The agriculture industry has been responsible for around 80% of global deforestation and 24% of yearly greenhouse gas (GHG) emissions worldwide, and increased food production is predicted to necessitate 40-50% more water in the future[1]. The food systems of today are no longer sustainable and therefore, there is a clear need for policy-makers to act quickly and reform the current management and use of them. This is critical for achieving the objective of long-term, nutritious diets for all. As the current food systems are intensifying the climate change, especially land-use changes, processing and transportation, many food companies have adopted strategies for helping farmers adopt sustainable agricultural practices that are critical for the health of people and the planet, as well as progress toward the United Nations Sustainable Development Goals (SDGs).
Traditionally, environmental, social, and governance (ESG) has been seen as a way for businesses to reduce risk and fully comply with sustainable best practices. In this regard, ESG reporting and disclosure provides a methodical approach to manage climate-related risks and assist F&B companies by avoiding being caught off guard by social and environmental change.
Sustainability is not only seen as a market requirement but also provides a competitive advantage to organizations. In order to help food and beverage companies become sustainable, there is a need for human and environmental systems to be designed and managed efficiently. This article will explore the:
- Importance of ESG in the Food & Beverage sector
- Performance of ESG in the Food & Beverage sector
- Effect of ESG on financial performance of Food & Beverage companies in the EU
- How can Food & Beverage companies improve their ESG to drive financial performance?
- Excel in ESG: How RegASK can help
Importance of ESG in the Food & Beverage sector
“Food systems hold the power to realize our shared vision for a better world.” – United Nations Secretary-General’s Chair Summary and Statement of Action on the UN Food Systems[2]
The Food & Beverage sector (popularly known as F&B), like other high-profile industries, is vulnerable to a wide range of risks, ranging from employee safety to energy and procurement disruptions. In the coming months, there has been a prediction of increased pressure for greater ESG performance and transparency in the industry.
Today’s food systems industry accounts for 70% of global freshwater every year, employing 1 billion people and accounting for one-fifth of global carbon emissions[3]. Therefore, it is critical for the industry to look into their ESG criteria and form a successful strategy.
A growing number of irate customers, as well as the investors, are exerting pressure on F&B companies, through changing consumer demands for new products and more ingredient information. This means shortening the product development cycle and speeding up transitioning. At the same time, stricter regulations have led to new labeling requirements and stricter food safety procedures. As the scope of “sustainability” is expanding, F&B leaders are working to demonstrate more than just compliance.
According to the Financial Times, investors are having difficulty incorporating food companies into their portfolios. The far-reaching effects of food companies have been difficult to quantify, making it unclear whether they fit ESG requirements. However, we are able to see a clear shift towards conscious consumerism. A study conducted in 2015 analyzed 66% (i.e. two-third) of consumers will be ready to purchase products that are committed to having a positive environmental and social impact, making it essential for F&B companies to audit and report their ESG data.
With increasing investor interest in ESG standards, F&B companies are encouraged to report on their environmental performance[4]. Many sustainability initiatives today are supported by programs focused on GHG emissions using Science-Based Targets (SBTi)[5]. F&B companies face severe challenges while ESG reporting, of which one is showing the reduction of GHG along the supply chain since it requires working with stakeholders throughout the value chain to find appropriate emission reduction options at each stage and provide incentives for change.
Performance of ESG in the Food & Beverage sector
Out of the 5,500 public companies evaluated by the Wall Street Journal on ESG metrics, only one food company scored in the top 100[6]. This is problematic for an industry seeking to strengthen its connection and credibility with consumers.
According to a New York based F&B holding company, the ESG data is not up to the mark in the sector, notably in social and governance parameters. There is a major gap in the industry’s preparedness towards the challenges of climate change, food security and promoting human rights.
F&B companies with an extensive supply chain ranging from land-use change to packaging are more vulnerable to ESG risks with a bigger environmental footprint. This issue has a substantial impact on the scope and complexity of sustainable investment. For such organizations, the relationship between ESG and financial performance can be more complicated and evolve over time.
In the European Union, consumers are becoming more aware of issues surrounding climate change, carbon footprint and nutritious diet that are influencing the industry’s sustainability patterns.
This rising consumer awareness is also an increasing trend of switching to plant-based food and drinks. It is estimated that the plant-based F&B products would grow by 8.87% between 2022 to 2027[7]. According to a survey conducted in Europe, there is a huge potential for plant-based products in the EU and 45% of respondents would be interested in plant-based food options in eating joints[8].
ESG has been on the agenda for European F&B companies since a while. According to a food processing industry paper, certain F&B companies from the Netherlands, Denmark, France, Germany and Italy are considered to be in the top 100 list of F&B companies. It was observed reporting ESG is playing an important role in the industry and biodiversity is being given much attention with respect to climate change[9].
It is crucial to focus on the producing and packaging of alcoholic beverages as they emit a significant amount of GHG emissions. It is observed that Europe is one of the largest contributors to beer carbon footprint as manufacturing of cans and bottles also adds to the carbon footprint along with fermentation and distillation[10].
Investor emphasis on SDGs has raised social issues in the economic context, such as gender equality or human rights in food ingredient supply chains, which were previously overshadowed by environmental or governance concerns. These social issues will be addressed under the new EU legislative framework on Environmental and Human Rights Due Diligence[11].
Need to learn more about ESG compliance? Get in touch with RegASK experts
Effect of ESG on the financial performance of Food & Beverage companies in the EU
A study was conducted to address the effectiveness of ESG reporting and its influence on financial performance of European agri-food companies[12]. The results of the study showcased that while there is a positive relation between profit and E & S indicators, the disclosure of governance parameters shows a negative relation with market value of the company. This suggests that increased transparency and accountability will help in making more profit.
One of the leading dairy companies of Europe has implemented various strategies and schemes for reducing GHG
emissions for making the company carbon neutral, including a circular strategy for packaging, and producing green electricity. The company is constantly working towards cost-saving measures which are in alignment with achieving sustainability. This led to the revenue growth of the company in 2021. The loans given to the company are incentivized by discounting the interest rate but only if the company achieves the desired sustainability targets.
Another example is of a multinational alcohol brewing company headquartered in Europe, creating long term value with an evolving ESG agenda for better alignment with the UN SDGs. The company is committed towards achieving smart agriculture, circularity, water stewardship and climate action. All of this through materiality assessment, sustainable governance, sustainability incentives, and external engagement of environmental consultants. The company was able to achieve a high liquidity position that was available on their sustainability-linked loan.
Therefore, we could derive from the case studies that the ESG conscious behavior of a company will help in possessing one or other financial advantage that will lead them positioned better than their competitors in the market.
How can Food & Beverage companies improve their ESG to drive financial performance?
The link between sustainability and financial performance is one of the most important and strategic issues confronting any F&B company. Changing market conditions, intensifying competition, reliance on natural resources, and new government requirements all force enterprises in this area to convert and engage in sustainable practices.
Many institutes and organizations have published self-assessment and improvement guides that are necessary for understanding and assessing a company’s existing ESG framework.
Consumers are growingly conscious around climate change and are more particular towards brands which are taking sustainable actions. Therefore, it is important to understand and meet consumer expectations that will help the most in generating revenue.
Establishing cost reduction strategies in water, electricity and energy consumption is another way of having a positive financial performance linked with ESG. These strategies will help in improving the overall operations, efficient supply chain and regularly tracking the performance of all established indicators. A cost reduction strategy will also help in minimizing waste in the sector.
An investor or asset manager looks into companies with tools and softwares that account for the value and impact that the companies can create under categories of fair trade and environmental consciousness. It is imperative to align ESG reporting with recognized frameworks to meet the funding criterion.
Certain studies and reports have also analyzed that having superior governance attributes in business practices will definitely yield higher financial performance[13].
According to a report by UNPRI, each industry is affected in a different manner by ESG factors; however, F&B companies tend to have higher financial performance when integrated with ESG[14].
Need to learn more about ESG compliance? Get in touch with RegASK experts
Excel in ESG: How RegASK can help
We believe that enhanced transparency backed by an environment that offers help in the regulatory space for the Food & Beverage companies will accelerate the sustainable efforts in a company and drive positive transition for the sector. However, we also want to ensure that the whole range of social and environmental hazards is considered in order to avoid unexpected consequences.
As more shareholders engage with public companies on sustainability, F&B companies will have to be more responsive to the shareholders’ concerns and parameters related to sustainability. These may include human equality, supply chain diligence, waste management and climate change.
These concerns are not going away, and F&B companies must consider long-term trends when making strategic investments. As a result, developing an ESG strategy to respond to and manage such risks is critical for businesses, and external consulting or platform tracking tools such as RegInsight can be beneficial and provide the company with the right expertise.
Our RegAlert is an advanced version of machine learning technology used for driving ESG regulations data. The platform detects regulatory alerts in the ESG subjects that have been identified in the scope and will immediately notify you about such regulatory changes by scanning an array of sources.
RegASK also uses local regulatory affairs teams and a network of specialists as part of its advanced capabilities to deliver in-depth ESG intelligence as needed. To know more about the platform book a demo to ensure you choose the right path for developing an ESG strategy.
References:
[1] The World Bank – Climate-Smart Agriculture
[2] Secretary-General’s Chair Summary and Statement of Action on the UN Food Systems Summit
[3] Food systems hold key to ending world hunger
[4] Bril H, Kell G, Rasche A , editors. Sustainable investing: a path to a new horizon. 1st ed. Routledge; London 2020.
[5] Science-Based Targets (SBTi)
[6] The Wall Street Journal’s overall ranking of the 100 most sustainably managed companies in the world
[7] Europe Plant-Based Food and Beverage Market – Growth, Trends and Forecasts (2022 – 2027)
[8] 46% of consumers have significantly reduced their meat consumption, according to the new Smart Protein pan-European survey
[9] The International Treaty on Plant Genetic Resources for Food and Agriculture
[10] Beverage Industry 2018 Water & Energy Benchmarking Study
[11] Proposal for a DIRECTIVE OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL on Corporate Sustainability Due Diligence and amending Directive (EU) 2019/1937
[12] The impact of direct environmental, social, and governance reporting: Empirical evidence in European-listed companies in the agri-food sector
[13] From the Stockholder to the Stakeholder: How Sustainability Can Drive Financial Outperformance