It’s time for investors to slim down food companies’ portfolio

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It’s been a landmark week for the fight against obesity. The UK Prime Minister has taken aim at “unhelpful influences like promotions and adverts’’ and announced a swathe of new measures targeting the promotion and sale of unhealthy foods. This new legislation should give investors the energy they need to encourage the food and drink industry to finally take responsibility for supporting their customers to eat a healthier diet.

Adding to existing interventions such as the sugar levy on soft drinks, sugar reduction targets and a ban on the sales for energy drinks to children, these policy measures intend to further discourage British shoppers from purchasing unhealthy food and drink products.

The new measures are a significant political development. Boris Johnson had frequently described himself as “very libertarian” when it came to food choices and has shown scepticism towards “sin taxes” adopted by previous Conservative administrations. So, what has changed?

Covid-19 makes tackling the obesity pandemic more urgent

The public health case for government intervention against obesity is not new. Being overweight or obese is the “new normal” in a majority of OECD countries – including in the UK, where it affects two out of three adults and a third of all children.

Anti-obesity policies are being fast-tracked in attempts to improve society’s resilience against the current and future health crises

Closely associated with the rise of conditions such as heart disease, type-2 diabetes and certain types of cancer, the sheer scale of the problem has wider socio-economic ramifications, including placing a large burden on national health systems. Rathbone Greenbank estimates that up to 20% of global health budgets are spent on obesity-related treatments. This puts the total economic impact of obesity at £1.5trn each year, or 2.8% of global GDP – equal to that of smoking.

Obesity is also adding fuel to Covid-19’s fire. Emerging evidence has identified excess weight as the second leading cause of complications from the virus after old age. In the UK, data shows that obesity raises the risk of death from the virus by 33%. Over 70% of all intensive care patients with Covid-19 have been either overweight or obese.

Combined with public opinion overwhelmingly in favour of intervention, it is not surprising that anti-obesity policies are being fast-tracked in attempts to improve society’s resilience against the current and future health crises.

Health remains a critical gap in food companies’ strategies

Food companies and their investors should see UK policy developments as the latest confirmation in the shift of global obesity-related policy.

Supported by a growing body of evidence, direct intervention on food products and retail environments is becoming the norm. The popularity of sugar taxes has grown in the last five years and these are now present in more countries than carbon taxes.

Similarly, stricter marketing rules are also gaining traction. Chile has led the charge with a ban on the use of Tony the Tiger on Kellogg’s cereals, and the sales of unhealthy products with enticing toy promotions such as Ferrero’s ‘Kinder Surprise Eggs’ and McDonalds’ ‘Happy Meals’. Such moves are now rapidly spreading to other Latin American countries and beyond.

Despite such dire warnings from regulators and growing consumer demand for healthy foods, the food industry seems largely unprepared to respond to this changing landscape. In the UK, a recent report from the Access to Nutrition Initiative showed that 69% of packaged food and drink products were unhealthy, and 85% unsuitable to market to children.

Official data from Public Health England paints an equally bleak picture. It warns that the food industry has so far only delivered a 2.9% sugar reduction – far short of the 20% target set for 2020.

Investors have a key role to play

Despite the apparent variety of products found on supermarket shelves, the food industry is highly concentrated.

Globally, the top ten manufacturers including companies like Coca-Cola, Unilever and Nestlé have combined annual revenues of $400bn. In the UK, the top four supermarkets represent two thirds of the grocery market. This means that investors in this sector, through stewardship of their equity or corporate debt, have a huge opportunity to reshape the nation’s diet.

ShareAction, in partnership with Guy’s and St Thomas’ Charity, is leading a campaign calling on retailers and manufacturers operating in the UK market to raise their ambition to support healthier diets, starting with better disclosure. We are supporting a growing coalition of investors, already representing $1trn of assets under management, that want to play a positive role in supporting dietary improvements and tackling obesity levels.

Given the exposure to the financial and reputational risks and opportunities associated with corporate actions in this area, for example Marks & Spencer facing reputational backlash over its popular Percy Pigs products, it is not surprising that investors are increasingly pushing food companies to be more transparent on the nutritional quality of their products and to shift their sales towards healthier portfolios. We are already seeing this in action – coalition members Nest and EQ Investors publicly joined ShareAction’s coordinated call on Tesco to do this at their recent AGM.

“Health is emerging as a key investment risk. We believe companies that get ahead of the curve on this issue will have a better chance of long-term success.” Mais Callan, Senior Responsible Investment Manager at Nest Pensions said. Equally, Louisiana Salge, Impact Specialist at EQ Investors identified “raising awareness of the importance of health and nutrition in sustainable finance” as one of their key engagement aims this year.

There has not been a better time for investors to put the food industry on a diet.

 

Ignacio Vazquez is a Senior Manager for Strategy & Research at ShareAction