Brands with social and environmental responsibility

The scenario below shows how human values cross over to shape what a customer chooses. Those same values challenge the law of supply and demand, and they can differentiate products considered impossible to differentiate.

Manuella went shopping at the supermarket in her neighborhood. Engaged with the climate out of a genuinely humanitarian sense, she prioritizes products that can prove they are sustainable. Manuella does not want to fund illegal deforestation, she is against the exploitation of people and animals, and she wants to help slow global warming. Inside the supermarket she notices that sustainable food can cost twice as much as the traditional kind. Even with limited money, Manuella decides to pay for the expensive sustainable products. All of that because she genuinely believes in the utopia of a better world and wants to help make it real.

The way commodities are valued is clear evidence of how human values move the market, to the point of changing trade rules and trade policy and of generating brand equity. Here is the context: in economics, a commodity is a basic, non industrialized global product. Raw materials are known as products that cannot be differentiated, whoever produced them and wherever they came from. Their price is set uniformly by international supply and demand.

For industrial thinking, supply and demand are the main price drivers in the market. The law of supply and demand was first described in the eighteenth century by the economist Adam Smith. In it, the number of products available against the number of customers looking for them determines how the price moves.

In several sectors of the economy, mainly the ones tied to land based production, supply and demand ruled as the only possible driver. The new values of the customer changed that completely.

All over the world, people engaged with environmental and humanitarian questions demand more responsibility from the products and brands they buy. In response, retail tightens its trade policy, brands make public and legal commitments, and industry requires traceability data from the producer.

Traceability means knowing where every grain, fruit, cut of meat or raw material came from.

In more technical terms, traceability is a set of information that confirms the best sustainable practices across every link in the production of a raw material. Picture it as an identity card for production. It means following every stage of the chain, from the origin to the final customer. It can be done with labels, QR codes, blockchain and even artificial intelligence. The main goals are:

• Guaranteeing food quality and safety;
• Meeting export requirements;
• Preventing fraud, such as selling adulterated products or products of illegal origin;
• Raising the value of the brand and the product with sustainable credentials.

Compliance means producing without destroying

If traceability answers "where did it come from?", social and environmental compliance answers "was it produced the right way?". Being compliant means producing with respect for the environment and for the communities around the operation. It means producing more without clearing forest or invading protected areas and indigenous land. Compliance is a state, not a condition, which is why it has to be monitored.

• Environmental preservation: zero illegal deforestation, rational use of water and soil;
• Respect for labor law: no slave like work and no child labor;
• Sustainable management: crop rotation and integrated crop, livestock and forest systems.

For anyone exporting, meeting those rules is mandatory. The European Union, for example, approved laws that block the import of products linked to deforestation. In Brazil, traceability has been mandatory for some crops, such as fruit and vegetables, since joint regulation 02/2018 from the ministry of agriculture and the health agency.

The environmental posture of brands was never altruistic. They understand that the sustainable customer is demanding and, in return, willing to pay more for what they buy. Look at how it plays out:

• Clothing brands are willing to pay more for traced fabric. They know sustainability is in fashion, and the new sustainable values are trends that push up the perceived value of their products.
• Food and cosmetics retailers are willing to pay more for traced products. They fear reputation crises, because there is no beauty in funding environmental crime.
• Carmakers and luxury furniture brands are willing to pay more for traced leather. They understand that their customers are moving towards a sustainable future and want to furnish their homes with more human values.

To picture the gain, imagine this: a tannery sells one million two hundred thousand traced wet blue hides. If each unit were sold three dollars higher, the account would represent an extra three million six hundred thousand dollars in revenue.

Beyond the commercial benefit, they take a sustainable position to reduce the risk that comes from directly or indirectly encouraging environmental crime.

Sustainability is now a contract: do it right or lose the market

Being sustainable is no longer a choice, it is a contractual requirement. Large companies only buy from producers who follow the rules. Which means:

• If a producer is caught using illegal land or predatory practices, they can be banned from major markets.
• Supply contracts already carry green clauses, requiring certifications and environmental registration.
• Exporters need full proof of origin. Without it, Europe and the United States are closed.

Being out of compliance means every commercial relationship with the offending brand is treated as a reputational risk and a loss.

The legal damage is shared by everyone, in every jurisdiction. It means the legal losses can be shared from the field to the point of sale. It is a problem for whoever produced, whoever industrialized, whoever used the product as raw material for something else, whoever distributed and whoever sold. Worse, environmental damage in Brazil carries triple liability. Individuals and companies, authors or accomplices, can be punished independently in three spheres: administrative, civil and criminal.

On top of that, the fines set by the Environmental Crimes Act 9.605/98 can reach the millions. In 2017, across the states of Bahia, Tocantins and Pará, the environmental agency ran Operation Cold Meat, which resulted in embargoes and charges against fifteen meat plants, with two hundred and sixty four million reais in fines.

The financial market rewards whoever does it right

Big banks get stricter with agriculture every year. Want financing? Then you have to prove you are producing without clearing forest, without exploiting workers and without dodging environmental law. Whoever plays clean gets advantages:

• Lower interest and longer terms. Public banks already offer credit lines with reduced rates for whoever invests in sustainable practices.
• Fee waivers. Producers who follow ESG guidelines can be exempt from some banking fees.
• More credit available. Private banks and investment funds release more money for whoever proves good environmental practice.

The Brazilian banking federation set a single protocol for socially and environmentally responsible lending, with private banks such as Itaú, Bradesco and Santander on board, alongside the measures announced by the main state institutions, such as Banco do Brasil, BNDES and Banco da Amazônia.

The measures require banks to run social and environmental audits before any credit or investment for agribusiness. Where sustainability clauses exist, current credit contracts can be terminated, forcing the borrower to pay the entire outstanding balance at once.

Sustainable companies attract more investors. The financial market has been betting hard on green bonds, where the money only goes to environmentally responsible projects. Whoever does it right watches the value of the business climb.

• Investment funds are prioritizing companies committed to ESG.
• Shares in sustainable companies rise faster and carry less risk.
• Governments and international investors are blocking companies with a history of deforestation or environmental violations.

ESG: environmental, social and governance

These principles assess the impact an organization has on the environment and on society, along with its management practices and internal policy. Putting the three criteria together sets the new parameters for decisions by investors, banks and insurers, and they are treated as indicators of profitability, sustainability and social role. Here is what each one covers.

Environmental: it looks at the impact and the conduct of companies along their production chain on questions such as climate change, resource scarcity, waste treatment and disposal, deforestation and emissions.

Social: it looks at the impact of how companies act and relate to their stakeholders. The balance between the interests of shareholders, customers, suppliers, employees and the communities where the business operates, weighing structure, education, culture, jobs, income and opportunity.

Governance: it looks at the management practices and internal policy of the organization. It covers tax strategy, pay, the leadership model, the rights of partners and shareholders and anti corruption measures.

In this article we looked at how human values can shape global market trends and significantly change the way people buy and relate to brands.