The globalisation of the economy and the development of a huge autonomous financial sphere may be considered as the main characteristics of the past decade. Nevertheless, as far as the cosmetics industry is concerned, the decade’s was also marked by the development of a strong demand for ethical and sustainable products. While this demand was mainly concentrated in Europe, with France and Germany being the largest markets for fair trade and organic or natural cosmetics, before the credit crunch, North America was catching up quickly.

According to research firm Kline & Company, growth for the natural products segment in the U.S. outpaced the general personal care market by a landslide in 2007, with a general market growing by 3%, in sharp contrast to the naturals’ market growth of 13%.

Ethical markets to carry on growing

Will the trend continue? Reports from retailers in Western Europe and the U.S. suggest that their business is now deteriorating rapidly. While consumers may face income squeeze, certain analysts suggest that a substantial part of the demand will move to low cost products and retail chains with consumers switching from “values” to “value”.

We can already see how changing attitudes are affecting customers’ shopping habits… consumers aren’t prepared to pay a premium when they cannot taste the difference,” Andy Bond, CEO and President of British retailer Asda, U.K.’s second biggest retailer, told earlier this month.

However, consumers’ interest in eco-friendly or fair trade products did not fade out suddenly. Actually, the Co-operative Bank’s ninth annual report into green spending shows the economic downturn will not halt the growth in ethical consumerism. The Report, which acts as a barometer of ethical spending in the U.K,. shows that, despite the first tremors of the downturn being felt towards the end of last year, the overall ethical market in the U.K. was worth GBP 35.5 billion in 2007, up 15 per cent from GBP 31 billion in the previous 12 months.

As per the future, the Bank cites the impact of green legislation and policy choices as key factors that will continue to drive ethical sales.

Regulations to become key

For some time now we have argued that only through legislation will we secure the necessary changes to deliver mass market, low carbon lifestyles. Government intervention, which promotes energy efficient products such as boilers, white goods and more recently lightbulbs, is underpinning these markets ensuring that they continue to grow,” Dick Parkhouse, Managing Director Retail at The Co-operative Bank, explains.

Of course, the state of the economy will impact on consumer spending but this report shows that bold Government action can stimulate markets, save consumers’ money and protect the environment,” he adds.

But what will be the final editing choice of governmental authorities remains quite uncertain. This weekend’s discussions on the “climate deal”, during the EU summit in Brussels, have shown that some countries have to cope with heavy pressure from industrials determined to avoid that ambitious goals to cut carbon emissions add a huge cost burden on their shoulders.

The paradox is that recession times may be an opportunity for some innovative companies to stand out from the mass and get ahead from competitors. From this point of view, players who embrace sustainability as a means of reducing costs or increasing transparency may be the winners.

The “ecoflation” scenario

The production facilities of some natural manufacturers have shifted to renewable energy sources such as wind and solar, but so far, very few companies are doing this,” says Carrie Mellage, director of personal care products for Kline & Company.

In a joint study titled Rattling Supply Chain, A.T. Kearney and the World Resources Institute have examined the effects of environmental change on business. According to the study, companies in certain consumer goods sectors that would fail to implement sustainable environmental strategies could face a potential reduction of 13 percent to 31 percent in earnings by 2013 and 19 percent to 47 percent in earnings in 2018.

Although the current financial crisis has resulted in declining commodity prices, the authors find that environmental pressures will continue to impact the supply and price of key commodities in the long term. The crisis should therefore be viewed as an opportunity to address these challenges through transformational change and not as a time to ignore them.

For their research, the World Resources Institute and A.T. Kearney based the "ecoflation" scenario on major environmental trends and policy developments, such as climate change regulations, enhanced forest policies, growing water scarcity, and new biofuel policies. They then analyzed how these drivers might affect prices on selected commodities like oil, natural gas, electricity, cereals, palm oil, and timber. The results offer tangible illustrations of how environmental costs might impact the value chain, especially for fast-moving consumer goods that are usually produced in large quantities.

According to the scenario, oil costs are expected to increase by 22 percent by 2018, 40 percent for natural gas and 45 percent for electricity. Paper products are expected to increase by 13 percent

In such conditions, it is not hard to understand how tough economic times could boost the development of innovative materials such as eco-friendly and biodegradable plastics for packaging. Even without the environmental benefits, using bioplastics may turn out as a mere consequence of the economic interest of companies. The higher oil prices are, the more competitive bioplastics are.