CHANGES IN FOOD INDUSTRY INVESTOR STANDARDS

Thu, November 01, 2018   |    Download PDF of this article

The past year brought a wave of unprecedented changes and challenges to the U.S. food and agriculture sectors, and these effects translated to new approaches to investment in food and beverages. Much of the country’s agriculture, energy, and distribution industries were buffeted by extreme weather, wildfires, and labor and farmworker disruptions. The Trump administration ushered in deregulation and a reversal of many policies long pursued by the U.S. Environmental Protection Agency (EPA), U.S. Department of Agriculture (USDA), and other key agencies for the food industry, and began dismantling some Obama-era investment rules. Newly energized social movements, strong state and local governments committed to climate change goals, and corporations aligning with the United Nations’ Sustainable Development Goals (SDGs) redoubled efforts to advance sustainability. Finally, tech innovations like robo-investing, alternative proteins, and blockchain—which allows for massive amounts of information to be stored, dated, and easily searched—brought new possibilities for investors and food companies alike. Despite such a volatile market environment, U.S. investors enjoyed a strong bull market and record index highs.

One investor trend that has remained consistent over the past decade is the strong, steady growth in sustainable and responsible investment (SRI). The investment thesis that companies with better environmental, social, and governance (ESG) commitments will have better financial performance than their less responsible peers over time is now widely recognized as valid and valuable. For example, 78 percent of the largest U.S. asset owners have incorporated ESG analysis into their investing strategy, up from 33 percent in 2013.

In addition to greater ESG investment overall, more mainstream investment firms like Blackrock and Vanguard Group are engaging in shareholder advocacy, voting their proxies in favor of select proposals that support transparency and sustainability. Investors dedicated to ESG are also stepping up advocacy through the number of shareholder resolutions filed. The Principles for Responsible Investment (PRI) group of investors reported a 180 percent increase in resolutions filed in 2017 over 2016, for an all-time high of 241 resolutions. Key themes include governance, environment (including climate change and water scarcity), and workplace diversity. Many firms are asking major corporations to demonstrate that their boards of directors are “climate competent”—or knowledgeable about how climate change imposes business risks and opportunities to their company. Others are pushing for more women on boards of directors and greater commitment to hiring and promotion of minority or female employees. The food industry is plagued by issues of sexism and harassment; a recent study found that on a monthly basis, two-thirds of women experienced sexual harassment from management. Men also experienced sexual harassment, though at lower rates, and harassment was worse in general in states that allowed tipping. The #MeToo movement has focused attention on these issues, and recently several celebrity chefs have been called out as having been harassers for years. While the focus thus far has been on widely known individuals, food companies and restaurants should expect investors to be concerned about workplace harassment in the coming year, and the industry as a whole would do well to address sexual harassment head-on as a pre-competitive initiative. In any event, investors increasingly see this set of issues as a whole.

The growing threat of antibiotic or antimicrobial resistance (AMR) continues to be a concern for investors. The scientific evidence that the overuse of antibiotics on livestock translates to a heightened risk of AMR in humans is settled, and global institutions such as the World Health Organization have called for strong, rapid action before the arsenal of antibiotics that continue to work is depleted. Sixty-six investor companies representing an astounding $3 trillion of assets have signed a letter encouraging food companies to phase out the routine use of non-therapeutic antibiotics in their livestock, poultry, and seafood supply chains. As investor attention turns to AMR, related issues often ignored by mainstream firms are also gaining attention, such as animal welfare and the environmental impacts of intensive animal farming.

For food and beverage companies, this trend of greater investor engagement is challenging but will certainly continue. In addition to institutional investors discussed above, individual investors are interested in ESG investing, and new, automated ESG investment products with low barriers to entry (such as minimum investments of only $50), lower fees, and easy management through phone applications are poised to bring younger, passionate investors into the ESG space. For example, Swell Investing offers portfolio baskets focused on six sustainability themes, including healthy living (with a focus on healthy food and exercise products) and zero waste.

Finally, investors are taking note of innovation trends in the food sector, which continues to be something of a pet project of tech investors. Many focus on alternatives to animal protein, such as a new milk alter native that relies on genetically engineered yeast, or meat alternatives made with a variety of plant-based ingredients. The use of blockchain technology will enable greater food safety and traceability.

SCORE: 4

As social, political, and environmental uncertainty increase in the U.S. and abroad, investors seek businesses that incorporate sound sustainability strategies and risk management. As more institutional and individual investors increase their engagement with publicly traded companies on sustainability, food and restaurant businesses will need to be especially responsive to and aware of a key set of concerns to investors, including transparency, climate change risk to ingredient supply chains, and workplace diversity.

IN SUMMARY:

  • Although the new administration has relaxed or removed many regulations affecting the food and restaurant industries, investors and many companies appear to be redoubling their commitment to sustainability. They have concluded that tangible risks like climate change and antibiotic resistance pose significant financial risk to operations.
  • Interest in sustainable investing by institutions and individuals remains extremely strong, and even mainstream investors are engaging companies through dialogue, filing shareholder resolutions, and voting proxies in support of shareholder proposals that advance environmental, social, and governance (ESG) benefits. Companies should expect this trend to continue.
  • As more institutional and individual investors increase their engagement with publicly traded companies on sustainability, food and restaurant businesses will need to be especially responsive to and aware of a key set of concerns to investors, including transparency, climate change risk to ingredient supply chains, and workplace diversity.