The food industry widely recognizes a looming mountain it must climb: By 2050, the world population will grow by more than 2 billion, which will require upward of a 70 percent increase in food production. Along with this rise in demand, companies in the food supply chain face increasing scrutiny on the environmental and social impacts of farm operations.
Here’s the fundamental challenge: increasing production while preempting regulations and minimizing environmental impact.
Forward-thinking companies are setting ambitious goals to implement sustainable businesses practices across their supply chains. While most publicly listed food and beverage companies don’t have on-farm operations, they are leveraging their market power to deploy a host of sustainable agriculture measures. Such initiatives are no longer created for a quick PR release and then ignored; rather, they are developed to advance strategic business objectives.
But while these objectives have direct financial impacts, many investors still don’t recognize the significance of sustainability metrics on food and beverage manufacturers’ long-term performance.
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Today, agricultural systems account for between 15 and 26 percent of global greenhouse gas emissions, 75 percent of global deforestation and 70 percent of all water consumed globally. Forward-looking corporations realize that while food production needs to increase dramatically, such negative environmental consequences simply cannot. For this reason, companies have developed relationships with farmers to support best practices, outlined procurement policies regarding agricultural operations, and set up a variety of independent organizations to assure the sustainable production of key ingredients.
For instance, Coca-Cola set a goal to sustainably source 100 percent of its key ingredients by 2020. In order to achieve this goal, the company developed a set of “Sustainable Agricultural Guiding Principles” that establish prohibitions on child labor, forced labor and abuse of labor; provide guidance on water management, soil management, and crop protection; and outline appropriate management systems among other requirements.
Coca-Cola states this initiative will “help farmers operate more efficiently and sustainably by introducing measures to boost crop yields (such as ensuring crop selection is suited to local growing conditions), cut production costs, (and) reduce pesticide use.” These efforts directly impact the cost of production and thus the cost of Coca-Cola’s raw materials – making it an appealing proposition to savvy investors.
To develop sustainable agriculture supply chains, corporations have worked with suppliers, banks, investors, and non-governmental organizations to develop sustainable practices. Recent proceedings by the Roundtable for Sustainable Palm Oil (RSPO) show the importance for investors to consider the impacts of agricultural practices on portfolio performance.
On April 4, IOI Group, a Malaysian palm oil supplier, was suspended from RSPO membership as a result of allegations of illegal deforestation practices. The suspension led Nestlé, Mars, Unilever and Kellogg to disengage with the company and move purchases to other suppliers. Since March 14 (when news of the suspension first surfaced), IOI’s stock price has fallen by more than 11 percent and analysts estimate the company could see a seven percent decline in net profits for the year. Adding further pressure, in May, Moody’s reported that it was reviewing the company’s credit rating, noting “the review for downgrade was driven by uncertainty regarding IOI's operating performance, particularly on its downstream business, after its entire oil palm production was suspended by RSPO and the resultant announcement by several of its customers to cease cooperation with the company."
Companies are realizing the financial benefits of sustainable agriculture through enhanced crop yields, improved input efficiency, and value-added risk management practices. Investors who incorporate analysis of companies on sustainable agriculture practices stand to achieve the same benefits.
In addition to establishing best practices with farmers, companies along the food supply chain have developed robust codes of conduct for the fair treatment of agricultural laborers. Whether companies follow these codes of conduct and manage suppliers’ human rights performance is paramount to maintaining brand value and good legal standing.
Nestlé’s supplier code lists human rights as the first of four pillars, stating “the Supplier must under no circumstances use, or in any other way benefit, from forced labor.” Despite this, the global food manufacturer faced a series of lawsuits when slave labor was found in its Ivory Coast cocoa and Thai seafood supply chains. These lawsuits are a product of increasing regulations in the United Kingdom and California on human rights in the supply chain. Companies and investors must remain vigilant of these risks and the risk of additional future regulations.
Another cautionary tale lies in the Louisiana Municipal Police Employees’ Retirement System’s suit of Hershey in 2011. The pension fund sued over alleged child labor practices in its supply chain, noting “Hershey has flouted domestic and foreign law and placed at risk its century old brand and reputation.” The pension fund’s concerns over how this issue might hurt the Hershey’s brand were well founded as it led Whole Foods to drop Hershey’s artisan brand.
Companies that adopt strong human rights policies and seek certification of products not only avoid risk, but see exciting opportunities for growth. A 2011 Harvard study found that sales of two popular coffees increased by 10 percent following their Fair Trade certification. The study, which also reported that 75 percent of consumers would pay a 16 percent premium for Fair Trade-certified coffee, shows consumers today are asserting their values through purchasing decisions.
Noting both the risks and opportunities presented by human rights practices, investors are starting to incorporate this information into their analysis. In fact, recently, a group of investors representing $4.8 trillion in assets announced support for a corporate human rights benchmark and agriculture is front and center among the three sectors covered by the benchmark. Forward-looking investors would be wise to understand the exposure of their investments to human rights issues.
Investors Take Note
Despite the connection between sustainable agriculture practices and financial returns, much of the work is going unnoticed by investors. This isn’t the fault of investors or of companies, but rather the result of a lapse in communication. Due to incomparable metrics and inconsistent channels for disclosing sustainability topics, investors are simply unable to determine the progress a company is making on its initiatives, how this progress compares to the industry, and whether risks are being appropriately managed.
In the coming decades, agricultural systems will face unprecedented pressures that will require a second green revolution to dramatically increase the output of agricultural systems – not through amplifying resource intensity but through improving resource efficiency. Companies have done well to initiate this journey. Investors now need to consider the importance of sustainable agriculture practices to the future performance of their portfolio. It’s time to open a discourse between companies and investors on sustainable agriculture.