User:MargoBP1/Ecoflation

Ecoflation (a portmanteau of "ecological" and "inflation") is a future scenario in "Rattling Supply Chains," a research report by the World Resources Institute and A.T. Kearney released in November 2008. It is characterized by natural resources becoming scarcer and sustainability issues become more pressing, leading to an increase in the price of commodities. The effects of the increase in the price of commodities are felt by corporations suffering environmental costs being added to their usual cost of doing business. The concept of ecoflation focuses on having environmental externalities of business be the burden of the organization/business responsible, rather than costs being allocated to the general public. Ecoflation represents more accurate pricing of the true costs associated with business actions. The concepts also emphasized the necessity of businesses to be creative and innovative in order to adapt their business models and supply chains to remain competitive on the market. The idea is that the more a business integrates sustainability in their core business principle, the more success they will have.

Drivers of Ecoflation
The World Resources Institute and A.T. Kearney identified three main drivers for ecoflation :

1. Scarcity of resources
An increase in population and consumption leads to an increased demand for resources, such as wood, oil, water, and grain. Meanwhile, climate change is an increasing threat to such resources, in the form of extreme weather events (wildfires, droughts, floods, etc.) and biodiversity loss. For example, as freshwater levels decline, and the demand keeps rising globally, because of the law of supply and demand, the price of water is bound to rise, some predict by 20% to 30% by 2050.

2. Policies
Governmental institutions, like the World Economic Forum, European Union, General Agreement on Tariff and Trade are increasingly aware of the necessity to react to climate change, and continue to pass stronger regulations in order to protect the environment. One such regulation is the introduction of carbon emissions trading, which forces companies that pollute more than they are permitted to suffer the cost. These are costs that companies will either have to internalize, decreasing their profit margin, or pass on to the consumer, potentially making them less competitive.

3. Consumers
Consumers are also increasingly asking companies to provide more sustainable goods and services. Adapting to such consumer demands represents a cost for companies to adapt to. For example, companies may commit to using recycled wood material in response to public concerns about deforestation, or reducing plastic, because it comes from fossil fuels.

Addressing Ecoflation
The risk of ecoflation is not inescapable, and companies can start by taking concrete steps to counteract its effects.

1. Voluntary actions
Companies can take voluntary action in order to reduce gas emissions and avoid ecoflation. For example, companies may choose to use less plastic or recycled plastic, or they may modify their distribution system to increase efficiency and decrease both greenhouse gas emissions and costs.

2. Business Opportunities
Drivers of ecoflation can be business opportunities. As stated by the consulting firm Kearney in their report "The Cost of Ecoflation" : “Leaders in this new landscape will be companies that make environmental sustainability one of their core business principles.”. In order for business to remain competitive and to emerge as leaders, sustainability is an important factor.

As pointed at the 2020 Davos economic forum, the five greatest global risks to the economy today are all related to the environment, starting with climate change. Companies will have no choice but to adapt to this reality.

3. Big changes
Addressing ecoflation is not a task to be taken lightly, as stated by Andrew Aulisi, a researcher at the World Resource Institute. "You should not make small 'cosmetic' changes, but work with a true vision of the future," he concluded.

Methodology
For the scenario, the World Resource Institute chose to focus on the industry of Fast-Moving-Consumer-Goods (FMCG), and analyses seven types commodities: oil, natural gas, electricity, cereals & grain & soy, sugar, palm oil, and timber.

Impact 1: Commodity Prices
The study concluded that the price of commodities will be greatly affected by the drivers of ecoflation.

Impact 2: Total Delivered Cost
The study concluded that ecoflation will increase Total Delivered Cost for companies.

Impact 3: Earnings Before Interest and Tax (EBIT)
The study concluded that ecoflation will lead to a decrease of Earnings Before Interest and Tax between 13% and 47% between 2013 and 2018.

In the media
In 2009, “ecoflation” was classified as a buzzword by the media outlet The Humanitarian