A group of 60 institutional investors has written to 15 food and drink companies urging improvement in how they manage and report on water risk in their own operations and in their supply chains. Ben Cooper reports.
The evolution towards seeing sustainability issues in terms of business risk was demonstrated this week, as a group of 60 European and US institutional investors, wrote to 15 companies operating in the food and beverage sector, suggesting they need to improve their water risk management and disclosure practices.
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Among the 15 companies are some big names such as Archer Daniels Midland, Dean Foods, Fresh Del Monte Produce, Hain Celestial, Hormel Foods, Tyson Foods and the newly-combined Kraft Heinz Co.
They were selected on the basis of the low scores they attained in a report entitled Feeding Ourselves Thirsty published in May by the Boston-based sustainability think-tank, Ceres, which is also co-ordinating the investor letter.
However, the letter cannot be seen as just another "name and shame" exercise, when those doing the shaming are investors holding some US$2.6trn in assets.
It speaks to how the attitude of the investment community towards sustainability has changed. Ten years ago, many investment analysts were as guilty as any of seeing sustainability as a "bolt-on" for businesses and, moreover, one they were not very interested in.
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By GlobalDataLinked of course closely to the steady realisation of the huge business risks inherent in sustainability challenges, particularly water, the attitude of institutional investors is very different today.
Brooke Barton, senior director of the Ceres Water Program and one of the report's authors, says the letter is "testament to where the investment community is right now on understanding how material environmental and resource issues are to corporate financial performance". She adds: "I think we're at a very different moment with the investment community with this issue."
While very low scores must suggest insufficient engagement, Barton says there may be instances where "companies have done a lot of work and analysis" but have not provided sufficient information for investors."You see very large shareholders who have identified this as a factor they are concerned about, where they see that data is short and their analysts are not able to frankly do their full due diligence or analysis of these stocks because of the gap in data."
The exercise is to reach out to the companies, she explains, to ascertain what their poor rating in the report signifies. "The investors would like to hear from these companies directly on this. The first step is to understand the degree to which the companies that did score poorly are in fact not looking at these issues in a very serious way or perhaps they are and simply haven't shared that information yet with their shareholders."
In a statement responding to the letter, Hormel Foods appears to suggest its ongoing efforts had not been fully appreciated. The company says it has "a long tradition of stewardship in water programmes, including publicly stated numeric goals and progress in water reduction for nearly a decade".
Governance and management of water risk was one of the four criteria across which the report assessed some 37 food and drinks sector companies. Barton says it was an area where the 19 packaged food manufacturers had generally performed well, for example in relation to board oversight of water risk, "sophisticated data analysis" and integrating data around risk into business processes.
The remaining 18 companies were divided into three further industry sub-groups, comprising six beverage companies, six meat producers and six suppliers of agricultural products.
In addition to governance, the report looked at companies' actions to reduce water risks and impacts in their direct operations, in their manufacturing supply chain and in their agricultural supply chain, scoring each company on a 0-100 point scale.
Where Barton says the packaged food companies' performance left more to be desired was in relation to water risks and impacts in their agricultural supply chains. Describing engagement in agricultural supply chains in some instances as "tepid", Barton says there is an "urgent need" for more analysis, investment and on-the-ground partnership in relation to water risk in supply chains.
A nuance in the way the report's sample is subdivided, and in the proportion of the different subgroups cited in the investor letter, is arguably very relevant in this context.
The agricultural products companies themselves, and to a certain degree the meat companies too, form part of the supply chains of the 19 packaged food companies. At 13.5 and 10.5 respectively, the median scores of the six agricultural companies and the six meat companies were considerably lower than those for the packaged food (27) and drinks producers (26.5).
While aspects of the report methodology meant direct comparison of scores between companies from different subgroups was potentially misleading, the fact that the higher performing companies all came from the packaged food or beverage groups can hardly be ignored. Not surprisingly, Unilever was the top-rated company with a score of 70, followed by Coca-Cola Co. (67), Nestle (64), General Mills (57), PepsiCo (55) and Kellogg (54).
Unilever was praised for "leading practices" such as linking the CEO's personal performance goals and bonuses to progress against the company's goals in its Sustainable Living Plan, using a shadow price for water to calculate the return of efficiency investments and, when making investments, prioritising water efficiency investments in factories located in water scarce locations. The company was also picked out for having a goal to source 100% of its agricultural inputs sustainably by 2020, requiring manufacturing suppliers to provide data on water use, as well as providing financial incentives to growers and manufacturing suppliers through the Knorr Sustainability Partnership Fund, which invests in projects to accelerate the adoption of sustainable agricultural practices.
Along with Unilever, packaged food companies generally featured more frequently in discussion of leading practices. General Mills was praised for having developed collaborative watershed protection plans in high water risk regions. ConAgra Foods and Kellogg were said to be among the companies reporting the most water data for their facilities.
Both General Mills and Kellogg were praised for setting time-bound goals to source the majority of their agricultural inputs sustainably. PepsiCo was commended for having a sustainable agriculture policy which directly addresses water use.
While 66% of the meat companies and 50% of the agricultural companies received the letter, only 32% of 19 packaged food and beverage companies were among the 15 companies.
There are a number of possible explanations for this. It could reflect meat and agricultural companies being further behind packaged food companies in some of these areas.
It is often said companies with major consumer brands are generally quicker to move on major sustainability issues because of the public pressure they face in the marketplace, whereas commodity suppliers are afforded a degree of anonymity.
However, if it is the case packaged food companies are still not sufficiently prioritising agricultural supply chains, the lack of progress by the agricultural product companies could partly be because there has not been sufficient pressure from or engagement with them on water from their customers, namely packaged food manufacturers.
Overall, what the relative performance across the different industry groups undoubtedly reflects is, with regard to water, it is in agricultural supply chains where the most work needs to be done and where greater focus needs to be applied.
