Investors considering consumer packaged goods (CPG) shouldn’t overlook the household and cleaning (H&C) sub-sector. Its outputs—keeping our homes clean, hygienic, and healthy—are, after all, a tangible and essential part of our daily lives.
However, the production of cleaning products often involves the use of energy-intensive processes and chemical processes. These can release greenhouse gases and contribute to global warming. The same is true for the production of packaging materials, such as plastic bottles.
Aside from manufacturing, the products themselves can significantly impact climate change. For example, many cleaning products contain chemicals that contribute to air and water pollution or contain ingredients whose extraction contributes to deforestation or similar habitat destruction.
Climate change regulations will likely subject the H&C sector to significant changes. Read on for three ways that this sector could be impacted by increased climate change regulation:
1. Increased emphasis on eco-friendly products
As governments worldwide take steps to reduce carbon footprints and promote sustainable living, consumers are becoming more conscious of their impact on the environment. This attitude change is reflected in how people shop for H&C products.
Many consumers are now looking for environmentally friendly, sustainable, and biodegradable products. As a result, companies that specialize in these products are experiencing significant growth. An excellent example is The Honest Company, the eco-friendly baby and cleaning company founded by actress Jessica Alba in 2011. It debuted on the NASDAQ in 2021 at a valuation of $1.5 billion.
Established brands are also responding to the eco-trend. Procter & Gamble has set a target of making 100 percent of its products recyclable or reusable by 2030. And as of March 2023, 19 members of the American Cleaning Institute (ACI) immediately committed to the Institute’s challenge to align with the UN’s Business Ambition for 1.5°C campaign to reach net-zero global emissions by 2050.
2. Increased standardization of product labeling
Misleading and unsubstantiated claims, or "greenwashing," can make it difficult for consumers to identify genuine eco-friendly products. As a result, regulators will likely impose greater standardization on product labeling to address the issue.
This could involve the introduction of standardized labeling schemes, such as the European Union's Ecolabel, which certifies products that meet specific environmental criteria. Established in 1992, Ecolabel is a voluntary mechanism for organizations wishing to distinguish themselves as sustainable. But as climate pressure mounts, global governments may be forced to impose similar labeling standards. With the increased consumer confidence this will provide, more people may opt for sustainable alternatives.
3. Increased oversight and regulation of supply chains
Many companies in the H&C sector rely on complex global supply chains to source their raw materials and manufacture their products.
As concerns about environmental sustainability grow, regulators are likely to introduce stricter rules around sustainability in supply chains. This could include requirements for companies to monitor their supply chains for environmental impact, use sustainable materials, and reduce carbon emissions.
Collaboration Is Essential to Climate Efforts
American consulting firm Spencer Stuart interviewed leaders of prominent global CPG companies ahead of the 2022 Consumer Goods Forum. The resulting report identifies one key takeaway: the need for CPG leaders to elevate collaboration and influence like never before. The report outlines three critical paths of collaboration:
Creating mutually beneficial partnerships with suppliers, distributors, and customers
Building innovative and distinctive cross-industry partnerships with competitors
Leveraging a wide network of relationships among organizations with different goals and concerns to create mutual benefits on this societal challenge
Undoubtedly, addressing climate change regulatory pressures will pose challenges for H&C companies in the near future. But they can also present opportunities as consumers increasingly demand responsibly sourced and manufactured products. Companies that demonstrate their commitment to sustainability in their products, processes, and supply chains could gain a competitive advantage. With this in mind, current earnings should not sway aspiring CPG investors. Instead, they should consider whether firms are investing in bolstering their sustainability practices and whether their leadership team can adapt to a new, more collaborative and transparent mode of operation.
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