Now is perhaps a good moment to take stock of how investor attitudes to sustainability in the food sector have changed in recent years and may continue to do so.
Last month saw Paul Polman, sustainability standard-bearer-in-chief for the food industry and the wider corporate world, step down after ten years as chief executive of Unilever, a tenure defined by his groundbreaking and unrelenting focus on sustainability. Last week, the World Economic Forum (WEF) Global Risks Report 2019 confirmed climate-related issues, among the threats Polman sought to elevate in 2009, now dominate the long-term risk horizon.
While investors have been characterised as somewhat sceptical or even dismissive of sustainability, generalisations are problematic. There will be a spectrum of opinion reflecting the many different kinds of investors. Meanwhile, the socially responsible investment (SRI) sector has been a growing and influential force in the market for many years.
Nevertheless, Polman’s revelation in an interview with Business Insider magazine last March that during his time as CEO he had never had a single question from a sell-side investor about Unilever’s strategies on climate, diversity or human rights suggests scepticism prevails in some reaches of the investment market.
“The investor approach varies, but long-term oriented investors are clearly paying a lot of attention to ESG [Environmental, social and corporate governance],” a spokesperson for Nestlé, the world’s largest food company, says. “For these investors, it is a key requirement for future success.”
Non-profit organisations working to promote sustainability through investor engagement, such as Ceres and As You Sow in the US, or ShareAction in the UK, say investor interest in sustainability has broadened in recent years.
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“Big institutional investors embraced climate six, eight years ago,” says Conrad MacKerron, senior vice president at As You Sow. “Now you’re seeing a little more movement in this area. It’s all slowly growing.”
Deborah Ball, head of communications and fundraising at ShareAction, describes a very similar pattern in the UK, with climate at the “forefront” regarding investor interest in sustainability for some years. “I think it’s fair to say there has been a move,” Ball says, adding that mainstream investors like Blackrock and Vanguard are now talking publicly not only about their climate policies “but also ESG more generally.”
However, Martin Deboo, consumer goods analyst at investment bank Jefferies, says sustainability issues “hardly ever” come into conversations he has with investors which he says “sort of squares” with Polman’s assertion that investors are not interested.
While advocates for sustainability stress its capacity to create long-term value for a food company, Deboo says the lack of a link to financial delivery in the near term limits investor interest. Conversations with investors at the moment are dominated by concerns such as the demands of Millennials, the growth of niche brands, the perceived lack of pricing power and e-commerce.
Deboo, who has criticised Danone CEO Emmanuel Faber for placing too much emphasis on sustainability at the expense of “more prosaic goals”, says sustainability may come into the equation when discussing Millennials, but he does not see it as a prominent issue for investors in its own right.
Clear risk and measurable performance
Targets and interventions relating to climate change and water are the cornerstones of most food companies’ sustainability strategies. These criteria were the initial focus for investors, too, and they remain the sustainability issues of most interest because of their direct association with risk. In a sense, it could be argued investors are not moving towards sustainability but sustainability, led by the carbon and water issues, has migrated into an area in which investors have always shown interest, namely risk, as the latest WEF Global Risks Report underlines.
Moreover, carbon and water are in what might be seen as a “sweet spot” where exposure and responses to significant, tangible risks can be measured using metrics that allow comparisons to be made over time and between companies. However, there are a few other ESG issues that offer this combination of attributes.
In 2016, New Zealand pension fund NZ Superfund launched a strategy aimed at reducing the Fund’s carbon emissions intensity by 20% and potential carbon reserves by 40% by 2020. “Having emissions data and data which rated companies in relation to their climate change management practices was a critical component to the way we reduced the Fund’s emissions exposure,” Arti Prasad, senior investment strategist for responsible investments at NZ Superfund, tells just-food.
The following year, the Fund rebalanced its portfolio, selling holdings in 297 companies that did not meet its new climate criteria. Interestingly, food and beverage was among the sectors in which NZ Superfund reduced its exposure as a result of the realignment.
The Fund has remained an investor in the sector but applies the same conditions on investment in food manufacturing that it does with its holdings in farming. “We have investments in food manufacturers both through our public market equities, and privately,” Prasad says. “For our private market investments, we apply the same principles and approach to ESG integration and management of climate change risks as we do in farming. These sectors have exposure not only to climate change risks, but also health and safety, water, animal welfare, labour, corporate governance, and supply chain risks which we feel are critically important and require assessment and management.”
Reputation as common denominator
“There has certainly been increased interest from investors in recycled plastics, particularly in the US”
The experience with climate underlines how direct links to risk mitigation foster investor interest, so the links between reputational risk and sustainability issues across the board would appear to be important in gaining investor engagement in a broader range of sustainability issues. As MacKerron puts it, any sustainability issue “can blow up at some point if it’s perceived to be a big brand risk”.
The recent spike in negative publicity relating to plastic marine pollution is a case to point, with the threat to market share posed by bad publicity prompting heightened investor focus. “This year there has certainly been increased interest from investors in recycled plastics, particularly in the US,” Deboo says. “It is striking how it’s come from nowhere.”
As You Sow has been involved in campaigning on marine plastic pollution for many years, but MacKerron points to a surprising uptick in contacts on the issue from major investors. “I’ve had calls on plastics that I never would have dreamed of getting,” he says.
While in the case of plastic recycling a link to reputational risk has led investors to engage with companies about plastic use, what is required are better quantitative and comparable measures for individual non-financial criteria.
The lack of sufficiently rigorous and consistent ways to measure and compare performance across all sustainability criteria will present an impediment to further and deeper investor engagement and appreciation of sustainability issues.
“For all the fashionable talk of sustainability, the quality of disclosure that management provides on it is quite low,” Deboo says, adding there is “no real debate” concerning the cost-benefit profile of sustainability measures.
“So, my response to the Polman cri de coeur that no one’s taking any notice is, I think in fairness to investors, they won’t take any notice unless there’s some sort of reliable and accountable metrics put into the market on it, and there’s a quality of analysis on it from companies comparable to what one would get on, say, their margin outlook.”
Prasad says giving investors quantifiable and consistent metrics so they can compare companies’ exposure to risks and opportunities is “very important”, and, striking a positive note, she says this is “already happening amongst third-party service providers that rate companies based on ESG performance and rank them compared to their peers. It is important for data providers to have similar definitions and methodologies in the way they define ESG risks and award company ratings. That way there is consistency in the way companies are rated and compared.
“Third-party service providers that analyse ESG data are continuously implementing model enhancements that are designed to expand the range, type and data inputs in an effort to enhance the quality of the data or company ESG ratings and analysis. We are monitoring improvements.”
Meanwhile, The Embankment Project for Inclusive Capitalism (EPIC), launched in 2017 with the aim of developing a new comprehensive framework for non-financial reporting, published its first report late last year. The work has focused on grouping criteria under four pillars; talent; innovation; society and environment; and governance.
Led by professional services group EY and the Coalition for Inclusive Capitalism, EPIC has some influential backers. Three food companies, Nestle, Unilever and PepsiCo, are among its nine corporate participants but it is the involvement of powerful asset managers, such as Schroders, BlackRock, Barings and JP Morgan, and huge asset owners, including Allianz and Guardian Life, which is particularly significant.
Engagement of major investors in concerted efforts to put sustainability reporting on a more solid quantitative footing is a powerful indicator that scepticism towards sustainability on the part of investors is a thing of the past.