From Beef to Palm Oil, Investors Worry about Climate Risk in the Food Industry

Investors pressured Exxon to disclose its climate risk. Now they're targeting food companies with similar shareholder resolutions — 131 this year.

Indonesia has feed the world's appetite for palm oil by chopping down its tropical forests to clear space for palm oil plantations.

Indonesia has fed the world's appetite for palm oil by chopping down its tropical forests to clear space for palm plantations, while Brazil has lost rainforest for cattle ranches. Investors are now pressuring food companies to find more sustainable sources for ingredients. Credit Dimas Ardian/Getty Images

An oil giant and a pizza-delivery titan share an unlikely bond—a powerful shareholder with a climate conscience.

New York State Comptroller Thomas DiNapoli oversees the country's third-largest pension fund, with $192 billion in assets, and is concerned both about ExxonMobil's tar sands oil and about the sources of palm oil and other ingredients that go into Domino's pizzas.

He's at the forefront of a trend. Over the past several months, historic shareholder resolutions have pushed oil giants, including Exxon, to disclose their climate-related risks. Food companies are next, experts and investors now say—whether they use or produce palm oil, corn, soy or beef, to name some with the biggest climate impacts.

"There are many products consumers enjoy daily that suppliers produce in ways that destroy rainforests and promote climate change," DiNapoli said. "More and more companies recognize that by taking steps to buy palm oil or soy from suppliers that do not contribute to deforestation, they are promoting better environmental practices and protecting their shareholder value."

DiNapoli led a push by investors in May to force Exxon to better explain the impacts of climate change on its business. He led a similar though unsuccessful effort calling on Domino's Pizza to commit to a deforestation-free supply chain.  

Shareholder resolutions like these are rising in both number and variety, according to research from the sustainability advocacy group Ceres, which has tracked shareholder resolutions within the top publicly traded U.S. food companies in recent years.

The number of climate-related resolutions filed with food and beverage companies is up from 12 in 2011 to 131 this year. Of those, most were focused on deforestation linked to supply chains—from the production of palm oil, beef and soy—as well as climate change and animal welfare. Resolutions were filed with 44 companies over that period. 

Ceres believes that consumers are increasingly interested in transparency in the food system and prompting investors to push companies toward more sustainable production methods.

The group released a guide last week for food company investors that illustrates the climate-related risks that each of eight commodities represents to supply chains and businesses. (The companies include packaged food companies, agricultural producers, retailers and restaurants, among others.) The guide also looks at issues beyond but related to climate change, including water use and pollution, as well as social impacts, including land rights and working conditions.

"We wanted to arm investors with better information when they engage companies on these issues," said Brooke Barton, senior director of the water and food programs at Ceres. "The risks are mounting—whether it's climate change or water scarcity or human rights abuses—and investors need a one-stop shop."

Shareholder resolutions on the rise

The upward trend comes as climate-related shareholder resolutions are gaining traction among corporations in the oil and gas industry and beyond.

In addition to the Exxon vote in May, when 62 percent of the oil giant's shareholders voted for more climate risk disclosure, Occidental shareholders voted by two-thirds to require the company to produce a climate impact assessment, and shareholders of Pennsylvania utility PPL Corp. voted 57 percent in favor of a similar resolution.

Major financial firms, including BlackRock and Vanguard, which cast their shares in favor of the Exxon vote, have made climate disclosure a priority in their investments, as has Fidelity, which recently updated its proxy voting guidelines to say it would support shareholder proposals requesting additional climate disclosures from companies.

Last week, the Task Force on Climate-Related Financial Disclosures, an industry group chaired by former New York Mayor Michael Bloomberg, issued a framework for corporations to use in disclosing climate-related risks to investors, lenders and insurance underwriters. The framework, two years in the making and supported by more than 100 corporations, is designed to make climate-related disclosures more consistent and could prompt more companies to consider and disclose their climate risks.

'The food sector is the next frontier'

So far, Ceres says, food industry resolutions are getting less than 30 percent approval. But, the group points out, oil and gas proposals were getting similar numbers until recently.

This year, for example, Domino's shareholders voted just 23.1 percent in favor of the deforestation resolution. ExxonMobil's shareholder vote on climate risk disclosure, which was approved this year, drew just 38.2 percent last year, and before that the percentage hadn't exceeded 31.2 percent.

"Ceres believes that the food sector is the next frontier," the group said in an analysis related to the new guide,"Investor awareness is growing about the sector's financial risks stemming from sustainability challenges like climate change."

According to an analysis done in 2015 by EY, environmental and social justice-related shareholder proposals represent the biggest category of proposals — about 52 percent — driven in part by climate-related concerns.

About a decade ago, advocacy groups and investors began focusing on palm oil for its role in deforestation, eventually succeeding in securing sustainability standards through the Roundtable on Sustainable Palm Oil (RSPO). Domino's, in its corporate response opposing the shareholder resolution, noted its RSPO membership and said it has worked with the palm oil supplier for its U.S. stores since 2015 to have "100% certified sustainable mass balance palm oil." RSPO's "mass balance" option allows RSPO-certified palm oil to be mixed with non-certified palm oil. 

Now, other commodities are getting attention.

"There's been tremendous efforts outside of investor action," said Frank Sherman, a board member of the Interfaith Coalition for Responsible Investment. "But investors now are starting to use their power and voice to try and impact these other commodities through the supply chain."

Sherman's organization recently pushed Restaurant Brands International—owner of Burger King and Tim Horton's—to make its first-ever commitment to eliminate deforestation in its supply chain by 2030.  

It's also a business imperative

Analysts say that, in most cases, shareholder proposals are merely the starting point for a conversation.

"In general, we just try to have a productive conversation. That's the approach we try to take," said Allan Pearce, the shareholder advocate with Trillium Asset Management, a Boston-based investment firm. " In certain cases, we file resolutions if companies aren't going to improve."

But increasingly, climate-related risks to supply chains will get more urgent—a focus of shareholder pressure for reasons that go beyond advocacy.

"I think it's equal parts to appease investors and consumers," Pearce said. "But also a business imperative."

Trillium recently pushed the J.M. Smucker Company, which owns Folgers, to make commitments toward reducing its greenhouse-gas emissions—a step the company was probably more likely to take after a 2014 drought in Brazil pushed up coffee prices 9 percent.

Last year, Unilever, Kellogg and Nestle stopped buying from palm oil giant IOI Group after it was discovered that IOI wasn't meeting standards for sustainable palm oil production, Ceres said. And in 2015, South African sugar producer Illoyo Sugar suffered a 36.5 percent drop in profit after a drought forced it to shut down a sugar mill.  

A 2015 survey by CDP, formerly known as the Carbon Disclosure Project, found that 90 percent of 97 food, beverage and tobacco companies—representing 822 institutional investors and more than a third of the world's invested capital—said their businesses were vulnerable to the impacts of climate change.

While Ceres says the numbers of shareholder resolutions is rising, it hasn't tracked their success rate.  But, Barton noted, "there have been a number of withdrawals and commitments associated with palm oil and more movement from companies that have received proposals around water."

For example, Tyson Foods—which has seen 11 shareholder proposals linked to its supply chain since 2011—recently said it would set science-based goals for water conservation and greenhouse gas emissions.

"Investors are very concerned with food companies and the impact of agriculture," Pearce said. "It's definitely not going away, and is definitely going to continue getting more attention."

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