Risk, Resilience, Responsibility and Revenue. The driving agenda of sustainable agriculture and food supply chains

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1 promar May 2017 Risk, Resilience, Responsibility and Revenue The driving agenda of sustainable agriculture and food supply chains To meet global demand and output for a growing population, agricultural output needs to grow by 20% every decade for the next 40 years. The current system is imbalanced, unsustainable and requires new investment, innovation and technological development driven by sustainability. In 2014, both IPCCi and the World Bank reported that a combination of land use change and agriculture contributes 23% of direct emissions. The current structure and composition of the global food system is a big part of the problem and this needs to be addressed. Consumer-led concerns, and government policy, are increasing pressure on the supply chain to demonstrate that affordable and nutritious food and drink can be delivered in a responsible, secure, resilient and sustainable way. However, there is still significant inertia within the agriculture and food sector to obtain data/evidence and drive effective, demonstrable change for the benefit of all within the supply chain (producer to consumer). Shifting focus Simple measures to improve sustainability have focused on processing facilities or logistics. But these easy to change measures only influenced c. 20% of impacts. The gap is within primary production agriculture and food industry has not prioritised tackling impacts (social, environmental or economic). This is where progress is needed if a real influence on the future sustainability of the supply chain is to be achieved. Agriculture and food production has been heavily influenced by globalisation, which has exposed supply chains to negative news headlines such as disease risk, labour, or environmental pollution. Consolidation within the supply chain has changed the dynamic of food and drink production and there is now a greater need for transparency around how ingredients are reared/grown for consumption. A previous lack of interest by the consumer in where food comes from, how it is grown/reared and a disconnection with farming has weakened the industry and exposed risks which could be addressed through sustainability measures. This is changing, and studies are showing growing consumer interest in the sustainability of the food supply chain. The time for change is now.

2 promar Acknowledgements & references Tom Gill is Head of Environment for Promar International and is responsible for managing the Promar Environment Team. Tom works with agriculture and food businesses across the supply chain and delivers advice, training and technical support. Examples include carbon footprinting for UK dairy companies and environmental management for farm businesses He can be contacted on or Matt Brennan is a Senior Environmental Consultant for Promar International. Matt has led the development of the Promar Dairy Carbon Footprinting tool and works with retailers and dairy processors across the UK. Matt s main areas of expertise include carbon footprinting, resource efficiency assessment, water use, scarcity and appraisal. He can be contacted at or matthew.brennan@genusplc.com Dr John Kazer is Carbon Footprint Certification Manager at the Carbon Trust. John is responsible for managing certification projects and has audited product carbon footprints of over 200 individual products. His main areas of expertise in product carbon footprinting and sustainability are agriculture and food processing. He is the technical author of the carbon footprint assessment methodology for the UK dairy industry. He can be contacted on or john.kazer@carbontrust.com The authors would like to thank the following organisations for their contributions to the report References/sources i. IPCC 2014 ( ii. iii. climatechange1/05_2.shtml iv. Carbon Trust Consumer Interest Poll news/7/carbon-trust-reports-consumers-are-showing-arenewed-interest-in-carbon-footprint-labelling%20/ v. CDP/Carbon Trust/BSR Global Supply Chain Report vi. Energy and Climate Change Public Attitude Tracker, Department for Business, Energy and Industrial Strategy (BEIS) vii. Attitudes of European Citizens Towards the Environment, European Commission Barometer. Sept 2014 viii. The Sustainability Imperative: New Insights on Consumer Expectations, Nielsen. October 2015 ix. Environment, Food and Rural Affairs Committee. Food Security: Demand, Consumption and Waste. Sixth Report of Session x. xi. definition

3 Developing the opportunity The 4 Rs underpinning sustainability Agriculture can also be a critical part of the solution. The sustainable management of land through soils, cropping and forests constitute our largest carbon store ii that can (and should) only become more vital in the fight against climate change iii. Agriculture is therefore an essential component and driver of solutions as well as a direct contributor to the problem. Therefore, addressing sustainability in agriculture and food sector is no longer optional. It is our view that there is a need to demonstrate that the agriculture and food industry can deliver sustainability. Sustainability can be the binder between supply chain risk management and brand risk management. There is a need for urgency and we want to create a platform within the industry to drive improvement. However, this does not need to be at a cost to the industry, and can help to protect and enhance brand values as well as ensuring the long-term security of supply. This can help to build consumer confidence and the value of businesses across the supply chain. In this paper we aim to illustrate that the 4 R s provide clarity and perspective Mitigate Risk Source Responsibly Provide long term security of supply RRRR TO for the 80 per cent of the industry which has still to commit to change. The model shows how this integrates with the needs and demands of the supply chain. Build Resilience Unlock Revenue Protect and enhance brand values Risk and resilience 2017 will see numerous changes in the social and political landscape, with Brexit providing a potential magnifier for issues, particularly in relation to the environmental policy framework. Developing a resilient business that can adapt and grow in this climate requires a knowledge and understanding of your risks and opportunities. Within the food supply chain, there is a wide range of potential systemic risks for the future that can affect the environmental footprint and financial sustainability of any business across the supply chain. Some of these issues sit within the food supply chain and are important to consider from farm level, such as limitation in the soya supply chain; land competition leading to loss of quality grazing pastures to higher value arable or horticultural use, and other sectors such as residential; competition from new innovative options such as artificial meat and milk. The timescales of these options vary greatly, but all can put direct pressure on the food supply chain in the UK. Understanding these risks, and working collaboratively across the supply chain to build resilience, will be critical to providing long term security of supply in the UK. Developing the agenda However, pressure also comes from other sectors across the social and political landscape. For example, a strong health agenda has targeted the levels of protein in the UK diet and also impacted on UK livestock sales. This can have a direct impact on the financial sustainability of the livestock supply chain, and it is unclear how this risk may increase in the future. This can, however, also present potential opportunity for diversification, export to other markets, or drive more innovative marketing strategies to focus on organic or sustainable meat supply chains. Using the sustainability agenda can provide a competitive advantage for the UK supply chain, whilst also improving business efficiency and resilience. Collaborating on this across the supply chain can help to build trust in sustainable brands, presenting a unique marketing opportunity by seizing on consumer pressure for environmentallyfriendly products. As well as a focus on reducing carbon, there are rising social pressures to demonstrate improvements in water and energy efficiency, reductions in waste, and improvements in animal health and welfare. Securing the supply chain This allows the potential for a premium value supply chain within the UK, developing the key risks into opportunities for innovation to create a strong and resilient supply chain. Within this, the role of policy is not to define sustainable agriculture, or the details of how it is delivered. Policy makers should rely on existing commercial activity, and support the good progress being made by businesses. This will allow business needs and risks to lead policy. It will be important that this is done across a range of sectors, to ensure that policy considers the impact and requirement of change across key areas such as health and education, which will have a significant impact on the changing pressures on agriculture and food supply chain for the future.

4 promar Consumer Viewpoint 68% An EU study reported that 68% of UK respondents felt that promoting sustainability would boost the economy. A 2015 study by Nielsen supported this - reporting 4% growth in companies demonstrating sustainability, compared with 1% for those that did not. Reducing waste A Promar study showed waste as the 3rd highest concern for consumers Fresh, natural & organic What guides choice? Local produce Health & Wellbeing 39% Despite their concerns, 29% of UK respondents to an EU survey stated they felt badly informed on environmental issues. 39% stated that better information and education was critical to reducing environmental impacts. 94% Surveys by Promar, BEIS and the EU reported that 70-94% of people felt that protecting the environment was important and/or stated they were concerned about climate change. Brand Trust A Nielsen study showed that having a sustainability initiative was of high importance Studies show... of consumers actively seek information on the sustainability of products they 17% purchase. 82% would be willing to pay more for sustainable/environmentally friendly products. This is shown as highest in younger age groups. 55% 55% of UK consumers told a Carbon Trust YouGov poll they would feel much more positive about a company that has reduced the emissions of its products. 2nd Sustainability is reported as the 2nd highest priority after price.

5 Demonstrating responsibility: enhancing brand value Change in the food supply chain is primarily driven by the consumer, and the sustainable agenda should be no different. The infographic (opposite) shows the range of opinion which exists amongst consumers. Recent studies by a range of organisations, including the Carbon Trust iv, CDP v, Promar, BEIS vi, the EU vii and Nielsen viii have consistently shown that consumers regard environmental issues as important areas of concern. But does this translate into practice when choosing products? Surveys undertaken by Promar and Nielsen have identified a range of key factors that influence consumer choice. Brand identity remains critical in this, particularly the level of consumer knowledge and trust in that brand, focused on areas of environmental policy, health and wellbeing. Following on from this, despite limited change in consumer preference, there is still a clear desire from the outcomes of recent studies that have shown consumers are willing to purchase environmentally friendly/sustainably sourced products. However, there is a need for action. More information is needed to educate consumers about food production and understand the true value of sustainable food and drink. What drives opinion? The issue with this is knowledge and information. While a 2015 report to the Environment, Food and Rural Affairs Committee ix identified that 17% of consumers will actively seek out information on a products sustainability, it also reported that demonstrating sustainability was often reliant on the use of insubstantial metrics, with the use of phrases such as local, seasonal and organic that in many cases did not stand up to examination as a demonstration of sustainability. This may be reflected in a growing confusion for consumers. Despite 94% stating that protecting the environment was important, a recent EU survey identified that 29% of UK citizens felt they were badly informed on environmental issues; this is a 5% increase on the same survey 10 years earlier. It is therefore unsurprising that 39% felt that providing more information was a key way to tackle climate change and environmental issues. Who takes responsibility? Consumer surveys have suggested that the responsibility should fall on a range of groups from industry to government. However, around 70% of consumers have reported that they feel large companies are not doing enough to improve sustainability, and that improving sustainability will help to boost the economy. Responses have indicated a growing pressure for business to demonstrate social responsibility in operation of their supply chain. A Nielsen study in 2015 indicates this may be an increasingly significant factor in consumer brand selection; the results showed 4% annual growth in brands that demonstrated commitment to sustainability, compared to only 1% for those that did not. Critically, growth was highest for those that were able to make a specific claim to sustainability for a product, as well as demonstrating a wider sustainability agenda in the company. In addition, CDP s global supply chain report showed significant cost savings associated with reductions in supply chain emissions. The information reviewed has consistently showed that consumers in younger age demographics report higher focus on sustainability in their product choice, and a higher willingness to pay for sustainable products. This demonstrates a huge opportunity to reduce operational costs and realise a new marketing opportunity. Brands targeting this key demographic to demonstrate real and quantifiable sustainability are well positioned to provide future financial growth and stability for their business.

6 promar Pioneering resilience and responsibility in the supply chain McDonald s UK is one of the biggest customers of British and Irish farming. Supporting and helping the industry create a more sustainable and secure future is a priority for the food business. McDonald s purchases ingredients from over 17,500 British and Irish farmers each year. This is a commitment driven through policy and goals, with a clear visioni which has seen the retailer in 2016 cook over 130 million free range eggs, use 74 million litres of milk from the UK, of which over 30 million litres was organic semi-skimmed milk, source all tea and coffee from Rainforest Alliance producers, and ensure 100% of the potatoes for their famous French fries are grown by British producers. So why does McDonald s UK commit to sustainable sourcing? McDonald s investment and development in sustainability allows it to provide leadership and direction for its farmers. It helps them to deliver a traceable, assured and secure food supply which meets the expectations of their customer. This helps them to achieve the following key objectives: Mitigate Risk Build Resilience Optimise usage of natural resources (land and water) and utilise inputs in an efficient manner to maximise value across the whole of the supply chain Support its farmers to promote future growth and stability. Increasing resilience of McDonald s and its farmers to volatility and global market shocks Source Responsibly Unlock Revenue Provide leadership and direction for farmers by demonstrating best practice, using evidence derived from a robust data and evidence base Meet the demands and expectations of the consumer base to build trust in the brand and develop McDonald s as a sustainable brand

7 Where has McDonald s UK been taking this policy into effect and what results is it delivering for the supply chain? Since 2008 McDonald s UK has been investing in its beef supply chain and has invested over 1 million to better understand how they could support farmers to make incremental changes to their farming methods and practices. McDonald s UK established seven sustainable beef clubs (SBCs) across the UK and Ireland, involving around 200 farmers. These farmers also completed annual carbon assessments. Between 2008 and 2014 this approach reduced emissions on farms involved each year by 23%, and when annualised this carbon footprint represents a drop of 4.6% per year for those farmers involved against an industry benchmark of 0.94%. Using data to drive effective change within the McDonald s Supply Chain Looking to the future, McDonald s has been a core member of the SAI Platform and they are looking build on the principles established through this cross industry group to guide their journey toward even greater sustainability in their beef supply chainx. In the UK and Ireland, McDonald s is starting to explore the opportunity to drive improvements through data sharing and the generation of sustainability metrics which can not only be used to improve performance further but to boost customer trust in the sustainability of food productionxi. Challenges in engagement The question is how to drive improvement which delivers future proofed, sustainable farm business models which underpin the objectives of McDonald s. A secure, food supply chain manages risk for the farmer, the processor and the retailer. However, this requires a significant step change for suppliers. It would require a careful balance of driving the top 25% whilst bringing the 75% of producers further along the distribution curve. Yet our view of the lessons learnt from this work to date is that securing the commitment and motivation of all producers can be difficult. Even some of the most basic measures such as obtaining daily liveweight gain can prove to be inhibitors for some producers. The question is how to enable this change and what measures are need in terms of on-going support and development. In response we consider it is investment, action and commitment which have been a hallmark of McDonald s UK so far. For example there has been a clear commitment to invest in the next generation of farmers through its progressive young farmers programme. These achievements demonstrate the focus which the business has taken to integrating economic, environmental and social objectives within its core business model.

8 promar Implementing change management The sustainable management of natural resources and the environment is fundamental at every component of the supply chain pre and post farm gate. There needs to be a rapid move from knowledge to understanding to change management. The question is how and what metrics of sustainability can be applied to the agriculture and food supply chain. The vision of making change needs to be driven from data specific to the business, rather than a generic view or a gut feel. The focus must be to maximise data and use this to drive continual improvement based on key specific metrics for the individual business. Once a business has a handle on its data, it can define metrics and use benchmarks to drive improvement. This sounds simple but the reality is often quite different and requires an in-depth understanding of the wider supply chain links. The McDonald s case study shows that even large-scale businesses and pioneers in this can find challenges with their supply base. But by measuring and addressing the impact, we can use the 4 R s to identify marginal gains and this allows us to run through the change cycle. Supply chains are becoming even more integrated and vertical in nature. This should make change in performance easier but the reality can prove different e.g. 80/20 rule. Consolidation in the industry is driving change faster but barriers still exist. Therefore, the question is: how do we, as an industry, motivate and influence change across the supply chain? How do we drive effective change and continual improvement across the supply chain? Establish the purpose Change again Monitor Measure Challenge the mindset Change Compare How can data drive change within your supply chain business? Data is vital, and this must be relevant, measureable, accurate, and integrated with the needs and requirements of your business. Farms are awash with data; the challenge is collecting and selecting the right data for your farm or supply chain and then using this to define your measurable, and controllable, boundaries. Ultimately it is identifying the metrics which integrate with your 12 to 36 month business plan that is critical. Collecting data in areas that you cannot influence, control or change will not improve your business efficiency, resilience or sustainability. There is a plethora of data available; industry costings, farm business accounts, carbon footprints, health indices/ metrics are all measures that provide the temperature check for your individual business or across a supply chain. However, too often we focus on the easy to address issues. The iceberg illustration shows the need to drill down beneath the surface. Using this model can help to provide the resilience and growth needed to maximise the revenue achieved from your business. But there are inherent challenges in this, particularly when engaging across your supply chain. Conflicting priorities and business models may put pressure on your plans, and understanding and communicating the complex social and political pressures on different stages of the supply chain can be difficult. Easy to Measure Difficult to measure Breakdowns Opportunity costs Overproduction Non value adding time Skills Yield, inputs, outputs, overheads Disease soil condition and fertility However, this data is critical to the financial and environmental sustainability of your business. Using data to drive continual improvement and gain commitment from farmers/ supply chains is very difficult; but should remain a target for all in the industry to support and maintain a resilient food supply chain in the UK and globally. Undersupply Duplication Waste Low impact on Sustainability Plant & animal genetics High impact on Sustainability Farming Food & Drink Environment Public sector Trade associations and levy boards Private agri business Published by: Promar International, Alpha Building, London Road, Stapeley, Nantwich, Cheshire, CW5 7JW. Tel Fax www. promar-international. com