How to Quantify Sustainability’s Impact on Your Bottom Line
by Tensie Whelan, Bruno Zappa, Rodrigo Zeidan, and Greg Fishbein
SEPTEMBER 13, 2017
Humanity has an urgent need to fight climate change, and businesses can play a key role in doing so.
But we recognize that, in many businesses, resources are often allocated according to short-term,
bottom-line pressures. We thus wanted to figure out a way to help executives quantify the financial
benefits of reducing their firm’s greenhouse gas (GHG) emissions.
We chose Brazil’s beef industry as the location of our case study, both for the size and complexity of
the industry and for its impact on the planet. We found that sustainable and deforestation-free
practices created significant financial benefits for all players in the industry’s value chain.
Specifically, our analysis found that the net benefits to ranchers ranged from $18 million to $34
million (12% to 23% of revenues) in net present value projected over 10 years. For slaughterhouses
and retailers (Brazilian operations), we also projected positive benefits: $20 million to $120 million
(0.01% to 0.1% of revenues) and $13 million to $62 million (0.01% to 0.7% of revenues). These
ranges were wide due to the relative size of the different players in the supply chain (for example, a
company that has higher revenues will realize greater benefits than a smaller firm). Nonetheless, the
case study demonstrates that measuring the value of sustainable business can be done, and that
sustainable business itself can be cost-effective. We hope this will serve as a powerful motivator to
improve leaders’ decision making and bring sustainable business practices further into the
mainstream.
Brazil’s Beef Industry
Brazil is the world’s biggest beef exporter, with 19.6% of the world market, and the second-largest
beef producer and consumer. The industry makes up approximately 6% of Brazil’s GDP. But the
impact of the industry on Brazil’s natural resources — and global GHG emissions — has been intense.
From 1993 to 2013 the cattle herd in the Brazilian Amazon rain forest — covering most of country’s
northern region — expanded by nearly 200%, to more than 60 million head. During this period, over
300,000 sq km of forest (an area about the size of Italy) was cleared, much of it for ranching.
Deforestation causes up to 10% of global GHG emissions (trees store carbon, which reduces GHG
emissions, and release carbon when they are cut or burned), and reducing deforestation is one of the
cheaper and easier ways to tackle global climate change goals.
Nearly 450 companies around the world have committed to reducing or eliminating deforestation
from their supply chains, including many in the beef industry. We set about investigating the
financial costs and benefits of the uptake of sustainable and deforestation-free beef by ranchers,
slaughterhouses, and retailers in Brazil. Quantifying sustainability efforts is often viewed as
challenging, given limited data availability, the time and costs involved to conduct credible analysis,
and the lack of widespread experience with this approach. Our research has found that embedded
sustainability drives financial performance through mediating factors such as innovation,
operational efficiency, risk reduction, employee recruitment, engagement and retention, customer
and supplier loyalty, competitive advantage, reduced cost of capital, and improved marketing and
sales. These values can be estimated credibly and cost-effectively, and we set about applying them
to the Brazilian beef sector.
To do so, we worked with AT Kearney, who led the piloting of our methodology; retailers
McDonald’s and Carrefour; slaughterhouses JBS (the largest beef producer in Brazil) and Mafrig;
Brazilian cattle ranchers, Antea Group, and partner NGOs The Nature Conservancy, Instituto Centro
de Vida (ICV) and Imaflora. The Betty and Gordon Moore Foundation provided partial funding for
the research.
Since 2010 the Brazilian government, slaughterhouses, retailers, and NGOs have made a concerted effort to reduce deforestation, with public authorities responsible for satellite monitoring of the rain forest. The government agricultural agency teamed up with NGOs to work with ranchers on sustainable agriculture
practices, which focused on no deforestation, more cattle per hectare, reforestation, managing water, biodiversity, soil conservation, reducing waste, and helping to improve the welfare of workers and animals.
Measuring Sustainability’s Impact Across the Value Chain Our team worked with the value chain actors
listed above to assess the financial benefits of sustainable and deforestation-free practices through research, data analysis, and interviews conducted over a four-month timeframe.
The main finding from our study is that sustainability practices lead to improved profitability across
the value chain. The uptake of sustainable agricultural practices provided the most financial benefit,
while the uptake of deforestation-free commitments reduced risk.
Ranchers, who invested the most in adopting new practices, reaped the most benefits as a
percentage of total income in our model — between $18 million and $34 million (12% and 23% of
revenues) net present value over 10 years. Ranches in the Amazon currently have fewer than one
cow per hectare on average; sustainable intensification methods can increase that to three or more
by using fencing, rotation, and other methods to increase the number of cows while decreasing the
land use impacts. In addition, the cattle raised under this system are larger and higher quality than
animals raised using standard practices, and can command a higher price at the slaughterhouse.
These and other benefits translate into better cost management, agricultural innovation, and
increased land productivity and quality.
Novo Campo, a program launched in 2012 by ICV, helps local ranchers produce sustainable and
deforestation-free beef. For our study, we focused in detail on 10 ranches participating in the Novo
Campo program and on Fazenda São Marcelo, a large ranch that has been Rainforest Alliance
certified since 2012, working with the Brazilian NGO Imaflora.
“There is no price premium for sustainability alone, only for quality,” as one Novo Campo rancher
told us. “But when we implemented sustainable practices, our quality immediately increased. Now
70% of beef is sold with quality premium, up from 0% in two years,” referring to the extra $0.11 per
kilo of beef Novo Campo producers are paid for meat that meets quality standards. Sustainable
practices allowed producers to increase the share of quality beef from 0% to 70%, resulting in
$425,000 in additional revenue.
Cost-wise, the ranchers are: (1) reducing the costs of inputs such as fertilizers through better
management; (2) reducing the cost per kg produced through better agricultural techniques such as
pasture recuperation, water distribution, fencing and rotation of pasture; and (3) eliminating the
need to lease additional land for production through sustainable intensification (more cattle per
hectare). For example, the total cost per head produced in Novo Campo was 39% lower than on
conventional ranches: $283 per head versus $460.
All of these changes led to big gains for ranchers, who experienced an increase in productivity of
2.3x per kg of beef per hectare. Profitability was up by 6.8x. GHG emissions were reduced up to 20%.
Morale also improved, as ranchers saw these improvements in quality and productivity as a source
of pride, stability, and competitive advantage.
For slaughterhouses JBS and Marfrig, most financial benefits came from enhanced revenues and
margins from marketing higher-quality and deforestation-free beef, and reduced risks
(particularly reputational, regulatory, and supply continuity) — between $20 million and $120
million (0.01% and 0.1% of revenues) in expected net present value over 10 years. Beef labeled as
premium quality can be priced 20% to 30% above average-quality beef in supermarkets, bringing
better margins to slaughterhouses.
According to our calculations, JBS stands to gain between $17.8 and $103.1 million net over 10
years — between 0.02% and 0.09% of its revenue. Marfrig stands to gain between $1.3 million and
$16.5 million net over 10 years, between 0.01% and 0.13% of its revenue. Both are positioned to
benefit through revenue increases, risk reduction, reduced cost of capital, and talent enhancement
(better retention, engagement, and recruitment).
If more productivity is the biggest gain to the ranchers, and higher margins are the biggest benefit to
the slaughterhouses, beef retailers like McDonald’s and Carrefour find themselves in a very different
position. Consumer-facing brands such as these are the most vulnerable to reputational risk. Social
media makes supply chains transparent, and consumers will hold the retailers responsible more
than ranchers or slaughterhouses. Therefore, retailers are requiring their suppliers to demonstrate
compliance with deforestation-free commitments.
“McDonald’s standards in beef sourcing are among the highest in the world; even if our mass
consumer is not willing to pay premiums for sustainability, we still have to maintain them,” says
Daniel Boer, McDonald’s Director of Protein Supply for Latin America.
Retailers must be willing to pay for sustainability simply because the risk is too great not to — even if
there’s a cost to their bottom line. “In 2009, after Greenpeace’s report on beef and Amazon
deforestation, we had to reduce our supply base to as few as six different suppliers, which is not an
ideal position to be in, in terms of price and volume negotiations,” Paulo Pianez, the Sustainability
Director of Carrefour, told us.
Despite these strictures, the Brazilian operations of McDonald’s and Carrefour reaped similar types
of benefits as the slaughterhouses — $12.5 to $62.1 million (0.01% to 0.6% of revenues) in expected
net present value over 10 years, due to reduced risk and higher quality. According to our
calculations, McDonald’s Brazil stands to gain between $5.7 million and $22.2 million net over 10
years — between 0.13% and 0.5% of its revenue. Carrefour Brazil stands to gain between $6.8
million and $39.9 million net over 10 years, between 0.01% and 0.05% of its revenue.
Sustainability’s Link to Financial Performance
This case study found that, in the case of beef production in the Amazon, embedded sustainability
does improve financial performance through mediating factors such as innovation, operational
efficiency, risk reduction, employee recruitment, engagement and retention, customer and supplier
loyalty, competitive advantage, reduced cost of capital, and improved marketing and sales.
In particular, we found that deforestation-free commitments reduce risk, and sustainable agriculture practices create financial opportunity for all value chain actors. It also appears that investments in deforestation-free traceability and other legal requirements can be paid for with the financial gains from adopting sustainable agriculture practices.
We believe that this methodology can be adapted for any industry or value chain by: (1) analyzing the drivers of improved performance (using the mediating factors in our model); (2) identifying key benefits; and (3) quantifying the benefits in financial terms.
The methodology and its application in this case study demonstrate that these financial improvements can be quantified and monetized in a credible and cost-effective manner, and have the potential to serve as a powerful tool with business decision makers.
Methodology
Our results reflect assumptions we made based on previous research and analysis; the data has not been fully validated by the supply chain actors themselves. Data for the ranchers was much easier to obtain
than data for the slaughterhouses and retailers. Therefore, we used publicly available information and wider use of assumptions for the latter. However, we believe the analysis provides useful insights into the value created by sustainable and deforestation-free ranching and, just as important, a methodology that all supply chain actors can use.
The methodology was created following five steps, building from the intellectual capital and research of the NYU Stern Center for Sustainable Business with AT Kearney and the input of the Monetization Working Group.
First, based on our framework (Sustainable Business Benets at the Firm Level), we identified and selected for deeper consideration a list of potential benefits of adopting sustainable and deforestation-free practices across the different players in the supply chain.
Second, we designed a method to quantify those benefits and ascribe a monetary value to them. While this is an oversimplification, it basically boils down to: analyzing the drivers of improved performance through adoption of sustainable practices; identifying significant benefits for each supply chain actor based on each of the overarching drivers; quantifying the results; and assigning a dollar value.
Third, we conducted a round of interviews with industry stakeholders and made site visits to key project partners. During this phase, initial hypotheses regarding the benefits and quantification methods were
tested and data was collected.
Fourth, we conducted further desktop research (consulting academic papers, business publications and industry reports, and primary sources — public/commerce statistics, for example) where data was not previously available or where estimates were needed to build assumptions. At this point, the initial
benefits were adjusted. Benefits that proved to be unquantiable or irrelevant were discarded. The quantification method for the benefits was adjusted based on data availability.
Fifth, we inputed the data and assumptions, assigned a final monetary value to the benefits, and compiled the results for the case study.
Tensie Whelan is the Director of NYU Stern School of Business’s Center for Sustainable Business, which she launched in January 2016. Prior to launching CSB, Whelan served as President of the Rainforest Alliance for 15 years, transforming the engagement of business with sustainability and recruiting 5,000 companies in more than 60 countries.
Bruno Zappa is a consultant with A.T. Kearney’s general practice. His experience includes strategy, operations, and sustainability work in the U.S., Latin America, and Africa, as well as consumer goods industry and financial services. He holds an MBA from Columbia Business School, with concentration in finance & sustainability. He was the lead analyst for the CSB sustainable beef project.
Rodrigo Zeidan is Associate Professor of Practice at New York University Shanghai and Affiliate Professor at Fundação Dom Cabral, Brazil. He is also Associate Editor of the Journal of Sustainable Finance & Investment and Senior Scholar at the Center for Sustainable Business, NYU Stern. He is the author of Economics of Global Business (MIT Press).
Greg Fishbein is a Director at The Nature Conservancy, where he develops innovative business and investment models to reduce deforestation in agricultural supply chains. Greg leads the business case initiative of the Collaboration for Forests and Agriculture, a joint effort of the National Wildlife Federation, The Nature Conservancy, World Wildlife Fund and the Gordon and Betty Moore Foundation to eliminate deforestation from beef and soy supply chains in Brazil, Paraguay and Argentina.