Sustainability advocacy group Ceres released a new peer-reviewed resource guide, Engage the Chain, recently which is designed to help investors understand and evaluate the environmental and social impacts that drive financial risk in the food sector.
It looks at the production of eight common commodities: beef, corn, dairy, fibre-based packaging, palm oil, soybeans, sugarcane and wheat. An accompanying report provides specific examples of financial, reputational, market, operational, legal and regulatory risks that food companies can face as a result of supply chain impacts.
The guide includes:
• Descriptions of potential areas of financial risk in agricultural supply chains, including climate change, deforestation, land use, biodiversity, land rights, water scarcity, pollution and working conditions
• Detailed briefs on the eight commodities that include descriptions of the value chain for each and an assessment of how the risks identified can impact them
• A “table”: https://engagethechain.org/company-exposure showing the exposure of major U.S. food and beverage companies to each of the commodities
• Guidance for investors on the steps they can take to evaluate material risks in their portfolios due to these supply chain impacts
“Engage the Chain is a one-stop-shop for investors looking to understand the materiality of ESG risks for food company supply chains,” said Brooke Barton, Ceres’ Senior Director, Water & Food Programs. “It provides guidance on the key risks by commodity and helps investors understand which companies are exposed to which commodities.”
The project was initiated because Ceres identified that growing pressures on agricultural production such as climate change and deforestation create new risks for food sourcing. Ceres wanted to accelerate investor understanding by taking the existing academic literature and making it more accessible. “Engage the Chain contains a complete recipe for engagement,” said Barton. “To manage the portfolio, investors need to understand the complexity of the issues and the potential materiality of supply chain risks.” The tool was also developed as Ceres saw a marked increase in shareholder resolutions at food companies; several dozen were filed in 2017.
Over the next couple of years, Ceres hopes to add new commodities, such as coffee and chocolate, but is currently seeking funding for this expansion. Ceres started with those commodities most commonly identified as critical purchases for US companies in the packaged food and beverage industries, for example.
Peter van der Werf, Robeco’s Senior Engagement Specialist, Active Ownership, who is working with Ceres, said his firm had been conducting a soft commodities research project since 2014 similar in intent to Engage the Chain. The research identified social issues in the food and agriculture chain, looking at issues such as human rights violations, living standards, a living wage and smallholder capacity building within 10 major soft commodities. This led to three years of engagement; a process which was about to conclude.“We have made good progress with the companies we talked to,” he said.
Engage the Chain was designed in a similar fashion to provide a broad group of investors the opportunity to put together a ‘risk heat map’, with areas of high, low and median risk. For example, in Robeco’s research, sugar from Brazil presents higher human rights risks than that from South Africa, though that in turn may involve problems with water management. Engage the Chain was designed to help investors pinpoint such issues. Van der Werf had become involved in Engage the Chain as a member of the sustainable Palm oil working group set up by the PRI. This group is now evolving into a broader deforestation working group, aiming to engage on cattle, paper pulp and soy production.
“The tool is designed particularly,” said van der Werf, “for those that don’t have a sector specialist in-house or a dedicated consultant. It is a first step in finding the relative risk exposures of commodities. It can be used to find out where exposure is most significant, how severe it is and to screen regions or engage. For such an initial analysis it is a very helpful tool.”
Noting that US companies often lag their European peers on ESG disclosures, I asked van der Werf if he had noticed any improvement during the engagement process.
“Back in 2014,” he said, “there was very little transparency among US companies, but the result of us asking for reporting has caused many companies to really step up, with less anecdotal disclosure and more materiality. Companies have also engaged in partnerships to help manage risk.” Van der Werf also noted that the tool was very useful for an introductory call with a company, enabling investors to ask concrete questions.
Allan Pearce, Shareholder Advocate at Trillium Asset Management, another contributor to the tool, said that he had become involved because Ceres had approached him because of his experience in sustainable agriculture. He saw the tool as distilling information and allowing investors to apply it to identify risk hotspots that they might being exposed to, for example companies associated with particular commodities that are at high risk. Investors would first look at the 10-K SEC filing to see which commodities a company relies on most heavily, Engage the Chain would then help them to see which risks a company faces. “It is hard to have a conversation about supply chains with companies, given their complexity,” said Pearce, “but the tool has a lot of background information so an investor can gain quickly a basic level of understanding about what a company supply chain might look like and where the risks lie.” While Pearce noted that the tool might be most useful for smaller, less experienced investors, it was also helpful for more experienced players, especially in the area of new risks. A lot of attention has been paid to, for example, palm oil and deforestation, but other commodities such as wheat and sugar cane have been less studied. In addition, companies themselves might not be aware of risks embedded further up the supply chain, and the tool is effective at giving investors the ability to engage companies at a deeper level. Link