2110-sustainability

How Food Companies Meet Demands for Sustainability

Oct. 4, 2021
Sustainability is far more than a buzzword now. What do consumers (and others) expect, and how can those expectations be met?

How sustainable is sustainability?

The very word has become daunting. There are so many aspects to it and so many options for incorporating it into a company’s operations. And it’s not something that can be ignored. Pressure from consumers, trade customers, investors and others is piling up for food and beverage processors; those who don’t develop some kind of sustainability strategy will lose out to those who do.

“Consumers today are getting more and more concerned to know that food companies are taking sustainability seriously, and are willing to pay more for this,” an executive with Fonterra, a New Zealand dairy cooperative, told a recent meeting of Asia-Pacific food industry and government leaders, according to Food Navigator Asia. “Many will walk away if they have doubts – this applies across the entire food industry.”

Coca-Cola has made 100% recycled plastic bottles a priority in its sustainability goals.

It’s a powerful marketing tool. According to the Sustainable Market Share Index issued by New York University’s Stern School of Business, about 55% of the growth in consumer packaged goods from 2015 to 2019 is attributable to products marketed as sustainable – even though they make up only about 16% of CPG products, and they tend to be more expensive.

“There’s no question there’s been an explosion of growth of initiatives around sustainability when it comes to the food sector,” says Kyle Tanger, managing director of U.S. sustainability at Deloitte.

Corey Chafin, a principal with Kearney, says that a key indicator of how seriously companies in general are taking sustainability is that not only are more of them naming a chief sustainability officer or similar position, but these often report directly to the CEO. This demonstrates sustainability is no longer perceived merely as an aspect of corporate social responsibility. “Now it’s seen as more of a critical function of the business, and more regarded in terms of how investments are prioritized,” Chafin says.

For a company that wants to make up its mind what to do about sustainability, the first step is to decide which aspects of sustainability should be concentrated on.

Specific food industry concerns related to sustainability include: the environmental impact of farming practices, such as deforestation and use of fertilizer and pesticides; the use of electricity and water in processing plants; their generation of air and water pollution; packaging waste, especially plastic packaging; food waste exacerbating global hunger while adding to greenhouse gases, and more.

Some companies, especially larger ones, will take on several of these; others concentrate on one or two.

Arguably the most basic step in this decision is determining what a company’s consumers prioritize. This can be tricky, however, because what consumers may tell a pollster they want in a product often differs from what they do once they’re in the store.

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“I think the first question is, who cares and who doesn’t care about this?” says Hank Cardello, an author and former food company executive. “Because oftentimes we say yeah, everyone cares about sustainability, and that isn’t necessarily the case.”

Cardello says the best audience for sustainability-related concerns are so-called LOHAS consumers – Lifestyles of Health and Sustainability. These folks check off all the boxes with sustainability, as well as other concerns like clean labels, organic product, gluten-free and other nutritional concerns.

Taking the initiative

LOHAS consumers can serve as bellwethers to help companies set priorities. There are, however, usually not enough of them to pull a company in a given direction by themselves. That’s why companies still have to take the initiative on sustainability concerns.

“The way I tend to look at is, there’s a whole series of buckets that have different rationales for caring about sustainability,” Cardello says. “And then it almost flows uphill to the consumer, depending on what product category you’re talking about.”

With so many aspects of sustainability, it can be hard to determine which one will resonate with an individual subset of consumers. But as a general principle, the future of the planet, especially relating to greenhouse gases, has been a consistent top-of-mind concern across all groups of consumers, especially younger ones.

“People are waking up to the connection between our food system and the health of the environment,” says Amanda Starbuck, research and policy lead on food and farming work for Food & Water Watch. “And many are looking to support companies and products that align with their values.”

Chafin says that within the framework of climate change, a consumer is more likely to respond to “proximity to their experience” – specifics that she can see or otherwise experience firsthand, such as reduced packaging or local ingredients.

“So efficient water usage isn’t likely to trigger your typical consumer,” Chafin says. “It certainly will for an environmental evangelist consumer, but not your typical one. What resonates with consumers is what they can see and taste and experience.”

Some food retailers are demanding that the seafood they sell be sustainably sourced, with appropriate certifications.

Follow the money

Consumers are, of course, the ultimate source of pressure on a consumer packaged goods company when it comes to preferences about sustainability (or anything else). But often this pressure gets filtered and intensified by some of the others a CPG company must deal with.

One of these is trade customers. Large chains of restaurants and food retailers often impose conditions on their suppliers about all sorts of social issues, including sustainability.

Whole Foods, for instance, requires that all the seafood it sells be certified as sustainably caught by the Marine Stewardship Council or a similar organization.

McDonald’s says in its “supplier code of conduct” that “suppliers are responsible for managing, measuring and minimizing the environmental impact of their facilities” in aspects that include air emissions, waste management, water use and disposal, and greenhouse gas emissions.

Trade customers, like major retailers or fast food chains, often are a source of pressure for sustainable operations. Photo credit: 8th.creator / Shutterstock.com

Trade customers sometimes drill down to specific issues, such as water use or animal welfare, that consumers tend to overlook.

Another form of pressure for sustainability comes from investors. Increasingly, the investment community – financial-institution analysts, institutional investors and individuals – are demanding that the food and beverage companies they invest in adhere to principles of sustainability. Investment funds are available that specialize in investments in environmentally responsible organizations.

“My opinion is that the investor side can be extremely powerful,” Cardello says. “Investors and investor analysts are very crucial to effecting the change, and they’re the ones who are going to have to make noise.”

ExxonMobil and other energy companies have even been persuaded to accept environmental activist members onto their boards. So far, no major food company has done that, but effective pressure is coming from another part of the investment community: financiers.

Bonding with the environment

An increasingly popular way for companies to establish bona fides on sustainability is to take out “sustainability bonds” – borrowing that depends on a company meeting stated goals. These usually have a slightly more advantageous interest rate than general-market bonds, but are structured so that, if the borrowing company fails to meet those goals, the rate increases.

These “green bonds” totaled, by a conservative estimate, more than $250 billion in 2019, according to business law firm Latham & Watkins.

Sustainability bonds, and linking sustainability initiatives to borrowing in general, got a big boost at the beginning of 2020 at the hands of Larry Fink, CEO of BlackRock, an influential investment management firm. In a letter to potential CEO clients, Fink declared that “climate risk is investment risk” and stated that BlackRock would “place sustainability at the center of our investment approach,” exiting investments in companies that present “sustainability-related risks.”

Major food and beverage companies taking out sustainability-linked bonds in the past couple of years include Anheuser-Busch InBev, Kellogg, Pilgrim’s Pride and PepsiCo. Pilgrim’s Pride claims that its $1 billion bond issue, sold in March, is the first sustainability-linked bond by a global-scale meat and poultry company.

The Pilgrim’s bonds have an interest rate of 4.25%; they will be used to pay off an earlier bond issue at 5.75%. Pilgrim’s got a slightly more favorable rate because the bonds are sustainability-linked, although most of the difference in interest rates is due to market changes, says CFO Matt Galvanoni.

The new bond issue, however, comes with strict conditions, as is typical with sustainability bonds. Pilgrim’s has to meet goals it has laid out in its sustainability guidelines, which include reductions in greenhouse gas emissions and the use of water, electricity and natural gas. Compliance will be monitored by accounting firm KPMG; if Pilgrim’s falls short, there will be penalties.

“We are in effect putting our money where our mouth is, in the fact that our interest rate would go up by 25 basis points [0.25%] if we don’t meet the targets of this bond—which is a 30% reduction [in greenhouse gases] from a 2019 baseline, by the time we hit the end of the bonds in 2031,” Galvanoni says.

The primary motivation is not financial. “We just think it’s the right thing to do,” Galvanoni says. “From an overall Pilgrim’s Pride and [parent company] JBS perspective, we’ve all pledged to do zero net greenhouse gas emissions by 2040. This further solidifies our commitment to sustainable projects.”

In some cases, companies are going beyond linking sustainability efforts to borrowing; they make bonuses for top executives contingent on reaching sustainability goals. About half of S&P 500 companies now use “environmental, social and governance” metrics, which includes sustainability, as part of their compensation evaluations, according to Willis Towers Watson, an investment advisory firm. Unilever, JBS, Danone and PepsiCo have all made executive salaries or bonuses dependent in part on meeting sustainability or other ESG goals.

Financial incentives like this serve as good-faith manifestations of a company’s commitment to climate change. Ultimately, however, food and beverage companies have a bigger incentive, along with the rest of the planet: survival.

“Everyone has been elevating the sustainability implications of what they’re doing,” says Kearney’s Chafin. “You won’t be able to continue to farm in the way you’ve always farmed if you don’t change the way you deploy water to the crops. I don’t think it’s a long view anymore. I would say there’s very near-term real implications.” 

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