Sustainable operations: Consumer and investor demand spurs food & beverage response, finds Ceres report

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24 Apr 2018 --- Consumer demand for clean food, transparent labeling and responsible sourcing is challenging the industry’s business models, forcing large companies to rapidly transform their portfolios by accelerating research and development timelines, vying to acquire artisanal or organic brands, and reformulating existing product lines. These were among the key learnings from a food and beverage sector analysis is derived from Turning Point: Corporate Progress on the Ceres Roadmap for Sustainability.

The report evaluates more than 600 of the most significant US-based publicly traded companies across 21 different sector groupings. This analysis takes a closer look at whether and how 21 food and beverage companies are establishing, implementing and disclosing business strategies that enable and drive improved performance across critical material impact areas, such as climate change, water scarcity and human rights.
 
The global food system must provide enough calories for a worldwide population, which is expected to increase to 9.6 billion people by 2050. Despite the tremendous opportunities posed by growing demand, food and beverage companies face significant hurdles to long-term, sustainable growth. 
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Kristen Lang, Director, Company Network at Ceres

“The food & beverage sector has an understanding of what the financial implications are due to issues such as climate change, water scarcity and human rights,” Kristen Lang, Director, Company Network at Ceres tells FoodIngredientsFirst in a podcast corresponding with the release of the sustainability analysis. “They also have drivers from their consumers that are calling on them to understand better where their foods are coming from. With these two critical drivers for the industry, it is pushing these companies to outperform their peers across some factors, including having better examples of how they are building sustainability into their daily decision making and corporate governance patterns. We see that translate into more ambitious targets regarding how they are focusing regarding water, for example, or driving more examples of how they are looking to reduce greenhouse gas emissions across their company.”

But things are not going as fast as they could, warns Mary Ann DiMascio, Senior Manager, Company Network at Ceres. “If we go with the pace we are going at right now we will not be able to address the issues in the time that we need. We won’t be able to meet the goals of the Paris Climate Agreement. It is imperative for all companies involved to accelerate their efforts and collaborate to try to move forward. The goals are there, but it may not be possible to meet them at the current pace. So more effort and innovation is needed,” she notes.

The food and beverage sector comprises companies that process and package food and beverages for retail consumption, along with companies that produce ingredients for those products. With an estimated market capitalization of more than $40 billion, food processing is a key contributor to both the US and global economies. Ceres has a long history of advancing leadership in this sector, in particular through direct engagement with companies in the Ceres Company Network, engagement with the Ceres Policy Network’s BICEP and Connect the Drops coalitions, the AgWater Challenge led by Ceres and World Wildlife Fund, and through performance benchmarking and other issue-specific research.

Key findings of the report were:
• 48 percent formally integrate sustainability into board committee charters. (All Sectors: 31 percent)
• 90 percent hold senior-level executives accountable for sustainability performance. (All Sectors: 65 percent)
• 43 percent link executive compensation to beyond-compliance sustainability performance metrics. (All Sectors: 8 percent)

Ceres’ analysis finds companies across the food and beverage sector acknowledging and responding to the business risks posed by a new operating reality, but with varying degrees of urgency and ambition:
• While almost all companies hold senior-level executives accountable for managing sustainability issues like greenhouse gas emissions (GHG), water stewardship and nutrition, fewer than half of the assessed companies incentivize performance improvements by linking executive compensation to these sustainability metrics.
• The impacts of climate change on agricultural supply chains have become increasingly clear, and reflecting this new business context, all but one of the assessed companies include climate change-related risks in their annual financial disclosures. An impressive 86 percent have set time-bound GHG emissions reduction targets, though most have yet to set specific targets to reduce agriculture- and transportation-related emissions that are the most significant sources of GHGs for the sector.
• The global food sector uses 70 percent of the world’s fresh water, and all but two companies have set quantifiable time-bound goals to manage the impacts of their water use. Less than half of the evaluated companies prioritize water goals within the regions of the world and the areas of their value chains facing the most severe water risks. And even fewer have evaluated the risks they are exposed to in their agricultural supply chain, where a bulk of the water risk and use lies.
• The sector has successfully embedded human rights into its policies and codes: the share of food and beverage companies with formal human rights policies has jumped from under half to over three-quarters since Ceres’ 2014 assessment. And supplier codes at nearly all assessed companies require adherence to both social and environmental standards, though most companies still need to establish comprehensive systems to ensure compliance.

“We specifically found that because the global food sector uses more than 70 percent of the world’s fresh water, it makes sense that all but two of the companies assessed have set quantifiable goals to manage the impact of their water use,” says Lang. “What is interesting is that only 38 percent of the companies that we looked at are prioritizing those goals with targets within specific areas of their value chain where there is the highest risk to water resources. We looked at how companies in the food & beverage sector are doing so in their outer supply chain. So there are far fewer that are looking specifically at their outer supply chain.”
 
Food and beverage companies embrace governance for sustainability, but there are opportunities for more companies to link sustainability to executive paychecks. Sustainability challenges like drought, deforestation and obesity present ongoing business risks that management and boards must consider and address, and increased food and beverage companies are recognizing this as a fiduciary duty. Almost half (10 of 21) of the food and beverage sector companies include sustainability oversight into board committee charters, compared to just 31 percent of all assessed companies. And companies including Bunge, The Coca-Cola Company, General Mills, Kellogg and PepsiCo are taking steps to integrate material sustainability issues into board-level discussions.

The Public Issues and Diversity Review Committee of The Coca-Cola Company’s board of directors addresses sustainability issues. Of the three directors on the committee, two also serve on the board’s Compensation Committee, while another sits on both the Corporate Governance Committee and the Finance Committee. This cross-pollination of expertise across board committees allows sustainability issues to inform multiple committees and enables integration of these issues into board discussions on risk, governance and compensation.
 
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Mary Ann DiMascio, Senior Manager,
Company Network at Ceres
PepsiCo’s board of directors plays an essential role in determining strategic priorities and considers sustainability issues an integral part of its business oversight. In 2015, after discussions with external stakeholders, the board amended the company’s Corporate Governance Guidelines to add “sustainability” as a key aspect of PepsiCo’s business requiring board oversight. To align with the new Performance with Purpose 2025 goals, the board created a Public Policy and Sustainability Committee in 2017 to assist the board in providing more focused oversight of the company’s policies, programs and risks related to key public policy and sustainability matters. The committee includes independent directors and reflects a mix of directors with public policy, risk, international and scientific-related skills and experience.

As the business case for this sector to proactively address sustainability risks and opportunities become undeniable, so too has the sector’s commitment to executive management oversight. The percentage of food and beverage companies with senior executives accountable for sustainability has leaped from 54 percent to 90 percent since Ceres’ last assessment in 2014. Companies including ConAgra Foods, Constellation Brands and Kellogg have established systems to manage material sustainability issues at the senior executive level; and one company – General Mills – explicitly states its CEO is ultimately responsible for its sustainability strategy and performance.

While 90 percent of the sector holds senior executives accountable for sustainability performance, only half of those companies (43 percent) incentivize performance improvements by linking executive compensation to sustainability performance metrics. And although this sector significantly outperforms the average of just 8 percent of companies, given the significant financial implications of climate change, deforestation, water scarcity and pollution, and human rights abuses, all food and beverage companies need to consider and prioritize these issues, just as they would other material business risks affecting long-term growth.

To help reduce climate and water risk in its agricultural supply chain and meet its goal to sustainably source 100 percent of its 10 priority ingredients by 2020, General Mills is exploring an emerging area of opportunity: regenerative agriculture.This is a holistic approach to farming that makes optimal use of the earth’s natural solar energy, water cycles, and nutrient cycles to build healthy soil, ultimately capturing carbon in the earth and keeping it out of the air. In 2016, General Mills gathered experts to form the Organic & Regenerative Agriculture Advisory Council (ORAAC), which helps the company identify challenges and propose solutions to achieve its larger sustainability goals through these promising practices.

DiMascio pointed to General Mills as a good example of sustainable operations. “They have set a science-based GHG reduced target in 2015 to reduce emissions across their entire value chain, which in their lingo is ‘farm right to fork.’ Part of the way to do this is to work with farmers on the ground. So they work with some NGO partners and also their suppliers in parts of their value chain and especially in dairy and row crops, really working on where those impacts are and how we can measure them,” she notes.

For DiMascio, the success of implementing this type of strategy goes beyond just looking at a reduction but also at what are the solutions and long-term things that we can do to support and increase resilience over the long term, such as investing in the health of the soil. “It could be about regenerative agriculture and ways to regenerate the soil and help it capture carbon more effectively. It has been really interesting to see companies that have set these goals to be using innovation as a method to try to help achieve them and bring their partners there along the way. Investing in these practices will help achieve these global goals, but it is also good for the business and productivity of the company and suppliers involved,” she adds.

But what about the role of suppliers, including the ingredients industry in this? While the analysis mainly focused on manufacturers, DiMascio did note that the entire chain “from farm to fork” has a role to play, as manufacturers can never succeed on targets alone if their suppliers are not involved. “There is a pressure that comes for suppliers if they know that the consumer-facing brands that have set these goals, it gives more dynamic and incentive for their supplier partners to put their plans together, to help their customers to meet them and be able to demonstrate that through their transparency and reporting. I think that strengthens the confidence of their buyers that their supply chains are more responsible,” she says.

Ceres stress that investors will seek to understand the environmental, social and governance (ESG) risks of commodities going forward. Commonly sourced commodities – such as beef, palm oil and sugarcane – are among the most prominent drivers of deforestation, GHG, water depletion and human rights abuses. While the severity of environmental and social impacts varies by commodity and region, the collective trends are producing tangible business risks that are increasingly affecting company bottom lines. From the reduced availability of key ingredients to damage to brand equity from advocacy campaigns to legal actions or sanctions for environmental violations, these impacts present material financial risks to companies and their investors.

“I would call out palm oil, beef and soy, as ingredients that have a larger environmental footprint and do have some complexities to them from a GHG perspective, which come from deforestation,” says DiMascio. “Some consumers may not know that certain ingredients are being grown in areas where forests need to put cut down for growing palm oil or raising beef cattle. That is a huge issue of concern for Ceres because of the GHG coming from it and clearing that land is a risk embedded into a lot of these supply chains that are companies are just starting to get their heads around.”

“With global agricultural supply chains, there are a lot of areas where there may be risks within companies that need to be addressed and mitigated. We certainly see that there are also associated human rights risks. If you are displacing people related to forests there are a lot of challenges that come from those commodities and they are ones that we see more focus on. We are hearing from investors more than those are ones they are keeping an eye on, to see how the companies they are investing in are managing risks further down the value chain,” she adds.

Both Lang and DiMascio are confident for a sustainable future food & beverage industry that will be critical to the planet as a whole, however.

“From the work that we have seen, there is good progress being made. Among individuals, there is an understanding that this is urgent, not only for businesses to be able to succeed and thrive as the resources and environmental changes, but also how the needs of the consumers and the economy change. They must evolve. There is also an understanding that we are all in this together and we do need, we as humans need to make sure that we can feed everyone in a healthy way in the decades to come,” says Lang.

DiMascio notes that she is heartened by how consumer demand, increasing expectations from investors and other stakeholders are calling on the food & beverage companies to take action. “They are listening and looking at ways on how to collaborate, innovate and be able to meet those expectations in the future. The results so far show there are movement and progress. While there is much work to be done, the food & beverage companies that we have looked at have the right mindset regarding finding a solution for the future,” she concludes.
 
A podcast on the results of this interesting sustainability study can be found here.

By Robin Wyers

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