Consumers who already pay a premium for ethical goods such as Fairtrade and organic produce are unlikely to be put off by an economic slowdown
Spring is in the air and the world has never looked greener. Farmers’ markets are mushrooming, organic product ranges are increasing their share of supermarket shelf space and the market is awash with green gimmicks, from carbon-neutral car insurance to low-carbon customer reward cards. And companies are clamouring to broadcast their progress on going carbon neutral.
But will a predicted economic downturn cast a shadow over the current trend towards ethical goods, services and business practices? Bleaker forecasts from economists suggest that the unravelling housing market in the US coupled with persistently high energy prices may well lead to a global recession – or at least a slowdown.
As anticipated food price inflation takes hold, will shoppers hang up their ideals, bypass the organic produce and reach for its conventional counterpart instead? Or will ethical choices prove to have a motivation that goes deeper than price?
Will Fairtrade products be cleared from supermarket shelves to make way for the cheaper commodities? Or will supermarkets narrow their margins on ethical brands and price these products more competitively?
And, as the slowdown in consumer spending affects companies’ spending patterns, will corporate social responsibility be classified as a core activity or will it be sheared off into the cost-cutting pile?
Sitting pretty
Mark Robertson, spokesman for Ethical Investment Research Services (Eiris), which investigates companies’ non-financial performance, says ethical consumers are like ethical investors, in that they care about more than price.
Robertson says ethical investors show greater commitment to their investments than their more neutral counterparts. “It is for this reason that ethical funds tend to fluctuate less and that, in times of economic downturn, ethical funds lose less than mainstream funds,” he says.
Robertson adds that consumers’ “deeper ties” with ethical brands could mean that such brands will fare better during recession than their non-ethical equivalents. Backing that prediction, a recent paper published by the Canadian Agricultural Economics Society reports: “Purchasers of Fairtrade products are much less price-responsive than those of non-Fairtrade products.” So an increase in prices of ethical products would not automatically result in a switch to cheaper products.
Ethical products are premium brands, insofar as consumers willingly pay more for them. A report published last year by Packaged Facts, a research company, revealed that half of Americans aged 18 to 29 would spend more for products labelled organic, environmentally friendly or fair trade.
Increased appeal
Ryan Brightwell, ethics adviser at the UK’s Co-operative Bank, says certain ethical brands may be slightly more expensive, but they often present longer-term savings and increased appeal during recession. “During an economic downturn, consumers tend to become more careful about their spending. Given that consumers are more inclined to buy products that represent cost savings, energy-efficient products are likely to emerge as winners,” he says.
Brightwell adds that ethical products would probably retain their shelf space during a recession. He says: “Supermarkets that have built a level of trust on corporate responsibility issues are unlikely to let this trust slip by cutting down on their range of ethical products.”
There has been a recent trend among supermarket chains to narrow their margins on more ethical brands, particularly those bearing the Fairtrade mark, Brightwell says.
Jim Hawker, spokesman for green insurance group IBuyEco, goes as far as to say: “Ethical brands are recession-proof – they are perceived as luxury consumer goods, targeted at a niche market that will be less affected by the credit constraints of a recession.”
Breaking the bank?
While ethical consumerism has experienced unprecedented growth over the past five years in both the UK and the US, ethical purchases currently account for just 5.3 per cent of total UK household spending.
But the market potential for ethical brands has not gone unnoticed. Cadbury’s acquisition of Green & Black’s (organic chocolate), Mars’s ownership of organic brand Seeds of Change and Danone’s subsidiary Stoneyfield Farm (organic yoghurts) indicate the anticipated growth in these markets.
Currently in the UK, leading household brands including Barclays, Tesco, B&Q, HSBC and Marks & Spencer are investing in campaigns to drive ethical brands and business practices into the mainstream.
Good examples are Tesco’s recent price-cutting and promotional campaign on energy-efficient light bulbs, Barclays’ new Breathe card, which offers low-interest credit on green purchases, and B&Q’s in-store campaigns promoting the efficiency gains of home insulation. Given that 27 per cent of the UK’s carbon emissions are generated from households (and 50 per cent of UK households are poorly insulated) it is an area pertinent to the UK’s emissions reduction strategy.
According to research by the Climate Group, consumers not only expect leading brands to have strategies in place to tackle climate change issues, but also expect these brands to help consumers develop their own strategies, via the choice of products and services made available to them.
For the companies responding to this demand, it is an exercise in brand building. David Hall, director of the Climate Group’s “Together” campaign, which promotes ethical consumerism, says that while companies are engaging in these initiatives to gain a competitive advantage, the benefits to the bottom line are currently intangible. Indeed, some companies are taking a hit – Tesco ran its campaign on efficient light bulbs at a loss. But Hall argues that the benefits accrued in terms of brand reputation over the longer term are enormous.
During the last US recession, John Quelch, associate dean of Harvard Business School, said: “Only when you get into a recession will you know whether your values will hold up.” According to Corporate Register, a global corporate responsibility directory, the number of sustainability reporters actually accelerated during the last economic downturn of 1999-2001.
Reporting on the rise
But this period coincided with a number of high profile exposés including Nike’s supply chain of sweatshops in Asia, BP’s connection with human rights abuses in Colombia and the McLibel campaign against McDonald’s. As companies struggled to clear their names and improve their reputations, corporate social responsibility was granted a new lease of life.
Currently, 81 per cent of FTSE 100 companies are producing stand-alone reports on corporate responsibility, sustainability, environment or similar. And 56 per cent of companies listed in the FTSE All World Developed Index, representing 77 per cent of its total value, have adopted clear environmental policies.
Those percentages may seem impressive, but the bigger picture is less inspiring. Of the millions of companies operating around the globe, only 2,380 are producing these non-financial reports.
Professor Malcolm McIntosh, founding editor of the Journal of Corporate Citizenship, suggests that the immediate need for businesses to address climate change will continue to pull corporate responsibility from the periphery into the mainstream, regardless of any economic slowdown.
Taking a more cautious view, professor David Vogel of the Haas Business School at the University of California, Berkeley, says ethics is currently not embedded in corporate activities – nor is it ever likely to be. “Just look at the behaviour of banks,” he says. “Banks claim to be transparent and responsible, yet they are persistently, incredibly irresponsible. Most major firms don’t invest in CSR and for the ones that do, its mostly cosmetic.”
Vogel, author of “The Market for Virtue”, says the impact of a global slowdown on corporate responsibility investment would be modest “because companies don’t spend much on it anyway”. He adds: “We might see a shift away from green marketing campaigns and a refocus of managerial energy, but there will be no major impact.”
Vogel thinks cuts will most likely occur in payroll, green marketing, capital investments and research and development. “Laying off people is likely to be the first cost-cutting measure – and CSR firms are no more likely to retain employees than non-CSR firms,” he says.
Sara Tye, founder and managing director of Redhead PR, a consultancy specialising in sustainability communications, also noted that staff numbers offer a quick cost-cutting solution during recession. But she argues that tight management, including human resource management that avoids over-recruiting, should protect jobs.
McIntosh expects CSR budgets to remain intact, saying: “A downturn is unlikely to negatively impact companies’ current CSR commitments, given that these companies will be unwilling to lose their established competitive edge.”
Some even argue that during recession, companies practising corporate responsibility may have an advantage over those that are not. Robertson says: “A company that is well run, managing its environmental and social impact, is more efficient in its own right.” He says companies actively addressing environmental, social and governance issues are usually better at managing risk and may even outperform others in a recession.
Demand leads; supply follows
On the flip side, some say that recession may be the catalyst that drives ethical business into the mainstream, as consumers and companies turn to energy-efficient practices and products as a means of cost savings.
Emily Farnworth, group manager at the Climate Group (and an Ethical Corporation columnist), says: “The movement toward a green economy is really young – often, the suppliers or the technologies are either very limited or do not even exist yet.”
The organic food market is illustrative of shortfall on the supply-side. A dramatic shift towards organic in the UK and the US recently created serious supply problems. David Bird, senior market analyst at Mintel, the market research firm says: “The lengthy conversion process from regular to organic farming meant that producers have not been able to react quickly to satisfy the growing demand for home grown organic food. This has undoubtedly had a huge impact on the growth of the market.”
In order for the nascent green economy to get kick-started, it will need a lot of support, from governments and other institutions. So far, in both the UK and the US, this hasn’t been forthcoming.
Last year, the UK department of trade and industry’s Low Carbon Building Project, which supported projects that reduced carbon emissions from buildings, proved so popular that grants for the scheme ran out on the first day of every month. In response, the DTI cut back the level of grants. This effectively rendered the installation of alternative renewable energy sources uneconomical.
Across the water, Joel Makower of GreenBiz, a research firm, says: “Green business has shifted from a movement to a market. But there is much, much more to do.”
The GreenBiz “State of Green Business 2008” report concluded that environmental performance in the US was advancing, but “not at the pace needed to offset economic growth or avoid the worst effects of climate change”.
Long road ahead
In a rational world, facing climate change issues and tighter budgets, consumers will shift from the throwaway culture towards a more sustainable one – paying slightly more for higher quality, longer-wearing products and investing in goods that are more energy and cost efficient.
But as McIntosh notes, the reality may prove different. “For the last 20 years, consumers have been reared on the idea that it is normal to fly somewhere else for the weekend and to do nothing else with their free time than spend. People simply do not know how not to consume,” he says.
The credit crunch may therefore be a good thing in that it might prompt consumers to take a longer-term view on the product choices they make.
In the same vein, companies should be taking a longer-term view of their practices. From a purely operational perspective, energy-efficient strategies deliver cost benefits, whether an investment into wind turbines or energy-efficient light bulbs. Reporting and outward-looking strategies, such as greater stakeholder engagement, have also been proven to deliver a competitive advantage, the benefits of which are greater brand loyalty from both consumers and investors, and more finely tuned risk strategies.
While the portion of consumers and companies taking ethics seriously remains a minority, an increasing body of evidence indicates that it will continue to grow as society addresses climate change issues. And so it appears that, recession or no recession, ethical consumerism and ethical business are here to stay.
The UK’s market for virtue
· The market for ethical products in the UK is now worth £32 billion.
· The average annual spend per household on renewable energy is just £6, while annual household expenditure on ethical food and drink is £190.
· The biggest market for ethical products comprises energy-efficient appliances, followed by organic food.
· Three out of five consumers recognise the Fairtrade mark.
Source: Cooperative Bank Ethical Consumerism Survey 2007
Worldwide demand for ethics
US consumer spending on ethical goods and services will amount to $57 billion by 2011.
Source: Packaged Facts
“Eco-friendly, ethical personal care products are likely to prove one of the biggest worldwide trends in 2008”
Source: Mintel
The organic market will increase by 54 per cent by 2012; 71 per cent of British consumers have purchased organic goods over the past year
Source: Mintel