Engage the Chain: An Investor Guide to Engaging the Food Sector on Sustainability Risks

In April, Greenpeace released video footage[1] showing that a palm oil supplier for major food companies, the Hayel Saeed Anam Group was destroying large swaths of rainforest in Indonesia, despite concerted efforts by industry stakeholders to stop forest destruction in palm oil supply chains. The repercussions for Hayel Saeed Anam Group are still unfolding, but recent history suggests that the outcome may well involve financial consequences.

Two years ago, the Palm oil giant IOI Group’s share price dropped 18 percent after its certification from the Roundtable on Sustainable Palm Oil (RSPO) was suspended when it was found to not be meeting the certificate’s standards. Several major brands including Unilever, Kellogg and Nestlé cut supplies sourced from the IOI Group, leading to a drop in its income.

Commodity-driven deforestation is but one of the profound sustainability challenges that large food and beverage companies are facing today in their agricultural supply chains.

Climate change, erratic weather and shrinking freshwater supplies are compromising agricultural productivity and increasing procurement costs. Illegal and unethical practices such as forced labor, and the razing of rainforests for cattle production, are intensifying as global population rises and places more pressure on food systems. And as consumers step up demands for food that is ethically and sustainably produced, campaign groups like Greenpeace are turning up the heat on questionable or illegal supply chain practices that exploit workers or communities, pollute water supplies, or destroy protected forests.

These sustainability challenges pose financially material business risks for food and beverage companies, from price volatility, inconsistent quality and supply of ingredients, to damage to brand equity from advocacy campaigns, to legal sanctions and seizure of goods.

While food companies have traditionally used procurement strategies to manage these risks (e.g., shifting to new sourcing regions or acquiring new suppliers) these strategies are becoming less effective on a resource-constrained planet.

The challenge is clear for global food and beverage companies: as the population rises, the agriculture sector they rely on will need to produce more food with fewer greenhouse gas (GHG) emissions while simultaneously shifting toward farm practices that conserve or restore diminishing water and soil resources. Sustainable sourcing strategies and supply chain transparency will become—and are already– essential practices for the food and beverage industry to ensure that their suppliers are making these critical changes.

As significant owners of and lenders to companies, investors can be major forces in driving these sustainable sourcing practices. It’s in their best interest to do so, as business risks that affect company bottom lines can show up as decreased revenue or stranded assets in investor portfolios.

But understanding and assessing how companies are managing these factors can be a challenge when each commodity – and each company – is faced with a different constellation of risks and impacts.

To help investors understand these risks and their potential impact on their portfolios, Ceres developed an online resource Engage the Chain: An Investor Guide to Agricultural Supply Chain Risk (https://engagethechain.org).

Engage the Chain provides investors with information about the social and environmental impacts driving material business risks for eight key commodities: beef, corn, dairy, fiber-based packaging, palm oil, soybeans, sugarcane and wheat. These commodities are among the most prominent drivers of deforestation, greenhouse gas emissions and water depletion and pollution.

Each of the eight commodities briefs includes global production data, a visual of the value chain for each commodity and a list of key companies involved in each stage, and an assessment of how the seven key drivers are impacting the commodity.

It further identifies the major U.S.-headquartered food and beverage companies that source these commodities and clarifies actions investors and companies should take to reduce agricultural supply chain exposure.

Since the launch of the website in July 2017, we’ve added new resources, and will continue to do so to keep investors abreast of new research, new tools and opportunities for engagement. Engage the Chain is intended to serve as a platform for highlighting best-in-class practices and providing talking points for investors to communicate effectively to companies in the sector.

New content added this year includes:

• Deforestation case studies series[2] that looks at the business risks companies may encounter when they source commodities from areas with deforestation. It spotlights three companies (IOI Corporation, JBS, and United Cacao) and summarizes the business risks and negative financial consequences they faced.

• Overview on sources of GHG emissions in agricultural supply chains

• Opportunities for reducing GHG emissions and sequestering carbon through agricultural practices

• Zooming in: An assessment of the traceability commitments of companies with zero deforestation policies[3]

Coming Soon to Engage the Chain

This summer additional resources will be added, including:

• Tools for analyzing Scope 3 GHG emissions (supply chain emissions)

• Briefing papers on GHG mitigation opportunities in beef and soy production.

• A short issue brief on grievance mechanisms and a company case study to investors with a baseline of knowledge on how investors can mitigate business risks associated with human rights abuses.

Investors are encouraged to visit Engage the Chain, use the information to analyze the vulnerability of individual companies, assess their plans to mitigate supply chain risks, and then start a dialogue with their portfolio companies.

As Allan Pearce, a shareholder advocate with Trillium Asset Management, puts it, “Commodity-based agricultural production is emerging as a key driver of climate change, deforestation, water pollution and biodiversity loss, while also subjecting hundreds of millions of people employed in agriculture around the world to harsh working conditions and poverty. Many companies don’t understand the full extent of these impacts in their agricultural supply chains, which is alarming because they can pose real financial risk.”

For more information on Engage the Chain, contact Julie Nash, nash@ceres.org

 

Engage the Chain was developed with peer review support from investors, companies and NGOs (https://engagethechain.org/about-investorguide). It was funded in part by the Gordon and Betty Moore Foundation, as part of a conservation and financial markets collaboration among the foundation, Ceres, World Business Council for Sustainable Development and World Wildlife Fund.

Article by Brooke Barton, Senior Director of Water and Food at Ceres. Brooke directs Ceres’ strategy for mobilizing leading investors and companies to address the sustainability risks facing our freshwater, food and agriculture systems. In this capacity, she oversees Ceres’ research and private sector engagement activities on the financial risks associated with growing freshwater challenges and deforestation.Brooke is the co-author of The Ceres Aqua Gauge: A Framework for 21st Century Water Risk Management [4] and three studies focused on agricultural water risks facing the food sector: the 2017 Feeding Ourselves Thirsty: Tracking Food Company Progress Towards a Water-Smart Future [5], as well as the first benchmarking analysis [6] that was released in 2015, and Water and Climate Risks Facing U.S. Corn Production [7]. Previously, Brooke directly advised Ceres Company Network members in the food and beverage sector on strategies for enhancing the overall sustainability of their operations and supply chains. Prior to Ceres, Brooke was a researcher for the Harvard Business School’s Social Enterprise Initiative, where she wrote case studies and articles on the integration of business strategy and sustainability. She holds a master’s degree from the Fletcher School of Law and Diplomacy, and a bachelor’s degree in economics from Duke University. She speaks Spanish and Portuguese.

Article Notes:

[1] https://news.mongabay.com/2018/04/palm-oil-supplier-to-food-giants-clears-forest-peatland-in-indonesia-greenpeace-says
[2] https://engagethechain.org/case-studies-business-risks
[3] https://www.ceres.org/sites/default/files/Fact Sheets or misc files/Supply change ceres.pdf
[4] https://www.ceres.org/resources/reports/ceres-aqua-gauge-framework-21st-century-water-risk
[5] https://feedingourselvesthirsty.ceres.org
[6] https://www.ceres.org/resources/reports/2015-analysis-feeding-ourselves-thirsty-how-food-sector-managing-global-water
[7] https://www.ceres.org/resources/reports/water-climate-risks-facing-us-corn-production