Sector Profiles :: Sustainable Products - the Green Stock Exchange (GREENSX)

LOHAS's Sustainable Economy segment is a growing annual market approaching $150 billion. It's not exactly about a specific category of products or services but rather a self-sufficient, ecologically friendly philosophy shared by a disparate set of businesses. And it’s catching on fast, not only because it's the right thing to do: It's also a more lucrative path than the status quo, as Amory Lovins, L. Hunter Lovins and Paul Hawken eloquently argued in their 1999 book Natural Capitalism.

Sustainable products can be defined as those products that generate greater positive or lower
negative social, environmental and economic impacts along the value chain from producer to end user than conventional products. The benefits of sustainable products can be realized through the production, consumption and/or disposal processes and can accrue value throughout the chain production and trade of sustainable products.

The sustainable products market consist of numerous products such as: green and sustainable building, natural household products, sustainable paper goods, cleaning products, gardening and any other products made sustainable.

Sustainable Homes

Forecasts predict that green building in the residential sector will grow from a $7.4 billion business in 2005 to a $38 billion one by 2010. Green home projects in the U.S. have sold for a nice premium -- as much as 25% above the local market, while the average construction cost increase of using green materials was just 4%. An example of a sustainable home is shown below:

Raleigh investment firm Cherokee Investment Partners, built a house dubbed the "Mainstream GreenHome," requires 96% less energy to heat hot water than a comparable dwelling -- and is predicted to save 80,000 gallons of water per year through smart conservation methods.

It was built under the National Association of Home Builders' Model Green Home Building Guidelines and just last month won a Gold Award in the NAHB Research Center's 2008 EnergyValue Housing awards. But, Cherokee chief Darden isn't banking on builders replicating the GreenHome en masse.

He thinks corporations and multifamily landlords are more likely to embrace green technologies first since they can more easily focus on the payback in energy savings over the long term. The typical homeowner is more caught up in the monthly mortgage payment than a return that might take 5 to 10 years to materialize.

Sustainable product certification procedures are often complex and expensive. They require well-established, efficient and effective institutions of certification, standardization, metrology and accreditation, which developing countries often lack. They require an interdisciplinary approach which poses a challenge for traditional certification and accreditation institutions. On the other hand, the “one size fits all” approach of many international certification schemes often fails to consider the realities in developing countries.

The last decade witnessed a growing interest in the market for sustainable products in developing countries. At international level, eco-labelling requirements, although they may help the identification and marketing of these products, also impose complexities and financial burdens, particularly
on smaller-scale producers. A variety of initiatives are also underway at the international level to assist developing countries to develop these markets and to facilitate and harmonize certification.

The assumptions that underpin these myths are prevalent in important economic and political sectors in developing countries and will need to be confronted before wide-scale headway can be made across the South in changing the status quo. At least three of these myths are of particular importance.

Myth 1: Sustainable product markets are niche markets. Clearly, what was conceivably correct at the beginning of the 1980s and, possibly, for most products even until the early 1990s, is not the case any longer. Sustainable products constitute one of the fastest growing markets. Organic products, for example, now have significantly gone beyond the one per cent market share threshold that might once have categorized them as niche markets. Indeed, approximately five per cent of world trade today is in so-called “green products.” The dynamism of markets for products from sustainable forest management, for example, raises expectations as to the increasing importance of markets for a diverse range of sustainable products.

Myth 2: Certification is a private sector business; there is no role for government. In developing countries, especially in those with more neo-liberal economic approaches, there is a common understanding that certification schemes are private sector operations— market responses to market needs by clients or consumers. Indeed, for some sustainable products, it has been the private sector, together with environmental or other non-governmental actors, that has elaborated and implemented certification schemes and criteria.

The most obvious example is the certification of sustainable forestry management. However, in a number of other cases, the role of government has been important. This has been so, for example, in the case of sustainable fisheries where the existence of a regulatory framework that prevents the respective species from being overexploited is one requirement, amongst others, for certification. In the case of organic agriculture, government has assumed a regulatory role as an overseer of the certification schemes or as the accreditation agency. Importantly, government has also tended to assume its role as an active promoter of sustainable products and of environmental and social externalities.

Myth 3: Developing countries have a competitive advantage in the production of sustainable products. Against initial suppositions that developing countries would have a competitive advantage in the production of sustainable products, it is now widely understood that the production of sustainable products implies a variety of costs and expertises that go beyond the traditional equation of labor, land and capital and that have a significant influence on supply and demand and the final market outcome. This includes costs and expertises related to: the internalization of social and environmental externalities, certification, market information and intelligence, and the development of local markets.

Most developing countries are only beginning to take into account environmental and social externalities. Governments have tended towards reactive environmental management, mostly through regulatory instruments, a few preventive mechanisms and even fewer instruments directed at the identification and promotion of opportunities for sustainable products. In industrialized countries, on the other hand, support payments that compensate for positive externalities may be very significant; up to 20 per cent of production costs in some cases. Moreover, the internalization of negative externalities generated through the production of conventional products is also significantly more advanced in industrialized countries.

The proliferation of certification schemes demands market information and intelligence that is not always available in developing countries and can make the task of selling sustainable products more complex and, at times, very costly. Moreover, there are scarce trade statistics and market information available for sustainable products. The geographical separation between developing country producers and industrialized country consumers implies increased costs for obtaining reliable information.

Developing countries’ domestic markets for sustainable products are still in the early stages of development. This implies that access to external markets is crucial for production to expand. It also means that it is difficult initially to acquire experience and training in the market for sustainable products locally.

In conclusion, developing country decision makers need to confront these myths and base their policies on the emerging trends and experiences if they are to capture what is clearly a growing market in sustainable products.