From Dinah A. Koehler and Chris Park, GreenBiz
The number of eco-labels in the marketplace continues to grow: According to Ecolabelindex, 426 labels circulate in 246 countries and 25 industries.
Most commentators are quick to point out the negative consequences: consumer confusion, disinterest and mistrust. However, there is a growing wave of large companies that pursue product certification to appeal to and meet compliance demands from their B2B customers.
Never mind the mixed signals from consumers: For these companies certification, and to a lesser extent eco-labeling, is a strategic move, and in some cases essential to bringing products to market.
Between February and May of this year, Deloitte conducted in-depth interviews with more than a dozen senior sustainability executives at predominantly large multinational companies to understand the business drivers of certification and eco-labeling. What emerged is a refreshingly coherent view of strategic decisions that strengthen a company’s competitive position, brand and supply chain management.
While companies may pursue certification and eco-labeling for a variety of reasons, four distinct strategies emerged from our research.
For some companies, it is necessary to maintain market share in U.S. states with mandated green purchasing guidelines (e.g. Pennsylvania, Massachusetts, Vermont, Maine and Connecticut).
Others use the label to drive value by winning large institutional contracts and responding to growing retail demand for certified products. The eco-label can help institutional purchasing agents who look for a simple signal of sustainability performance.
Longer-term competitive advantage can be gained by using certification and eco-labeling to raise the visibility of sustainability initiatives, achieve ambitious sustainability targets, and strengthen the corporate reputation.
Finally, some interviewed companies view this as a brand play, where the eco-label aligns with the brand strategy, adds a new dimension to the brand value proposition, and improves the company’s image and market position.
Yet even where there might be a compelling business case for pursuing certification and an eco-label, execution involves many tricky decisions: Which certifier, which eco-label, how much to invest in expanding supply of sustainable ingredients or products, among many others.
In some cases, the costs may outstrip a bounce in sales after certification, leading some interviewed executives to argue that certified products should be subsidized by sales in other products.
Where credibility is at stake, interviewees generally agreed on the qualities of a desirable certifier:
- Transparent in the development of criteria and decision-making process
- Staffed with general knowledge and specific scientific know-how
- Provides clarity on how the data is evaluated
- Permits applicants to approach reviewers for clarification
- Can protect confidential data
- Refrains from financial conflicts of interest
They also expressed a clear preference for eco-labels with the following characteristics:
- Designed by credible representatives from NGOs, industry and regulatory agencies (e.g. U.S. EPA)
- Objective, with scientific merit and justification, based upon a recognized scientific test that can be easily documented and yields clear results
- Multi-attribute, LCA-based
- Do not overstate or misrepresent benefits on the label
- Dynamic (e.g. not a static a check list) with criteria that allow for improvement in product performance and product innovation, including the possibility to substitute another ingredient in a product formulation.
- Have market recognition — or at least the potential
We learned that an eco-label is not always advantageous even for certified products, due to consumer confusion. In such a pre-competitive market many large consumer products companies and retailers continue to jockey for a better position on green issues, but are reluctant to put their brand at risk.
The interviewees indicated a preference for certification over eco-labeling in the B2B marketplace. With greater emphasis on credibility, and facing a more watchful Federal Trade Commission, companies may be better off reaching a higher level of sustainability integration first.
For companies at a higher level of sustainability integration across their entire business, eco-labeling is more straightforward. Yet, where brand equity is high, the eco-label itself may not add much value, except where it complements an existing brand value proposition. For stale brands, eco-labels can augment brand value.
We also foresee additional benefits of certification, notably in terms of cost savings, resource efficiency and improved supply chain management. Armed with more and better data on the material, water and energy use, and emissions in operations and the supply chain, we are finding that cost savings, operational efficiencies and more sustainable alternatives can be found.
Certification can help drive this process into the supply chain and across business operations, by providing a clear roadmap and goal. At a minimum, certification can help companies gain market knowledge, establish expertise, engage with large institutional buyers and educate them.
There are also long-term supply benefits: Certification may help secure access to crops where supplies are volatile or shrinking (e.g. seafood, cocoa, and sugar). Preparing for these supply chain risks, by pursuing certification of commodities, can strengthen a company’s competitive position.
This is a space to watch, given growing B2B demand for sustainable products, ambitious corporate sustainability targets, and what all interviewees predict: increased consumer demand.