McKinsey sees dollars behind sustainability shift

Consumer packaged goods (CPG) companies in the United States increasingly are offering products labeled as sustainable, and the effort seems worthwhile as measured by the bottom line, according to global consulting firm McKinsey.

In a recent report conducted in cooperation with research firm NielsenIQ, McKinsey reports total consumer spending in the U.S. accounts for more $14 trillion annually and comprises two-thirds of U.S. gross domestic product (GDP).

“An important subset of this spending goes toward everyday CPG, ranging from foods and beverages to cosmetics and cleaning products,” the firm adds. “The sheer size of the CPG sector—with millions of employees and trillions of dollars in annual sales—makes it a critical component in efforts to build a more sustainable, inclusive economy.”

Report authors Sherry Frey of NielsenIQ and Jordan Bar Am, Vinit Doshi, Anandi Malik and Steve Noble of McKinsey examine what they portray as CPG companies “increasingly [allocating] time, attention, and resources to instill environmental and social responsibility into their business practices” and whether it is sensible.

When listing brand features that fit into the ESG (environmental, social, and governance) category, they include “environmentally sustainable” and “eco-friendly” along with less recycling-related terms like “fair trade.”

The researchers point to a 2020 McKinsey U.S. consumer sentiment survey in which more than 60 percent of respondents said they’d pay more for a product with sustainable packaging. A recent study by NielsenIQ found 78 percent of U.S. consumers say that a sustainable lifestyle is important to them, according to the latest report.

Attempting to further the research connected to those results, the authors ask: “Do shoppers follow through and buy these products while standing in front of store shelves or browsing online? Do their real-life buying decisions diverge from their stated preferences?”

Over a period of several months, McKinsey and NielsenIQ say they examined the actual spending behavior of more than 100,000 U.S. households starting in 2017, “tracking dollars instead of sentiment.”

The two companies’ conclusion: “The result, for CPG companies, is a fact-based case for bringing environmentally and socially responsible products to market as part of overall ESG strategies and commitments. Creating such products turns out to be not just a moral imperative but also a solid business decision.”

By the numbers, the researchers found products making ESG-related claims averaged 28 percent cumulative growth over the past five-year period, versus 20 percent for products that made no such claims.

Not every brand that made an ESG-related claim saw a positive effect on sales, according to McKinsey, but the firm says the broad and deep study’s results allow it to state that consumers are shifting their spending toward products with ESG-related claims.

Among a handful of recommendations for CPG companies made by McKinsey is one that will jibe well with the Design for Recycling initiative favored by the Washington-based Institute of Scrap Recycling Industries (ISRI). “Develop a product design process that embraces ESG-related claims alongside cost engineering,” the consultancy says.

“Using a disciplined design-for-sustainability approach, product designers can maximize the visibility, efficacy and cost-efficiency of ESG-related product features that will resonate with consumers," the report adds. "Meanwhile, ingredients, materials, and processes that don’t contribute to this goal should be eliminated.”

The\ authors conclude, “There is strong evidence that consumers’ expressed sentiments about ESG-related product claims translate, on average, into actual spending behavior. And this suggests that companies don’t need to choose between ESG and growth. They can achieve both simultaneously by employing a thoughtful, fact-based, consumer-centric ESG strategy.”

The full report, including accompanying charts, can be found here.