

Adding to the supply-chain sustainability push are the 17 U.N. Sustainable Development Goals, which include everything from eliminating hunger to encouraging economic development for women and girls worldwide. Both are spurring investment opportunities. And we’re not talking small sums: The Business and Sustainable Development Commission estimates that unlocking the trillions in potential value trapped in supply chains would require annual investment of about $320 billion annually.

Kellogg, which relies on a network of some 65,000 smallholder farmers, is among the corporations investing in multiple facets of supply-chain sustainability. Although the company hasn’t publicly disclosed how much it plans to spend on pursuing the SDGs, Kellogg has enlisted the international nonprofit TechnoServe to work with 12,000 women smallholder farmers in India by providing training in so-called “climate smart agriculture,” plus access to financing, tools and agricultural inputs such as drought-resistant seeds.

Peer pressure is also coming into play with environmental risks posed by unsustainable supply chains. Institutional investors and advocacy groups such as Ceres are increasingly pressuring corporations that have lagged food industry peers — among them Kraft, Tyson and Dr. Pepper Snapple — to start by calculating risks that water and other environmental issues pose to their supply chains.

Optimal use (or reuse) of raw materials is another busy area of supply-chain investment, thanks in part to the growing circular economy models, where resources are constantly cycled back through supply chains. Groups focused on public-private collaboration to improve recycling infrastructure, such as the Closed Loop Fund, are certainly part of the equation. Large food players such as French dairy titan Danone are also getting on board, piloting new processes for extracting natural ingredients, such as the acid whey found in yogurt, to create complementary products, such as whey protein.

Across sectors, the infrastructure that powers supply chains is also being fundamentally reexamined. With its wider profit margins and smaller agricultural scale, large wine industry players such as Kendall-Jackson are experimenting with operations powered by renewable sources such as wind. Large-scale operators of data centers such as Apple have invested in renewably powered manufacturing — not just at home, but also in production hubs such as China.

Outside of clean energy, other technologies with big implications for sustainability are also gaining traction and investment from corporate incumbents.

The technological evolution occurring in agricultural supply chains can be seen in the rise of precision agriculture. Tech providers such as the Monsanto-owned Climate Corporation rely on networks of sensors — or in some cases, drones — to compile data on current field conditions, which is then used to inform analytics showing exactly how much water, fertilizer or other inputs a crop needs to maximize yield. Looking ahead, disruptors in the field are moving quickly to push the notion of radical efficiency even further, offering up everything from fully automated vertical farms (Bright Farms) to improved meatless products (Impossible Foods) that skip the pasture entirely.

Bioscience, too, is attracting investment from large corporate buyers. The fishing industry, well known for running into natural supply constraints in overfished oceans, is on the cutting edge of supply-chain innovation. For example, Calysta, a Silicon Valley biotech startup backed by $30 million in funding from investors including food supply giant Cargill, focuses on improving the sustainability of farmed fish by pioneering fish food made from bacteria that eats methane and turns it into energy.

There are also potential drawbacks in the ever-evolving quest to increase agricultural efficiency and output. Improving robotics already are raising red flags about the potential for mass job loss due to automation. The conversation about genetically modified crops is always rife with conflict. Even the age-old livestock business is at the center of ongoing debate over whether industrial agriculture is an environmental blessing or bane.

For ag supply chains, the stakes are only getting higher as climate change roils growing areas and seasons. “As much as we’re going to increase production, we’re still going to have a demand problem,” said Sara Menker, founder and CEO of food data provider Gro Intelligence, at an industry conference last year. “And we’re doing this at a time of unprecedented change in the climate.”

Companies to watch

Monsanto/Climate Corporation — seed business and GMOs aside, Monsanto and tech subsidiary the Climate Corporation are at the head of the pack in optimizing ag.

Kellogg — from supply chain emissions to smallholder initiatives focused on women in developing countries, the company is one to watch for broad-based food climate goals.

Clif Bar — on the front lines of experimentation in the economics of organic food.

Bright Farms — a pioneer in vertical farming, which could radically change the game for agricultural supply chain efficiency.

Interface — pushing the boundaries of manufacturing with 2020 goals targeting zero waste, zero emissions and zero adverse environmental impacts.