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It’s only natural that a beer company would be concerned about water. A fresh water shortage could completely hobble a brewery — after all, it takes five liters of water, on average, to manufacture one liter of beer. Yet the true scope of the issue is far deeper than that, since the vast majority of water use in the industry comes from the cultivation of crops. When SABMiller mapped its water footprint in 2009, it found that it takes 45 liters of water to produce one liter of beer in the Czech Republic. In South Africa, the number was 155.
That’s why water is one of SABMiller’s sustainability priorities. To ensure it can continue to operate, the brewer has recognized that it needs to work closely with NGOs, governments, other food and beverage companies, and the communities where it does business.
A report by the Water Resources Group projects that by 2030, humans will demand 40% more fresh water than the world can supply, a water gap that assumes average economic growth and no efficiency gains. The situation will be worse in some areas, of course, with fully one third of the world’s population expected to live in areas with severe water gaps.
“There’s clearly no way we can tackle this on our own, even in markets where we’re a very big player,” says Andy Wales (@AndyCWales), the company’s senior vice president of sustainable development. “We need to do it in partnership with others.”
Wales is optimistic that the gap can be closed, but emphasizes that companies cannot address water alone. He frequently speaks of the “water-energy-food nexus” — the fact that all three issues are interconnected, and must be addressed in a holistic way. He spoke with MIT Sloan Management Review guest contributing editor, Hannah Clark Steiman, about how the company is generating revenue from sustainable development, how it offers incentives to its employees to innovate, and why a partnership approach is critical to address the water gap.
Can you outline SABMiller’s water strategy?
We address this in three ways: firstly, we’re working on improving efficiency of our operations. Second, we look — brewery by brewery, in each community where we do business — at the local risks that water scarcity poses to our business and to the community. Then we work with other stakeholders to address those issues. Finally, we have been working to shape the water debate at both a global and local level. The water challenge is a global one however the particular problems — and the solutions — lie at a local level.
I’ll start with increasing efficiency within the breweries. We have an aggressive target to reduce the water used per liter of beer by 25% by 2015. And we’re on track with that. Our carbon target is to reduce carbon emissions from each liter of beer from on-site energy use by 50% from 2008 to 2020. Water and energy efficiency go hand-in-hand — the more efficient we are in our water use, the less energy is required to heat and pump water. This is a good example of why it’s so important to understand the interconnectedness of resources both in our own operations and in the value chain — what many call the “water-food-energy nexus.”
The second piece is looking at water scarcity issues in each brewery, assuming it’s going to be quite difficult for a brewery to operate if local communities are not getting the water they need. In Bogota, Colombia, for example, water prices were going up because the water utility had to deal with soil that had been washed into the river because of farming practices far upstream. Deforestation was one problem, as well as cattle that grazed near the river, degrading the soil. We partnered with The Nature Conservancy to develop a program where farmers are incentivized to manage their farms differently. That program costs something like $1.5 million per year and saves $4.5 million per year in water costs for the city of Bogota. It’s a very straightforward example of where a systems approach can save all the players money.
Finally, the global water debate. In the last five years, a number of food and beverage companies — the leaders include Coca Cola, SABMiller, and Nestlé — have started to raise the risks of water scarcity with leaders of global institutions and national political leaders. Our CEO, Graham Mackay, has been very involved with this, particularly with the Water Resources Group. We have been able to increase the emphasis on water in the political agenda rather than wait for NGOs and others to put pressure on business, which is what we saw with climate change 20 years ago.
One of the core concepts has been this idea of the water-energy-food nexus. You can’t manage water separately from energy policy and food policy — in fact, doing so is a huge mistake. If one agency in a particular country is thinking about its agricultural planning for 2020 and another department is thinking about water planning for 2020, we need to make sure they develop an integrated plan.
How do you encourage front-line employees to innovate to increase sustainability?
We have a performance-driven and results-driven culture. We measure our performance against our sustainability targets every six months, and we publish the results. As we’ve set these water and carbon targets, we’ve driven accountability down to the front line level. Instead of the financial or engineering head being solely responsible for water and energy bills, we’ve tried to drive that responsibility down to the person who runs each specific part of the production line. For those that have functional responsibility for anything related to our water and energy targets, their performance against those targets is linked to their bonuses.
We can see many examples of where this has delivered results. A few weeks ago, I was visiting MillerCoors, our U.S. joint venture. At our Irwindale brewery in California, operators in the brewhouse have installed an extremely protected camera inside one of the process vessels. To clean the vessel between your batches of beer, you normally use a set amount of water for a set time at a set temperature. What they’ve done is install a camera so if it becomes clean ahead of the time scheduled, they can cut off the water supply. We can spread innovations like these to other breweries around the world. By rethinking each stage of the brewing process from a water- and carbon-saving perspective, we’re making quite significant savings across the business, both financially and in terms of water and energy resources.
You’re focused on improving water and carbon efficiency, but as SABMiller grows, its environmental impact could remain the same or even increase in absolute terms. How do you manage that?
We’re very open about that. We estimate that our absolute carbon emissions will roughly stay flat between 2008 and 2020, but the efficiency gains will allow for volume growth in both emerging and developing markets. We will see significant absolute cuts in emissions in Europe, the U.S. and Australia, and we’ll see significant efficiency gains in emerging markets. Overall, we’ll meet the needs of millions more consumers for the same amount of resource use.
What organizational factors have enabled SABMiller to take a comprehensive approach to sustainability?
There are three things. First, the business is largely run by general managers who have come from emerging markets. They understand how intertwined the success of local society is to the success of business. There’s an instinctive understanding in the company of how running a successful business means interacting in a positive way with the local community and the environment.
The second is that we have a performance-driven culture. People are clear and accountable, so once we establish targets, it’s getting done.
Third, as a leading global brewer, we have been quite good at identifying the core issues that we will need to address to be successful in the future. We understand sustainable development as having two benefits: it helps us manage the risks to our growth in the future, but it can also lead us to new revenue opportunities.
How has your sustainability strategy led you to new revenue opportunities?
In Africa, outside of South Africa, the size of the illicit alcohol market is three times the size of the formal alcohol market in volume terms. So there’s a business opportunity for us. If we can produce affordable, high-quality local beers, using local ingredients sourced from small farmers, we can attract customers to trade up from illicit home brews to higher quality products. We’ve done this most successfully with sorghum-based lager, which originated in Uganda. That brand, Eagle, has helped us become the largest-selling brewer in Uganda for the last five years, and we are sourcing from 8,000 farmers who were not previously supplying to us.
We also have developed the world’s first high-quality commercial lager that is made with cassava, which was introduced a year ago in Mozambique. The challenge with cassava is that the second you take it out of the ground, it starts to degrade, and within 24 hours it’s almost unusable. It’s also heavy — it’s 75% water. We worked with a company that created mobile processing units, which farmers can then use to process the cassava on site as soon as it comes out of the ground. The waste water it generates can even be used to irrigate the fields. At the moment, we’re only working with 500 farmers, but that will increase significantly.
When we’re using local ingredients, we’ve been able to get excise reductions compared to normal beer made from imported barley. It creates a new revenue pool for government because even though it is a lower excise rate, we’re replacing products that weren’t being taxed. So it’s a triple win — growth for the agricultural sector, growth for our business, and it’s better regulated from a health and quality perspective.
Are there other ways the sustainability initiative has driven innovation at SABMiller?
I think the way that we view resource management has been innovative. We’ve seen that resource risks are shared risks with the local community, and therefore there’s a shared responsibility. I think that’s an innovation in terms of thinking about the footprint of our business and the fact that we need to engage in quite deep partnerships with NGOs and local governments. That’s a very different way of looking at our value chain.
And I think some of the work we’ve done on the philanthropic side is very interesting. We have very big entrepreneurship programs in countries like South Africa and Columbia, which are aimed at creating ecosystems of successful entrepreneurs across a whole range of sectors, whether it’s marketing or logistics or food services. We end up buying from many of these firms. These initiatives are quite important in those countries in driving much more dynamic entrepreneurial cultures.
What are the challenges SABMiller is facing as it engages with this work?
One is that clearly there is still a lot of uncertainty as to how climate change will play out in different parts of the world, and what impact there will be on water resources and food security. That’s why it’s critical that business is engaged with and understands the emerging science around risks related to climate and water. The science will continue to change and develop over time, and we need to be close to that.
The second, which I alluded to earlier, is the way that government manages policy in silos, and that needs to be much more integrated.
The third is around partnerships. We have successful partnerships, but they’re not easy to set up, and there is a difference between the language that businesses NGOs and donor agencies use. The time frames are different, the cultures are different, and the expectations of how long you have to talk before you do anything are different. Even when you have organizations that are quite aligned in their aims, it still can take a lot of time to get these things working. Partnership is an important part of the skillset businesses need to succeed in the future, and one that we are learning more about all the time.
How is the beverage industry addressing these issues? Are there industry-wide initiatives that are making an impact?
There are industry groups like the Beverage Industry Environmental Roundtable, which help businesses understand best practice and play a role of neutrally taking data from each company and normalizing it so companies can understand whether they’re ahead of the curve or behind the curve. More frequently, on the resource side, partnerships are based around geographies and normally food and beverage companies work together.
One of the best examples is a partnership called Grow Africa, which involves a number of companies, including Unilever, SABMiller, Syngenta and Nestlé, working together in different parts of Africa. Instead of running all our parallel projects on our own, we bring some of them together so the case can be made for greater infrastructure investment and greater donor funding support. We’re seeing quite a fruitful alignment of government, business, and donor agencies working quite rapidly to scale this up.
Ultimately, one business on its own is not going to make a significant difference. We have to work vertically, up and down our value chain with our business partners, and horizontally with similar businesses in a similar geography. It’s only when you get to that scale that you’ll make a significant positive development impact.
That’s a really interesting point that connects to my next question. Water is a classic common, pooled resource. It can be difficult to make the business case to make a tremendous investment in conserving water when you can’t track the ROI back to SABMiller. The investment you are putting into water helps everyone, even those who aren’t investing in conserving water. Is that an issue internally, and if so, how do you manage it?
We certainly look to do this in partnership with other companies. There’s clearly no way we can tackle this on our own, even in markets where we’re a very big player. We need to do it in partnership with others. So that’s one of the main reasons for doing the work at senior political levels through organizations like the Water Resources Group’s Strategic Water Partners Network, Grow Africa, the New Vision for Africa [Foundation], and others. By working within those organizations, we ensure it’s not just one company pushing this, but a range of companies.
Are you concerned that we won’t effectively close the water gap? What, realistically, do you think we can achieve?
No, actually I’m hopeful. First, because I see some very serious business people, like our CEO Graham Mackay, Peter Brabeck at Nestlé, and Paul Polman at Unilever, taking this very seriously. I think focusing on this now gives us enough time to get on top of the challenge.
Second, because the message can actually be quite positive. Without climate change impacts, South Africa is projected to have a 17% water gap by 2030. Depending on the climate scenarios, it could be up to a 30% gap. But South Africa can address that gap and actually save money — roughly $120 million a year — if different sectors work together creatively to grab those opportunities, whether it’s industrial water efficiency, agricultural water efficiency, or improving municipal leakage management.
I was struck by the fact that the 2011 McKinsey Resource Revolution report estimated we can address the challenge and create $3 trillion of value for the global economy if we do it in the right way. I think the debate is changing. I think there’s a real understanding now that there’s money on the table through smart resource management, and an appetite from government and business to secure that value.