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Growth of Sustainability in Southeast Asia

Not to be distributed without permission. The data included in this document is accurate according to Passport, Euromonitor International’s market research database, at time of publication: November 2020

Growth of Sustainability in Southeast Asia

C ON N EC T W I TH US

© 2020 Euromonitor International

Contents 1

Introduction Opportunity for growth in Southeast Asia The state of sustainability in Southeast Asia COVID-19 to slow sustainability but create new opportunities

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Six Sustainability Focus Areas Supply chain transparency Sustainable sourcing Water scarcity Technology accelerating sustainability Circular economy Net zero economy

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Conclusion

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Authors

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How Can Euromonitor International Help?

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Introduction The sustainability scene in Southeast Asia is booming, aided by increased awareness among millennial and Generation Z consumers and a growing recognition of the benefits of adopting sustainable business models. However, Southeast Asia still lags behind regions like Western Europe and North America, which are at the forefront of sustainability. These regions have the edge in regulatory support and a stronger corporate sustainability drive among global Multinational Corporations (MNCS), that recognise the corporate image and brand equity benefits from a more sustainability-friendly consumer base. Sustainability efforts in Southeast Asia face challenges from low cost manufacturing and consumer price sensitivity, along with a lack of awareness and regulatory support, which prove to be key barriers for companies investing in areas like supply chain transparency and sustainable sourcing. While Coronavirus (COVID-19) and the resulting reprioritisation of resources may slow the sustainability push in the short term, there are opportunities to improve business efficiency through sustainability.

Opportunity for growth in Southeast Asia According to Euromonitor International’s economic data, the Southeast Asian region accounted for 8% of the world’s population in 2019. While it accounted for only 6.5% of the world’s GDP by purchasing power parity in 2019, the region is forecasted to outpace the global growth average by 2024, accounting for more than 9% of global growth during the five-year period. Packaged food, apparel and footwear and consumer electronics are the top three industries with the largest market sizes in Southeast Asia. Although the ongoing COVID-19 pandemic has slowed down the growth of these industries in 2020, consumer purchasing sentiment is anticipated to pick up from 2021 onwards.

The state of sustainability in Southeast Asia Southeast Asia is widely regarded to be lagging behind the sustainability pacesetters of Western Europe and North America. Large global MNCs, including Unilever and L’Oréal headquartered in Western Europe, are key drivers of sustainability as they have the resources and incentive to spearhead sustainability initiatives in those regions.

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INTRODUCTION

Nevertheless, Southeast Asia still enjoys sustainability growth momentum in areas like sustainable sourcing, with local firms like C.P. Vietnam Corporation expanding its sustainable sourcing policy to cover all business partners. Furthermore, with the technological boom, some Southeast Asian firms are increasingly tapping into the Internet of Things (IoT) to improve inventory management and pursue more efficient farming methods to increase profits.

COVID-19 to slow sustainability but create new opportunities The COVID-19 pandemic brought about some short and mid-term challenges in advancing the sustainability momentum globally and in Southeast Asia, with cost-saving measures becoming a priority, often at the expense of sustainability. According to the Euromonitor’s Voice of the Industry: Sustainability survey, in June 2020, 35.3% of global companies considered “high cost / limited budget” a barrier to investing in sustainability, an increase from 30.8% in 2019. However, trans-national supply chain disruptions caused by the pandemic also mean new potential opportunities for going local. From the Euromonitor’s Voice of the Industry: Sustainability survey, in June 2020, “supporting local communities” saw a 15% point increase in the sustainability agenda for companies globally. In Southeast Asia, this translates to greater sustainability opportunities in areas like agriculture and manufacturing, especially with the increased emphasis on sustainable sourcing and the growing role of technology in advancing sustainability.

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Six Sustainability Focus Areas Euromonitor International has identified six sustainability focus areas to examine in this whitepaper, namely supply chain transparency, sustainable sourcing, water scarcity, technology accelerating sustainability, circular economy and net zero economy.

Supply Chain Transparency

Sustainable Sourcing

Water Scarcity

Technology Accelerating Sustainability

Circular Economy

Net Zero Economy

Supply chain transparency The trend towards supply chain transparency was gaining traction pre-COVID, as demonstrated by previous business investments in new digital technologies that bring visibility and transparency to product journeys. For instance, in 2019, Costa Coffee deployed blockchain technology to track coffee from bean to cup and Marks & Spencer used the technology to track different products such as salad leaves, beef or beer. With increasing scrutiny about how brands treat employees and suppliers expected to remain long-term, according to Euromonitor’s Voice of the Industry: COVID-19 survey, more businesses are announcing transparency pledges. As digital technologies are pivotal to achieve this level of transparency, in 2020, 29.9% of surveyed companies plan to invest in automation and new supply chain technologies such as Internet of Things, artificial intelligence, robotics and digital supply network.

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SIX SUSTAINABILITY FOCUS AREAS

Global companies leading the way for supply chain transparency

Supply chain transparency in Southeast Asia

According to the Voice of the Industry: Sustainability survey, in June 2020, 73.1% of global companies are investing in sustainability to improve brand reputation. With trust and transparency being key to building brand reputation, businesses are under increasing pressure from consumers, investors and other stakeholders to gain visibility and traceability in their operations. Added to that, the pressure from the media, NGOs and consumers on multinational companies means more investment is going towards improving supply chain transparency.

With fewer economic incentives and less stringent legislation towards full disclosure, companies in Southeast Asia are behind global players when it comes to supply chain transparency. Shortage of low-cost manufacturing in the region, along with higher price sensitivity of consumers in Asian markets, makes investment and transparency less attractive to businesses.

Apple is an example of a global firm leading efforts in supply chain traceability. In October 2019, China’s leading environmental advocacy organisation recognised Apple as the first to achieve its master’s level in the Corporate Information Transparency Index for pushing hundreds of suppliers to improve their environmental performance. Another global company actively working on achieving supply chain transparency is Nike. The multinational sportswear company launched a manufacturing map that includes the names and location of each factory, the types of product made and the demographic profile of the workers at each factory. While larger companies often have more resources to invest sustainability initiatives, they also tend to have more complex supply chains, presenting a series of challenges to achieve full transparency and visibility. According to the Voice of the Industry: Sustainability survey, 17.5% of companies reported the complexity of the supply chain as a key barrier to incorporate sustainability strategies in their operations, in July 2020.

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The COVID-19 pandemic had a profound impact on global supply chains that were highly dependent on Asia, posing an additional challenge to Southeast Asian companies in achieving supply chain transparency, as companies had to focus on dealing with the short-term impact of the health crisis and enforced lockdown. During the outbreak, sustainability and transparency efforts inevitably took a back seat as companies focused their efforts on cost-cutting measures and staying afloat. However, in future, 9.2% of global companies are planning to invest in supply chain automation and digital tools, according to the Voice of the Industry COVID-19 survey.

SIX SUSTAINABILITY FOCUS AREAS

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Since 2018, beverage giant Thai Beverage has been recognised as the Global Beverage Industry Leader in the Dow Jones Sustainability Index (DJSI), a recognised global standard for benchmarking corporate sustainability practices, for among other measures it is implementing of a “Supplier Code of Practice” to ensure supply chain conformity to its sustainable business practices. Global companies like Nestlé with strong activity in the Southeast Asian region have also been at the forefront of supply chain transparency through its supply chain disclosures for palm oil, meat and other commodities. Further supply chain disclosures being planned across Nestle’s portfolio as part of a bid to boost its sustainability credibility, are expected to spur other companies in Southeast Asia to adopt similar disclosure policies.

Opportunities for supply chain transparency in Southeast Asia Between 2016 and 2018, countries like the Philippines and Singapore updated their sustainability reporting guidelines for publicly listed companies, and Malaysia introduced additional disclosure and reporting requirements aimed at encouraging greater transparency. In addition to national initiatives, in 2019, the Global Reporting Initiative (GRI) opened its regional hub in Singapore to support Southeast Asian countries in their sustainability reporting. COVID-19 challenged supply chains to meet peaks in demand, asking questions about distance travelled and ingredients sourcing. . Such solutions can .

such as GRI and

Sustainable sourcing Greater understanding of product sourcing, origin and all-round provenance, in evidence pre-pandemic, is becoming more pointed as consumers look to make safe and more sustainable buying decisions. Consumers, especially younger generations such as millennials and Gen Z, are increasingly conscious of the brands they choose to purchase from. According to Euromonitor’s Lifestyles Survey 2020, 30% of Gen Z respondents and 31% of millennials said they buy sustainably produced items as a means to positively impact the environment or lead a more sustainable life. On the other hand, 22% Gen Z and 24% millennials claimed to boycott brands that are not aligned with their social and political views.

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SIX SUSTAINABILITY FOCUS AREAS

Heightened public concern around product safety and provenance due to the virus outbreak is expected to see more consumers seeking out information on how materials and ingredients are sourced and where they come from, with products coming from Southeast Asia under higher scrutiny from global consumers.

Barriers to sustainable sourcing According to Euromonitor’s Voice of the Industry Sustainability Survey, despite significant improvements in 2020, 43.5% respondents felt that cultural and behavioural challenges remain the biggest impediment to incorporating sustainability practices. This was followed by the lack of dedicated funding (36.5%) and lack of sustainability awareness within the company (30.7%) which the respondents felt served as barriers to incorporating sustainability initiatives.

Switching to sustainable sourcing practices comes with its own set of challenges in the region, where low-cost manufacturing and consumer price sensitivity along with lack of awareness and regulatory support are key barriers for companies to invest in sustainable sourcing.

Despite current economic pressures, companies need to think beyond the short-term cost-cutting approach as sustainability initiatives usually pay-off in the long run.

State of play in Southeast Asia While Western brands such as Unilever and Procter & Gamble adopted sustainable planning as early as 2010, progress in the South East Asian region has been slow with the 2019 UN report finding that the ASEAN region is not on track to achieve the SDG targets by 2030.

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Despite its rich forest cover and biodiversity, with Asia Pacific being home to nearly 15% of the world’s tropical forests, the region still lacks strong preservation policies. While countries such as Indonesia and Malaysia enjoy a 48% and 68% forest coverage respectively, lack of strong preservation policies is leading to loss of large territories of forests and biodiversity, with these countries ranking at the bottom of the Forest and Biodiversity Security index in Euromonitor’s Environmental Sustainability Index.

In 2017, C.P. Vietnam Corporation (CPV), an integrated agro-industrial and food business, and the Vietnamese arm of Charoen Pokphand Foods PCL, extended its sustainable sourcing policy and guidelines to cover all business partners, starting with 67 critical suppliers across 3 groups, namely agricultural raw materials, seasoning items and packaging items, with the company promising to audit all business partners’ practices by 2020. In doing so, the company is also supporting its suppliers to achieve certifications that will take them a step closer towards gaining global recognition. The number of businesses receiving FSC Chain of Custody (CoC) certificates has been growing steadily in Asia Pacific, with more businesses expected to switch to sustainable timber from credibly certified forests such as FSC certified forests over the coming years. In February 2020, one of the largest viscose-rayon producers in Asia, PT Asia Pacific Rayon, built a fibre manufacturing

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plant in Indonesia that only sourced wood fibre from sustainably managed plantations and forests, in line with the PEFC Chain of Custody certification. The company also requires its sourcing partners to comply with its sourcing principles, including 100% sustainably sourced dissolving pulp from internationally certified plantations, no deforestation and no new development on peat, the protection of indigenous communities and workers, continuous improvement of its forest management practices and commitment to transparency by implementing supply chain traceability. PT Asia Pacific Rayon also uses blockchain technology to ensure transparency and traceability across the production chain through a mobile app.

Opportunities for sustainable sourcing in Southeast Asia While sourcing and procurement decisions were traditionally driven by cost considerations, this can no longer be the only factor driving decisionmaking, with 36.9% of surveyed companies accelerating investments in sustainable sourcing, right in the middle of the health crisis and 60.1% of them, planning to invest in sustainable sourcing over the next five years (2020–2025), according to Euromonitor’s Voice of the industry: Sustainability survey.

and therefore

Not only is this crucial towards managing a company’s reputation and mitigating legal risks, but it also helps create a strong

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SIX SUSTAINABILITY FOCUS AREAS

ecosystem based on trusting and stable relationships. T To support businesses, governmental agencies in the region must also prioritise establishment and enforcement of laws and regulations pertaining to unsustainable practices.

Water scarcity With higher global demand for water mirroring the rapid growth of the world’s population, water shortages are increasingly occurring around the world, disrupting consumers’ and businesses’ access to regular water supply and threatening business activities in water-stressed regions.

Water is a key focus area in the UN Sustainable Development Goals (SDGs), where two of the seventeen global goals are focused on water (SDG 6 and SDG 14). According to Euromonitor’s 2020 Voice of the Industry Sustainability Survey, there was a 1.8% reduction in businesses engaging with the SDG 6 “Clean Water and Sanitation” which aims to reduce the number of people suffering from water scarcity. There was a 8.5% decline in business engaging with the SDG 14 “Life below water” which calls for the conservation and responsible use of ocean resources. While these declines are likely reflective of reprioritisation of resources elsewhere due to the pandemic, it also shows a lack of awareness among some businesses of the importance of water sustainability. According to the Global Water Report 2018 by CDP, water-related financial losses accounted for USD$36 billion, with the top three water risk drivers stemming from water stress, flooding and water scarcity, with companies in the mining and electric utility industries largely responsible. According to CDP, companies in the food, textile, mining and industrial sectors account for around 70% of the world’s freshwater use and pollution and are more exposed to water security risks with many companies setting targets to reduce their water withdrawals. However, water scarcity brings opportunities for innovation and collaboration with other industry players to create solutions with lower water footprints, with 44% of surveyed companies planning to invest in water-related sustainability strategies over the next five years (2020–2025).

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Water scarcity in Southeast Asia Despite the Southeast Asia region being surrounded by large bodies of water, only a small fraction is freshwater, with nearly all countries in the region experiencing water shortages in 2019. A series of heatwaves in Malaysia have resulted in dams such as Bukit Kwong Dam in Kelantan to store water at only 50% of its total capacity and worsening droughts in parts of Thailand led to depleting water levels of the country’s reservoirs. In the Philippines, a prolonged dry season and infrastructure issues led to more than 6 million residents in Metro Manila facing water shortages. While Singapore has no natural water sources and Vietnam has high pollution levels in water bodies from untreated wastewater. Cross-Industry Comparison of Market Size for Southeast Asia 2019 and Forecasted growth 2019-2024 9%

120

8% 100 7%

MarketSize(USDBillion)

5% 60

4% 3%

40

2% 20

SoutheastAsiaCAGR%

6%

80

1% 0%

‐ ‐1% (20)

‐2% Packaged Food

Consumer Electronics

Appareland Footwear

MarketSizein2019

SoftDrinks

Consumer Appliances

ValueGrowthover2019‐2024

Consumer Health

HomeCare

HotDrinks

Tissueand Hygiene

SoutheastAsiaCAGR%2019‐2024

Note: Industry Level Total Value Sales, % growth, 2019 constant prices, fixed year exchange rate Source: Euromonitor International. Last updated on 15th September 2020