VMG Catalyst Shares What They Believe Sustainability Practices Will Look Like Over the Next Few Years

● Earlier this year, VMG formed a Sustainability Council which includes 37 members who have a senior role in the consumer products space, with a functional focus on sustainability. The Sustainability Council was formed to help VMG collaborate with, learn from and make important connections with leaders who focus in this space.

● VMG Catalyst polled Sustainability Council members and 38% of respondents are planning to invest more money into tech solutions, better enabling sustainability in 2023 compared to 2022.

● VMG Catalyst believes that brands that invest in sustainability technology today will be able to generate long-term efficiency and cost-savings that result in stronger bottom-line performance compared to competitors.

In recent years, we have seen a dramatic increase in sustainability commitments published by brands. In fact, 63% of the Fortune Global 500 have set targets for emission reductions, according to a recent Climate Impact Partners Report. we believe these efforts have been catalyzed by both growing conviction among consumers that we must take more immediate, meaningful steps to protect our planet and also an uptick in ESG-related legislation.

In order to better understand the shifts in behavior and adoption of new technology aimed to measure, offset, or reduce the overall climate footprint, our team interviewed and surveyed sustainability leaders across our VMG Sustainability Council. We define a sustainability leader as the primary owner of sustainability efforts at a company. Their titles may vary between Chief Marketing Officers (CMOs), Chief Impact Officers (CIOs), VPs of Sustainability, VPs of ESG organizations, Senior Directors, Chief Sustainability Officers, Executives at Consumer Brands, and more. Such sustainability leaders on the VMG Sustainability Council shared insights into what sustainability practices will look like during the year ahead and which factors, they believe, will drive purchase decisions over the near future. Among those surveyed, 38% of respondents anticipate their organizations will invest more into technology solutions enabling more sustainable business practices in 2023.

Sustainability improvements remain a top priority for VMG and its portfolio companies. In our annual Environmental, Social and Governance Report published this August, VMG Talent Partner Cassie Burr explains, “We predict many of our portfolio companies will need a head of sustainability in the next 5 years, and it’s important for us to learn from existing sustainability leaders about this emerging role. We want to build relationships with people in the sustainability space that we would be excited to work with or introduce to our portfolio companies.” The report focuses on three sustainability sectors that we believe show the strongest signs of technology-led innovation: supply chain, carbon management, and textile recycling.

At VMG Catalyst, we are committed to investing in technology that powers the next generation of retail and consumer businesses, with sustainability being an imperative piece of that future. Ultimately, we believe that technology and innovation will unlock sustainability in a scalable way. Currently, however, we believe the industry landscape is dominated by expensive consultants and imprecise measurement tools to help back blanketed sustainability claims. We believe the industry must do better. While we still have a long way to go, there are a few categories making progress and that we believe prove to be the most susceptible to technological innovation.

What is driving sustainability forward?

Consumers are aligning their wallets with their values and it’s becoming increasingly clear that sustainability is an issue they hold close to heart. According to Footprint Global Consumer Research Study (2022), 87% of respondents believe that companies and brands have a responsibility to protect the planet and its people, and 85% of respondents think that brands should play a major role in solving sustainability because they are the ones causing the problems. 78% of respondents think that brands are not doing enough.

We’ve witnessed a trend toward ethics-based purchasing in recent years as Gen Z has aged into their role as consumers. As the first generation native to social media, they tend to be more outspoken about sustainable and ethical issues and expect a greater degree of transparency and accountability on behalf of the brands they shop. Individual consumers yield greater impact on brand reputation through their reach on platforms like TikTok and Instagram and we believe companies must listen or run the risk of being subjected to viral backlash in the court of public opinion.

The past few years have also marked the beginning of an impactful wave of new regulations. Europe has led the way with Germany’s Supply Chain Due Diligence Act and the UK’s Modern Slavery Act, but the US is starting to follow suit. Months ago President Biden signed the Forced Labor Prevention Act into law, which will require brands to prove where they source their materials from moving forward. This has quickly become a worldwide discussion — and with people in power taking part, coupled with the ever-growing spending power of the younger generation, we believe that we are finally beginning to see real-world action.

Digitizing the supply chain to create visibility

Each step in a supply chain carries its own ESG implications, from carbon emissions to social governance, forced labor, and a range of other issues. And we believe many of the largest brands don’t have a complete understanding of their own processes or the indirect players that they work with. We are often astounded by the inefficient and opaque processes that we see given that a resilient supply chain can make or break your business, as witnessed during the COVID-19 pandemic. We believe there is a critical need for innovation within supply chain operations and we believe that, through a radical industry transformation, the entire supply chain will be digitized and traceable within the next 5 years. Thus we believe, it is crucial for brands to invest in full end-to-end visibility from both a humanitarian and operational perspective.

Beautycounter and Ritual are two brands leading the charge, setting strong examples of excellent supply chain transparency practices.¹ We spoke to Lindsay Dahl, the Chief Impact Officer for Ritual, a traceable supplements brand that has a deep history working on supply chain transparency. In her previous role at Beautycounter, she launched their responsible sourcing program and comprehensive audits of their mica supply. Dahl notes, “Supply chains are incredibly complicated, with your average brand using thousands of suppliers globally. Unfortunately, most brands have little visibility into labor practices or environmental harms associated with sourcing ingredients, but it’s changing quickly as customers demand transparency and federal regulations require it. I can’t underscore how difficult it is to achieve full visibility into your supply chain, but new bullish companies asking hard questions, coupled with technology platforms, will unlock the future of end-to-end visibility.” Ritual recently launched its updated traceability standards and is on track to have all of its active and other ingredients fully transparent, with supplier names and final place of manufacturing publicly listed on its website.

The path for brands to achieve net zero goals

We believe that in reality, most companies have very limited understanding of their carbon footprint. Accurate measurement requires a detailed carbon life cycle assessment (LCA) for every product from initial production to end of life, with an LCA for a single product taking 3–4 months and thousands of dollars to complete. Brands that are committed to doing this thoroughly typically leverage expensive specialty consultants, but most simply use generic industry averages and imprecise guesswork instead. Some leading brands though are investing in technology solutions that will enable them to do this internally in a more data-driven, scalable, and cost-effective manner. We believe that such solutions will help brands achieve net zero goals and save costs in the long run.

Rebecca Gildiner, Director of Sustainability at Daily Harvest, shed some light on the impact of technological advancements in this sector, “The majority of the footprint of a business like ours is made up of Scope 3 emissions, which are incredibly hard to calculate. By leveraging a technology platform to help measure and manage our emissions, we’ve been able to build live models based on our actual data. We can then use these models to make data-driven sustainability decisions not only annually but throughout the year, allowing us to see the in-real-time connection between business activity and GHG impact.”¹

We think Circular fashion is here to stay

With the rise of fast fashion, we’ve seen an alarming increase in waste. We believe that ot only are brands over-producing, they are also under-recycling due to tax incentives on unsold inventory. So how can we fix this? We believe this can be fixed by using materials more efficiently, of course, and repurposing excess textiles rather than dumping them into a landfill. While Etsy’s acquisition of DePop and the IPOs of The RealReal, Poshmark, and ThredUp all demonstrate the demand for P2P models from consumers, we have not seen brands innovate as fast. That’s starting to change, however, as we’ve seen a significant uptick in funding in 2022 for B2B circular fashion startups like Eon, Smartex, and Recurate as these solutions become more financially viable.

Adarsh Alphons, Founder and CEO of Wardrobe, a peer-to-peer sustainable rental marketplace for luxury, vintage and designer fashion, believes that the scale of the fashion industry provides unique and multifaceted opportunities to reduce the world’s environmental impact. He notes, “Last year, manufacturers produced 100BN units of apparel, which equates to 14 items for every human on earth. Less than 1% of apparel that exists today gets recycled. Our focus on reselling customer returns has a massive positive impact as it keeps them from ending up in landfills. We live in a world where 25% of apparel purchased online are returned. Due to the enormity of customer returns being largely underreported, the aggregate negative impact hasn’t caught the attention of the media yet. We imagine it’s just a matter of time.”

As society embraces digital adoption, business models are evolving to help improve sustainability.

In our view, if anything is clear, it’s that sustainability is the way of the future, and data insights and transparency provide a key solution to enabling more sustainable business practices globally.

From the findings in our report and looking ahead, VMG Catalyst believes if sustainable practices are implemented, it will drive more positive and fundamental returns on a company’s bottom line over competitors.

And we believe brands are following suit — whether it’s from the goodness of their own hearts, regulatory pressures, or shifting consumer priorities. These actions and decisions are contributing to a common end: a better, safer, healthier planet for everyone. And we’re proud to stand alongside the innovators building the technology necessary to facilitate these sustainable changes because, in turn, we believe it will drive more valuable companies.

The Sustainability Landscape (2)

Companies We’re Excited About (3)

Sourcemap: Sourcemap has developed asupply chain transparency and traceability platform, including end-to-end supply chain due diligence, customs compliance, and environmental diligence. The company spun out of early MIT research in 2011 and since then, major traders, manufacturers, and brands have adopted Sourcemap’s full-suite solution for assurance okathn the raw materials-to-finished goods supply chain, including ongoing monitoring for production, quality, sustainability and risks such as deforestation and forced labor.

Planet FWD: Planet FWD offers a data-driven carbon management platform for consumer brands. Leveraging the largest LCA database for agricultural products and advanced value chain, their software was developed from the fiction of understanding and developing carbon-neutral products. Ultimately, what emerged from those learnings was a carbon-management technology platform for consumer brands to create a climate-friendly company and products more easily by being able to measure, reduce and neutralize emissions and report their carbon footprint. Their software addresses the 5 trillion consumer products industry to more accurately measure and reduce their carbon footprint.

Queen of Raw: Using supply chain software such as Queen of Raw, brands have the capability to leverage a blockchain-powered marketplace to recycle and reuse textiles. We believe that this results in reduced waste and increased bottom line t by improving company efficiency. The UN has reported that 92 million tonnes of textiles are sent to landfills each year and there is an estimated $120 billion worth of wasted raw materials sitting in warehouses today. Supply chain software powered by artificial intelligence changes the linear economic model most are familiar with in the fashion and textile industry. It alters it into a circular economic model that protects the environment, increases the bottom line, and drives value financially.

Footnotes:

1. Neither Beautycounter, Ritual nor Wardrobe are VMG portfolio companies. Daily Harvest is a VMG portfolio company
2. The market map shown was created internally and may not reflect all businesses in each category. We did our best to accurately categorize companies with the information available on their websites.
3. The “companies we’re excited about” have not been and are not currently portfolio companies of any VMG Catalyst fund and do not currently have a relationship with VMG Catalyst. Inclusion of such companies does not suggest endorsement of VMG Catalyst by such companies and does not suggest a relationship with VMG Catalyst.”

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