How should CEOs think about the transformational change in this decade?

SidebarThe current pace of change within the paper and forest products sector is unprecedented. The speed and scale of action will undoubtedly create a significant performance divide between those that understand the nature of the transformation and act accordingly and those that don’t.

Transformational change unlike any other

The immediate future of the paper and forest products industry will be characterized by two principal dimensions of change: sustainability and digital and analytics. Although these are overarching dimensions, several specific megatrends are also influencing them (see sidebar, “Transformational change unlike any other”). In addition, three key external forces are directly affecting this scenario: the repercussions of the COVID-19 pandemic, new value-chain dynamics (for example, the shortage of wood products such as timber has resulted in stronger regional trade and more protectionism), and the regulatory environment (such as packaging-waste regulations). These external factors are likely to have a greater influence on the industry than ever before. As the implications of these factors unfold, it will be vital for CEOs to understand them and respond proactively.

Sustainability

As in nearly every global industry, there is a significant sustainability revolution under way in the paper and forest products sector, with the rapid emergence of new regulations and global consumer concerns. This phenomenon is creating growth opportunities for the industry to serve as a substitute for other substrates such as plastics. Notably, our global consumer surveys indicate that paper-based packaging ranks quite high for sustainability both in the United States and among surveyed European countries. Similarly, wood-based textile and building materials are the focus of increased interest and growing demand. Meanwhile, more products are competing for forest raw materials (for example, textiles based on alternatives to cotton and other materials, which are boosting demand for dissolving wood pulp).

Simultaneously, the industry is faced with critical questions about its core resource, as climate change and biodiversity concerns affect forest usage and spur regulations. Forest biomass has traditionally been seen as a net-zero asset in terms of CO2 emissions because the source is biogenic; however, in relation to forests, this interpretation is increasingly being questioned. Regulatory policies that are expected to be implemented within the next few years are likely to favor forest products that enjoy extended usage: for example, wood construction over pulp and paper, which in turn is preferred over biofuels. It is clear that the role of forests is critical, with reforestation being a crucial component of meeting overall decarbonization targets.

The paper and forest products industry is faced with critical questions about its core resource, as climate change and biodiversity concerns affect forest usage and spur regulations.

Another challenge is climate risk related to sourcing and operations. Supply of recovered paper is approaching practical limits in many regions, which is leading to higher costs and lower-quality fiber for papermaking. Today’s transformational era is setting up significant dynamic tension: at a time when the industry is under increasing pressure to produce more “green materials” for its downstream industries, limited supplies will create challenges for the sector to maintain its sustainability efforts.

Article reproduced from McKinsey & Co report April 2022