The challenges and opportunities of ESG transformation for consumer businesses

In the coming years, the economy is expected be strongly affected by the resource scarcity and climate change, which will require companies to fundamentally reshape their business model to enable a considered approach to different environmental and societal challenges.

In turn, employees, regulators, and financial investors are pushing privately owned businesses in the consumer sector towards improved environmental, social and governance (ESG) performance.

That drive is already having an impact: more than half (59%) of consumer CxOs have already budgeted costs for implementing sustainability strategies and reporting, according to our C-suite barometer 2023 research. Considerations for a consumer business include the issues around the environmental footprint of a product: inputs, transportation, logistics, packaging, waste and energy. On the social front, meanwhile, it includes concerns about exploitation, wages, modern slavery and consumer safety. Finally, mid-market businesses are increasingly affected by regulatory pressure, following scrutiny further along the supply chain.

But with the ESG challenge comes an opportunity too – for mid-sized businesses to position themselves at the heart of the consumer demand environment of the future. Integrating ESG practices can help distinguish a company on the market, attract more investments and work as a driver for eventual change. Many businesses have multiple considerations when it comes to an ESG transformation, according to Tristan Mourre, Sustainability Partner at Mazars in France: “Privately owned businesses are faced with multiple constraints related to sourcing, energy efficiency, inflation, and regulatory changes. All of these have a direct impact on the daily functioning of a business, which prompts the need for an urgent business model transformation that enables them to respond to further challenges.”

In responding to that challenge, “a lack of knowledge can be a common issue for the mid-market when it comes to tackling ESG”, according to Philipp Killius, Sustainability Partner at Mazars in Germany, who outlined that the Mittelstand (Germany’s SMEs) often have a lot of competing demands to deal with, despite being the country's strongest driver of innovation and technology. It’s not unusual for the finance or marketing department to be asked to take responsibility for sustainability reporting. Philipp explains: “The problem with that is it becomes another task on an already long list. A positive first step would be to identify someone internally who has the capacity to begin looking at it properly”.

Getting all of your people on board is also key. “It's not a good idea to do this type of project behind closed doors, and then present the results without informing your employees along the way,” Philipp adds. “They're ultimately the ones who have to live up to the expectations and bring it to life”.

The right approach to these industry challenges lies in the broadness of operations throughout the supply chain, right from the production of goods and services to their delivery to consumers. The consumer is also a vital stakeholder, according to Tristan: “The most important consideration here would be consumer safety, reduced packaging and making sure you encourage consumers against producing unnecessary waste. Doing this can help distinguish a business on the market, attract more investments and work as a driver for eventual change.” The approach to integrating ESG practices in the companies’ strategy will vary depending on how they holistically address all these parameters.

“One example here focuses on a mid-market consumer goods business specialising in the production of dairy products. Adaptation to ESG challenges could include:

  • Making the sourcing phase of production more sustainable by supporting the farmers they work with to adopt more sustainable practices
  • Optimising their logistics to enhance sustainable production
  • Ensuring they avoid using chemicals that are harmful to the environment
  • Managing the energy consumption and waste

From the social standpoint, it is their responsibility to ensure workers are duly remunerated and supplied with adequate conditions”.

Technology

Technology can also be an enabler for ESG transformation – but only if it’s used in the right way. According to Philipp: “without the right strategy, structures or people, technology will fail. Introducing software or an e-commerce platform for products and services without a clear plan on sustainability targets, objectives and measures just doesn’t work. Getting it right is important because technology is vital for both data collection and monitoring, especially in the consumer sector.”

Tristan adds “Technology is another essential component of integrating ESG into a business model, whether it’s artificial intelligence or tools enabling data analysis, reporting, performance monitoring. Data is widely used in agriculture and production when it comes to the logistics optimisation, climate analysis, monitoring of the life cycle of plants, kettle, etcetera”.

The opportunity offered by the conscious consumer

Businesses that can overcome some of these challenges will reap the rewards. The rise of the purpose-driven consumer is one opportunity waiting to be exploited, especially given research suggests that customers are more willing to pay a premium for sustainability in consumer goods. “Improved brand loyalty is a big opportunity. If a business can really demonstrate a commitment to ESG, and also tell the right story around it, then it really can build strong brand loyalty among conscious consumers,” adds Hester Bos, Senior Sustainability Manager at Mazars in The Netherlands.

Philipp agrees: “Consumers are increasingly willing to spend more money on sustainable products, services and goods. That's an opportunity for an owner managed company to differentiate itself against its competitors and gain more market share.  It also applies to business-to-business (B2B) transactions too. Companies are often willing to pay more money for a piece of machinery that reduces noise or energy consumption, for example.” For Tristan, such issues as excessive packaging and food waste are among the biggest considerations the consumer sector should keep in mind.

Winning the war for talent

A crucial aspect to consider is other stakeholders, says Hester. “These are often family businesses that are not used to making this type of information public. It’s important that they know and learn who their stakeholders are – and the mindset of these employees, customers, suppliers and investors – to ensure they have their support.” Board engagement is also a key step in any sustainability strategy, supported by Mazars’ practical guide to sustainability for boards and leadership teams, to help engage leaders and move to determined action, with a wide range of insights on what aspects to consider and what questions to discuss.

A successful ESG transformation can help privately-owned businesses engage another key group of stakeholders – its people. You can attract and retain employees by being a more sustainable business. “Gen Z, in particular, want to work in a company with a purpose,” Killius says. “That's why mid-market businesses need to be sustainable and then communicate about it. It’s also really helpful in retaining your people. The worst thing to do is engage in greenwashing.”

To discover your ESG strategy, please visit our dedicated sustainability hub for privately-owned businesses, which has a collection of resources to support you on your sustainability journey. For more information on our global 2023 consumer report, or how Mazars can help you to transform your business, please get in touch.

Contact us