Responsible Investor Digital Festival: Summer 2020: Panel write-up: Food – ESG risks and sustainable investment opportunities

Covid-19 set to increase change in the food industry

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The pandemic has highlighted key risks and opportunities in the food industry, attendees at the Responsible Investor Digital Festival heard. Food companies’ supply chains have come under pressure while some meat processing groups had to close because large numbers of staff contracted the virus. Elsewhere, the link between obesity and Covid-19 has increased the pressure on the industry to do more to reduce obesity rates.

Food companies will be held accountable for their role in the growing obesity pandemic, especially given the link between obesity and the disease, warned Peter Van der Werf, Team Lead, Active Ownership, Robeco.

He also noted that the virus has sparked “a change in tone” as consumers do more to alter their lifestyle and companies move from defensiveness to “a clear focus.” 

However, he said companies needed to step up and develop long-term strategies for new products, getting rid of those that are detrimental to good health. “Looking at where obesity numbers are heading, there is a clear role for the food industry to play.” 

He also referred to the availability of more granular data that allows investors to see what products food groups are selling, and where their revenue comes from. “Is this company really able to deal with obesity risk or are there issues they are not taking into consideration?” he asks. If so, investors will now be able to discount companies’ fair value and question the attractiveness of a company’s stock or bonds in their portfolio.

Regulatory risk

Van der Werf also highlighted the risk of companies not paying attention to approaching regulation. The sugar tax is a clear example of a regulatory impact on a company’s ability to sell its products at the same price point, he said. Regulation is already playing a more important role in Latin American countries like Chile and Mexico, said ShareAction’s Ellie Chapman where some foods now carry warning signs for consumers. “Companies don’t want to see this on their products. Regulation is becoming more to the fore,” she said. 

Elsewhere, fellow panellist Will Nicholson, research lead at The Food Foundation, likened approaching regulation to the PRI’s ‘Inevitable Policy Response’, which outlines areas where policy tightening is likely. You can’t tell when regulation will kick in, he said, but it will be much easier to manage for companies that are ahead of the curve. 

Nicholson described how research from The Food Foundation now allows investors to highlight the trade-off between different parts of the industry. For example, a healthy food type may require more water than usual to grow. The charity produces a ‘footprint’ of different retailers, restaurants and catering groups and Nicholson told delegates many companies need to begin “menu engineering” to rebalance their business models. He argues the Transition will require a “shift in menus” and that plant-based menus need to “kick-in,” adding: “The food industry as it stands can’t have sustainable soy and palm oil as there is simply not enough land.” 

At ShareAction, which works with investors to engage companies to change, the focus is also around obesity, explained Chapman: “We are asking food companies to play a part in providing healthy food for children,” she said. She said that although food retailers mostly “understand” that their customers want to eat more healthily it doesn’t always translate into corporate change, while engaging food manufacturers on the topic is “harder.” In contrast, she observed “a marked shift” in how governments are pushing health issues. “Regulation will get stronger in coming months,” she predicted. 

Meat industry woes

The US meat processing industry’s struggle to deal with the impact of Covid-19 on employees will also invite a regulatory response, said Van der Werf. “None had seen it coming,” he says. “Yet the business risk was clear. They had to shut their factories. You need to take a sustainability discount for many companies when you are assessing their fair value.” Although meat packaging plants have always represented financial value with sleek processes, governance and health issues have not been as strong, he said.

Delegates heard how the food industry is a growth story, given the rising population. Yet it also needs to “clean up its act.” Opaque supply chains are a key issue. Van der Werf stressed companies needed to know where the soya used in their animal feed came from, or the conditions where cocoa in their products is produced.

Nicholson explained how issues like deforestation were both a demand and regulatory problem. For example, Brazil has opened natural habitat to agriculture with potentially catastrophic consequences. On the demand side, consumers also need to act on changing their eating habits.

Panellists also referred to a growing awareness of Zoonotic transition because of Covid-19. The human/animal interface increases either via intensive farming, or fast-growing cities where humans encroach on biodiversity. Large, concentrated livestock operations could brew the next pandemic, warned Van der Werf. Nicholson voiced concerns about the food industry “springing back to business as normal,” noting that multinationals are “not necessarily” grabbing the opportunity for change. “We will continue engaging with these companies and make sure it translates into action,” concluded Chapman.