Article by Mike Gaworecki.
Six years ago, Boston, Massachusetts-based NGO Ceres started tracking resolutions filed by shareholders asking food and beverage companies to report on how they are managing the risks that come with sourcing the agricultural commodities used in their products.
Since then, the group reports, there’s been a marked uptick in the number of resolutions aimed at requiring companies to make information available to investors about the financial risks posed by the impacts of their supply chain. “All told, 130 sustainability-focused resolutions have been filed with food and beverage companies since Ceres started tracking them six years ago, and they have grown from a handful filed in 2011 to 23 filed in 2017,” the organization recently announced.
And whereas these types of shareholder resolutions were once almost exclusively aimed at fossil fuels companies, that is not the case any more. “Restaurant brands Kroger, Domino’s and Kraft Heinz, for example, all received shareholder proposals this proxy season asking them how they were managing the reputational risks associated with sourcing commodities like palm oil, and Latin American beef and soy – the production of which is routinely linked to the destruction of tropical forests,” Ceres noted.
While beef, palm oil, and soy are the subject of much scrutiny these days, Ceres has released a new investor guide, called Engage the Chain, that goes well beyond those staples, covering the environmental and social impacts of eight different agricultural commodities: beef, corn, dairy, fiber-based packaging, palm oil, soybeans, sugarcane, and wheat. The guide also includes a number of examples of the types of threats these environmental and social impacts can pose to companies that, unwittingly or not, find their supply chains associated with them, from reputational and brand damage to litigation and running afoul of regulators.
Allan Pearce, a shareholder advocate with Trillium Asset Management, said that the investor guide is a welcome and timely resource.
“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,” Pearce said in a statement “Many companies don’t understand the full extent of these impacts in their agricultural supply chains, which is alarming because these can pose real financial risk.”
Procuring agricultural commodities has become a much more difficult business function for food makers and agribusiness conglomerates to perform amidst rising global temperatures and unpredictable weather patterns, as well as increasingly widespread groundwater depletion and soil erosion, all of which affect agricultural productivity and raise the cost of sourcing in-demand raw materials. Meanwhile, a number of environmental groups are calling out issues like deforestation and forced labor whenever they find them lurking in a company’s supply chain. These issues can impact a company’s bottom line in a number of ways — but research has shown that many companies don’t even have systems in place to monitor their supply chains for environmental and labor abuses in order to stay ahead of any financial risks they could face as a result.
A report released last December by London-based non-profit CDP found that many companies are greatly underestimating the extent to which they might be exposed to deforestation risks through their operations, for instance. CDP surveyed 187 companies — including major consumer-facing companies Colgate Palmolive, L’Oréal, McDonald’s, and Marks & Spencer in addition to global commodities traders like Archer Daniels Midland and Bunge — to find out what strategies they employ to safeguard against deforestation creeping into their supply chains. Though the four agricultural commodities most often linked to deforestation — cattle products, palm oil, soy, and timber products — are necessary for nearly one-fourth of those companies’ revenues, just 42 percent of them reported that they regularly evaluate their supply chains in order to determine how their growth strategies might be impacted by the future availability or quality of commodities.
“If a company cannot trace its supply chain, it cannot begin to address the substantial risks, including potential involvement in illegal practices, that lie hidden several tiers down,” Adam Kanzer, managing director at Domini Impact Investments, said in a statement. “We hope that Engage the Chain will provide one more link in the chain of accountability.”
Investors in agricultural or consumer companies can now turn to Engage the Chain for guidance on how to evaluate the level of risk in their portfolios. Ceres developed the guide through a peer review process that included input from top investors, a number of companies involved in the global commodities trade, and environmental NGOs.
“Commodity sourcing is an increasingly challenging business function for food companies,” David Bennell, director of food and capital markets at Ceres, noted in a statement. “Engage the Chain was designed with investors for investors to help them reduce their exposure to the mounting reputational, operational and other material risks embedded in agricultural supply chains.”
Oil palm seedlings in Sumatra, Indonesia. The production of palm oil has been linked to vast amounts of deforestation as well as human rights and labor abuses in Indonesia. Photo by Rhett Butler.
Follow Mike Gaworecki on Twitter: @mikeg2001