Concha y Toro: Sustainability Pioneer and Further Challenges
As the leading wine producer in Latin America and the fifth largest winery worldwide in terms of volume traded, Viña Concha y Toro (CyT) is certainly exposed to the climatic phenomena, which can impact its vineyard’s production yields, further affecting supply volumes and prices.
Climate is one of the main determinants of the environmental conditions in which living organisms develop; and human’s social and economic activities are not alienated to this rule. Precisely, agriculture represents one of the sectors that are particularly sensitive to the problem of Climate Change. In fact, the essence of these activities is the capture of carbon dioxide and its transformation, in conjunction with other elements that act as nutrients, to more complex organic products, such as wine.[1] In addition, we should consider Concha y Toro’s substantial dependency on water to carry out its business, in light of studies which confirm that “over the next decades, it is predicted that billions of people, particularly those in developing countries, would face shortages of water and food and greater risks to health and life as a result of climate change”.[2] Actually, according to 2006 data, in Chile, 83 percent of water is used for agriculture (46 percent for crop irrigation) and another 13 percent is for industry.[3]
The problem in this particular case is that, in turn, global warming is partly being caused by human emissions of greenhouse gases (GHGs), and one of the primary sources of same GHGs emissions is agriculture, forestry and other land uses, contributing nearly 24% of total GHGs global emissions[4]; meaning that CyT is both affected by and contributing to Climate Change. Therefore, CyT has showed actively commitment to the Sustainable Development Goals raised by United Nations in 2015.
The company has addressed this matter very seriously, becoming a pioneer in the industry in relation to the sustainability of its operations. In terms of resource management, CyT’s whole area of vineyards uses drip irrigation systems, which results in significant savings in water consumption. Currently, the winery’s water footprint is 36% lower than the industry average; however, the company has set the goal of further reducing total water consumption by 10% per glass of wine by 2020[5]. Another initiative designed to adapt the operations management in the face of Climate Change is the “Defoliation Project”, which consists in “removing the foliage leaves from the grape bunches to artificially adjust their solar exposure to minimize the damage produced by the sun’s rays and maximize the productive and qualitative potential of the vineyard”[6]. Regarding externalities management, the long-term initiatives developed by Concha y Toro can be summarized in the implementation of measurement tools such as the Carbon Footprint, which allows it to better manage not only its direct emissions (mainly coming from agricultural activities, land use and fuel consumption), but also its indirect emissions (electric energy consumption as well as transport and packaging related activities). Furthermore, CyT has created an owned Carbon Fund, a global initiative that internally taxes CO2 emissions, internalizing its own cost of pollution[7]. Simultaneously, the company has been measuring its Water Footprint, becoming the first winery in the world to make this measurement and a leader in responsible water management[8].
In my opinion, I would say that Concha y Toro has basically one main area of improvement in relation to how it could alleviate its contribution to Climate Change: leverage its position to increase awareness among suppliers, business partners, competitors and customers towards Climate Change effects, encouraging them to act accordingly and help making all their business a more sustainable activity. For instance, I would recommend CyT to gradually enforce their packaging suppliers to meet certain compliance standards with respect to their GHGs emissions and recycling practices. Another initiative could aim to transport business partners (mainly maritime shipping companies and truck transporters), which could begin by measuring their carbon footprint, commit to reduce it, and eventually, take part of Concha y Toro’s Carbon Fund Project.
While Concha y Toro continues its growth plan, it becomes clear that sustainability is one of their top priorities. However, is it enough to be responsible only for the environmental effects of your own business, or should Concha y Toro go further and take responsibility for the impact of the whole supply chain? Besides, will these initiatives be sustainable on the long term run as competitive landscape and shareholders will continue to push for profitability?
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[1] Luis A. Cifuentes, Francisco Meza, “Cambio Climatico: Consecuencias y Desafios para Chile”. Pontificia Universidad Catolica de Chile, Centro Interdisciplinario de Cambio Global (CICG-UC), August 2008, p. 8.
[2] Climate Change Secretariat, “Climate Change: Impacts, Vulnerabilities and Adaptation in Developing Countries”. United Nations Framework Convention on Climate Change (UNFCC), 2007, p. 5.
[3] Food and Agricultural Organization for the United Nations (FAO), 2016. AQUASTAT website. http://www.fao.org/nr/water/aquastat/countries_regions/CHL/index.stm. ABI/INFORM via ProQuest, website accessed on November 2017.
[4] Rebecca M. Henderson, Sophus A. Reinert, Polina Dekhtyar, Amram Migdal, “Climate Change in 2017: Implications for Business”. HBS No. 9-317-032 (Boston: Harvard Business School Publishing, 2017), p. 1-2.
[5] Vina Concha y Toro, Sustainability Report 2016, p. 45. https://www.conchaytoro.com/wp-content/uploads/2017/08/Sustainability-Report-2016.pdf. Accessed on November 2017.
[6] Concha y Toro’s Center for Research and Innovation, 2016. http://www.cii.conchaytoro.com/r-d-i-projects. Accessed on November 2017.
[7] Vina Concha y Toro, Sustainability Report 2016, p. 50. https://www.conchaytoro.com/wp-content/uploads/2017/08/Sustainability-Report-2016.pdf. Accessed on November 2017.
[8] Vina Concha y Toro, Sustainability website. https://www.conchaytoro.com/concha-y-toro-holding/rse-cat/environment. Accessed on November 2017.
Gregorio, this is great! I agree with your question about what role CyT should take for the whole supply chain. This is an interesting situation – CyT is obviously so impacted by climate change, but also the agricultural industry, to your point, is part of the problem, particularly as it pertains to water. I think wine is a particularly interesting industry to consider because the land is so important and changes in the soil or the water could make a huge difference in the taste and quality of the wine, which could upend the business model. So, while there is a big incentive to use the same amount of water to keep the quality and taste the same, by doing so, CyT may have problems down the road. I agree that they need to get a coalition of people on board to truly make broad change, and wonder how easy this would be to do in the wine industry in Chile. Are there already good centralized partnerships? How much leverage does CyT have among wineries and suppliers?
I also think your point around shareholders pushing for profitability is important. I agree that is a large risk. Right now, CyT can continue what they are doing and may be very profitable, but in 15 years the entire business could collapse if the soil is irreparably harmed. I wonder who in the company will be thinking about this long-term and how much leeway management has to make sure that shareholders see the importance of being sustainable now for long-term operations. Again, if CyT is able to act as a leader and coalition-builder in the industry, that could also potentially help to make sure that shareholders see the value of being sustainable today, even if it cuts into profits in the short term.
Interesting overview of the acute need for a wine producer to address the impact of climate change on business. I also read that another significant sustainability issue for wineries is waste water: industry standards show that for every liter of wine produced a winery outputs 10 liters of waste water (http://www.sciencedirect.com/science/article/pii/S0959652609000481). It would be interesting for CyT to conduct a holistic overview of areas to improve sustainability.
You raise a particularly good point on the sustainability aspirations of CyT and whether they should expand their scope to other players in the supply chain rather than focus on their internal initiatives. I think they will absolutely need to pressure other players in the supply chain to better manage resources and sustainability because of the broad risk their scale exposes them to. In addition, in the long run these investments could lead to decreased costs due to energy and raw material consumption as well as improved efficiency and yield. Sustainability efforts could thereby improve profitability in the long run.
Gregorio, this was a really informative article about a product we all love and see a lot! It was interesting to me to see the multiple approaches CyT is taking to tackle the large question of how you can be a sustainable business yet drive profits. The incentives are aligned for CyT to use less water (which saves their water costs), Defoliation (which improves their grape production), and the Carbon Fund (measuring their efforts, which arguably is the most important part of any effort). In addition, to address your question which is touched upon by DJ’s comment, is that CyT could also lead efforts to drive sustainability in the wine industry by offering to share their best practices and knowledge with others. Given that consumers now pay attention to environmental sustainability efforts, with the right marketing CyT could also reap benefits from this as well.
Thank you Gregorio for writing about sustainability in the wine industry! It is interesting to see that, even though the entire industry is affected by climate change, very few players are taking deliberate action to implement sustainability initiatives such as the water irrigation techniques, let alone implementing a carbon fund.
I would be interested to see if Concha y Toro could exploit this sustainability angle as a way to differentiate themselves in the market and to appeal to the environmentally conscious customer. Is there such a customer base? And if so, which wineries are the preferred amongst them?
As a leader in the Latin America wine industry, I agree that CyT should play an active role in shifting the entire industry towards more sustainable practices. So, if they manage to align the sustainability agenda with the profitability that shareholders expect thanks to a competitive advantage, there is a higher chance that the company can pursue this advocacy role.