“Greed, for lack of a better word, is good.”
In 1987, Gordon Gecko finally articulated what had long been Wall Street’s battle cry.
But investors worldwide – mostly – had already leaned into more socially responsible investing by steering clear of apartheid South Africa in the mid-to late-1980s.
Perhaps inspired by the rise of a global corporate conscious, the United Nations launched The United Nations Framework Convention on Climate Change (UNFCCC) in 1992 to tackle rising greenhouse gas emissions.
Finally, after decades of a laser-like focus on the bottom line, investors started to pivot toward “responsible investing” in the early aughts. The movement celebrated its coming out with the 2005 publication of “Who Cares Wins 2005 Conference Report: Investing for Long-Term Value.”
That landmark report gave voice to the silent majority of institutional investors, asset managers, research analysts, and others who felt that environmental, social, and governance (ESG) considerations would play an increasingly crucial role in long-term investment strategies.
“Global sustainable fund assets recovered in the fourth quarter to hit nearly $2.5 trillion at the end of December,” according to the analysts at Morningstar. “Europe continued to make up the lion’s share of the sustainable fund landscape with 83% of global sustainable fund assets. It remains the most developed and diverse ESG market, followed by the U.S., which housed 11% of global sustainable fund assets through December 2022.”
The report – and the trillions of dollars investors have poured into these funds – have made it clear that, when it comes to investing, good could be good, too.
ESG investing has exploded since then to play a crucial role in alternative investment strategies.
The E of ESG, which consistently gets the most attention, focuses on issues that affect the planet, such as climate change, pollution, biodiversity, waste management, and the responsible use of natural resources.
The financial services industry has responded enthusiastically. Based on the 2022 numbers from the Task Force on Climate-related Financial Disclosures, more than “60% of asset managers and over 75% of asset owners surveyed indicated they currently report climate-related information to their clients and beneficiaries, respectively. The majority of asset managers report through sustainability reports or directly to clients, while the majority of asset owners report through annual, sustainability, or climate-specific reports.”
The social component of ESG efforts covers topics related to people, such as human rights, labor standards, child labor, equal opportunities, and the global food supply.
Consumers are increasingly concerned about how brands do business – from ethical sourcing to responsible labor practices – and it’s influencing buying decisions like never before.
Finally, governance issues include issues focused on corporate management, such as board structure, executive compensation, bonuses, and corruption. The more significant corporate governance issues include:
Fairness. Brands should treat stakeholders at every level equitably.
Transparency. Companies must operate in the light of day, with processes visible to stakeholders, regulators, and consumers.
Leadership. Corporate governance manages key strategies but also ensures reasonable executive compensation.
Cybersecurity. Shareholders are increasingly worried about cybersecurity risks, which have emerged as critical threats to brand reputation and profits.
How ESG is already spilling over into F&B
In less than 30 years, ESG has evolved from a lofty ideal to an investment powerhouse, backed up by nearly every metric – whether it’s growing assets under management, consistent market returns, or genuine consumer interest. And this movement has quickly spread to the food and beverage sector.
We don’t like to talk about it, but it’s a poorly kept secret that the global food and beverage business poses an outsized threat to the planet’s health. Consider:
Animal agriculture is the fourth-largest producer – 11% – of the world’s greenhouse gas emissions, according to the World Resources Institute.
Global consumers discard about 1.4 billion tons of food annually.
The United States leads the way in this dubious competition, where 30% to 40% of the food supply ends up as waste. That works out to 40 million tons every year. Or, if you want to feel worse about it, nearly 220 pounds per person.
In fact, food waste is the largest single component in U.S. landfills.
Agriculture consumes 70% of the world’s fresh water, according to the World Bank. (And that doesn’t include the meat industry.)
Saving the planet
According to Mintel Consulting’s 2022 Sustainability Barometer, more than half of consumers worldwide say responsibility for saving the planet – environmentally speaking at least – should rest with manufacturers and governments, not the individual consumers.
It’s no wonder, then, that food and beverage companies all along the supply chain face mounting pressure to rewrite their environmental and sustainability playbooks. As a result, companies have started examining their energy sources, disposal practices, and ecological footprints.
But it’s been a tough sell. Brand leaders in the space have approached the ESG movement from a risk-mitigation perspective. But many see the short-term costs they must incur – eliminating the use of plastics or paying agricultural partners a living wage, for example – as too prohibitive to help in the long term.
But it’s become clear that embracing ESG practices is emerging as a value proposition that’s increasingly tough to ignore.
“One study analyzing 171 food and beverage firms observed that an increased level of ESG disclosure resulted in improved access to equity capital and financial resources, and a survey by McKinsey & Co. even suggested that investment professionals and senior management would be willing to pay a premium for companies with a positive ESG record,” Sheppard Mullin associate Patrick Quine wrote in Food Manufacturing.
Companies can roll out ESG protocols more affordably by adopting new technologies and innovative business practices that slash energy and water consumption.
Regulators gonna regulate
Industry veterans are no strangers to regulatory scrutiny. And an increased focus on ESG will almost certainly draw even more attention from government agencies and lawmakers. The European Union’s already started making moves, and the U.S. Securities and Exchange Commission (SEC) is taking a closer look at ESG investments.
And while it’s still early days, companies must get ahead of the tidal wave of new regulations bearing down on the industry. Spending now to monitor regulatory shifts will save brands later by staving off non-compliance risk, which invites fines or legal action threats.
“No doubt consumers will rally behind legislation that, on the surface, appears to benefit the environment,” the Mintel reports reads. “Consumer support will spur additional bans, which will put significant cost pressures on manufacturers in their quest to meet mandates and find suitable, though more costly, alternatives.”
To dig deeper into “The 2023 Food Industry ESG Survival Guide,” click here.