For well over a decade, Unilever has been a beacon for those advocating for a more sustainable global financial system, with the FMCG giant consistently among the early movers on many environmental, social and governance (ESG) issues and highest scorers in corporate sustainability rankings.

Earlier this year, however, Unilever provided a sharp reality check to proponents of what is increasingly being termed “stakeholder capitalism” when, amid investor criticism it had placed too much emphasis on sustainability at the expense of performance, CEO Alan Jope announced an emergency restructuring with the loss of 1,500 jobs.

The similarity with events at Danone last year that resulted in the defenestration of CEO Emmanuel Faber, are clear and have again brought to the fore the thorny question of how food companies balance sustainability with growth.

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Danone and Unilever may avow they are as committed to sustainability as ever but, to the food sector at large, it will appear that two companies that have been leading the way on environmental and social issues have been directly and successfully challenged by investors regarding the emphasis they place on sustainability.

A matter of interpretation

External stakeholders may be dismayed by the turn of events but they should not be surprised. Striking the right balance between profitability and sustainability is a pervasive and intractable challenge for business leaders, not least in the food sector which is subject to so many critical sustainability concerns.

The nub of the problem is “sustainability” is a loosely defined idea. Sometimes derided as meaningless by sceptics, it is, without doubt, a highly subjective and emotive term. It would be strange if there were not divergence between shareholders and CEOs, or between investors, or within boards, on what constitutes a “sustainable” strategy or level of impact. Some seek clarity by specifying long-term sustainability but how long is long? Differing investment horizons may legitimately result in conflicting conclusions about how elective ESG policies impact growth and risk, what is acceptable and what is not. 

Financial accounting may be complex and impenetrable but it is systematic, rational and empirical in a way that sustainability can no way begin to match, notwithstanding the progress that has been made in sustainability reporting.

Overt criticism by investors in relation to sustainability specifically is rare, however. Rather, the accusation, as Rick Alexander, chief executive of US-based sustainable business campaign group The Shareholder Commons, explains, will be one of mismanagement.

“These guys [activist investors] are saying ‘We want you to increase the top line, we want you to increase margin and you’re not doing a good enough job. We love sustainability. And we think you can do both.’ And then the company’s saying ‘Well, we can do both, we are doing both and just you have to be patient.’ Neither side wants to touch the fact that sometimes the sustainable thing doesn’t increase margin,” Alexander tells Just Food.

Alexander believes business leaders are not sufficiently candid with investors about the costs of prioritising sustainability, playing down the negative impacts ESG policies might have on margins while overegging the potential for long-term value creation.

The Shareholder Commons approach focuses on institutional investors with diversified portfolios, encouraging them to foster sustainable practices at individual companies that reduce or mitigate broader external impacts, thus benefiting not only the company itself but other companies in the investor’s diversified portfolio.

“In order to make ESG work, you’ve got to broaden your aperture and it’s okay, you can, because you realise that most shareholders are diversified,” Alexander says. “It has to be all the investors sort of agreeing that we’re not going to pressure companies to cut corners, even though it will increase their margins because that’s going to hurt, every time they do that, they externalise costs that investors re-internalise through their portfolios.”

Investor support growing

Notwithstanding recent events at Unilever, there is increasing investor support for investment in sustainability. While he is concerned enterprise value narratives have fuelled what he acknowledges has been a “huge appetite on ESG” among investors, Alexander sees “little glimmers here and there” of shareholders adopting a broader perspective.

In a similar vein, Simon Rawson, director of corporate engagement at UK non-profit ShareAction, says investor support is increasing, “but slowly”. Rawson continues: “I’d be lying if I said there’s been a sort of landslide of investors adopting responsible investment or ESG approaches but it’s certainly becoming gradually easier to make the case to investors.”

ShareAction also seeks to mobilise long-term, institutional investors, such as pension funds, to spur companies to adopt more sustainable business practices, coincidentally achieving a notable breakthrough with Unilever earlier this month on nutritional standards.

Perhaps understandably, these organisations have less to say about engaging shareholders that are simply not interested in long-term sustainability though both believe being completely candid is the wisest policy. “It’s very much about taking a longer-term perspective and avoiding an unhealthy focus on short-term results,” Rawson says. “And that means being prepared to be robust with your shareholders, too, so you’ve got an executive team and a board and a chair who are prepared to defend the fact that they’re taking a long-term perspective to their shareholders.”

Alexander also advocates straight-talking, urging CEOs to tell shareholders they are adopting policies in the long-term interests of the company and if “you want to vote us out, fine”. Those may not have been Faber’s exact words but clearly it was fine and they did. Unilever’s restructuring was widely seen as a response to investor pressure and, specifically, a pre-emptive move following the reported acquisition of a stake in the company by Trian Partners, the New York-based activist investment group led by billionaire Nelson Peltz. Whether Jope could or should have been more steadfast, quite possibly risking his job, is a matter of opinion.

Unilever’s announcement earlier this month that Jope’s total remuneration last year rose by 42% to GBP4.9m (US$6.4m) in cash and shares, from GBP3.4m in 2020, underlines what CEOs have to lose by being robust. What else it might say about the financial system is also likely to depend on your point of view.

Primacy, policymakers and the paradigm 

Rawson’s and Alexander’s faith their efforts can move the needle should give encouragement to sustainability campaigners and demonstrates investors can be a force for positive change. However, regarding the idea of stakeholder capitalism, it has to be said both organisations reinforce the primacy of shareholders, albeit to support wider stakeholder interests. Their methods offer a potentially fruitful pathway because of the statutory power of shareholders and companies’ fiduciary responsibilities towards them, enshrined in law. This underlines the relative weakness of regulatory apparatus underpinning ESG issues, particularly in relation to externalities and impacts on stakeholders.

In the UK, for example, the Companies Act does stipulate that, in addition to their fiduciary responsibilities to investors, businesses must consider the interests of stakeholders. Driving investors to be more proactive in urging companies to go beyond this fairly minimal requirement is clearly challenging. “There is nothing more important for boards to do than to balance up the interests of these different stakeholders,” Rawson says. “One approach that we’ve been advocating for but have found, I will be honest with you, little appetite for, is engagement between shareholders and stakeholders.”

Where there does appear to be meaningful progress, however, is in ESG standardisation. Given the lack of consensus among investors about sustainability issues, this is particularly welcome and much needed. The launch of the International Sustainability Standards Board (ISSB) by the IFRS Foundation during COP26 was widely seen as a significant development. The hope is the ISSB standards could become the non-financial counterparts of the widely adopted IFRS accounting standards that are mandated in as many as 144 jurisdictions. However, the ISSB launch immediately sparked debate regarding its narrow definition of materiality, focusing on ESG issues directly affecting the company. “They’re going with a strictly enterprise value method, which is very disappointing and we’re going to push back on that,” Alexander says.

Meanwhile, the EU’s Corporate Sustainability Reporting Directive (CSRD), which does take the broader “double materiality” approach that includes ESG factors affecting the company and its impacts on external stakeholders, the environment and society, is scheduled to be implemented in 2023.

The significance of double materiality to any formalised concept of stakeholder capitalism is clear. The fact the ISSB defines materiality more narrowly no doubt speaks to the importance being attached to achieving international harmonisation, though the need to do so suggests a paradigm shift in the global financial system to some universal form of stakeholder capitalism is some way off. That said, it will ultimately be down to lawmakers to make stakeholder capitalism a reality and the EU’s engagement underlines some jurisdictions will move faster than others.

As they invest more in sustainability, food companies are becoming more vocal in support of creating a level playing field through regulatory or fiscal measures. While welcoming how some investors, such as Larry Fink, CEO of influential investment group BlackRock, are backing long-term sustainability measures, Piet Sanders, chief executive of Belgian food group Ter Beke, says an “overall legislative framework” is required to ensure all adhere to sustainability standards demanded, above all, by the climate emergency. “That will, at the end of the day, close the roads for these money-only, or margin-only, investors,” Sanders says. “We have to go there or we don’t have a planet anymore.”

With big government and state intervention regaining political favour during the pandemic, lawmakers may be more prepared to legislate in relation to sustainability issues than they have been to date. The gravity of imminent food security crises and the climate emergency make the need for a financial system that accounts for external impacts more urgent than ever.