With the launch of the world’s first vegan exchange traded fund next week, animal-loving investors will be able to make their portfolio as “woke” as their diet.

The US Vegan Climate ETF, which backers Beyond Investing will launch on the New York stock exchange on Tuesday, is certainly a niche product. But it points to a wider trend of investors paying more attention to the opportunities — and risks — presented by the food industry.

Multinational food groups have long been regarded as sound investments, offering steady dividends and a way to tap growing and newly affluent populations in emerging markets. But the sector is also a large contributor to climate change and highly exposed to changing tastes and tighter health regulations, all risks investors must digest.

“There is growing interest in this topic from an engagement perspective,” says Carola van Lamoen, head of active ownership at Robeco. Food-related topics — food security, single-use plastic and palm oil — are themes the €186bn Dutch asset manager has singled out as special areas of focus with investee companies.

Broader investor initiatives seeking to push companies to deal with the raft of sugar taxes around the world and respond to consumer preferences for healthier products are at an early stage but gaining momentum.

ShareAction, the UK responsible investment group, launched in May a campaign seeking to reduce childhood obesity by pushing food and drinks companies to alter their products, limit the marketing of sugary products to children and provide clearer food labelling.

Changing consumer preferences, more stringent health regulations and reputational risk mean food groups that do not change will suffer financially, says Ellie Chapman, ShareAction’s food and health programme manager.

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“If companies can get ahead of the curve there’s a real financial gain they can make,” she says.

France, the UK and US cities, including San Francisco and Philadelphia, are among those that have introduced sugar taxes in recent years. Sugar “is a financially material topic if companies are not transitioning to a more healthy product range”, says Ms van Lamoen.

ShareAction is gathering support for its campaign and says it has received indications of support from 25 large investors. Its first goal is to rank large food retailers in the UK such as Tesco to help investors identify and target laggards, before they turn to food manufacturers.

Although it is harder to make a direct connection between sugary products and serious illnesses than is the case for tobacco, the risk of litigation also looms, says Elly Irving, head of engagement at Schroders.

While lawsuits against food and beverage companies have so far focused on accusations of false advertising — that products marketed as healthy were anything but — she believes companies that produce sugar-rich goods could eventually be held legally accountable as the body of scientific research linking them to conditions such as diabetes and heart disease grows.

“There is more and more research in that space,” she says.

In 2017 the London-listed Schroders and Rathbone Greenbank, an ethical and sustainable investment group, published a framework for investors to ask investee companies about how companies are adapting their business models to deal with changing legislation and attitudes towards sugar.

“If you’re not investing in reformulation [of product lines] and R&D, we think it will reflect in sales growth and company performance,” Ms Irving says.

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The Schroders-Rathbone framework suggests investors ask if a particular board member has responsibility for implementing new health policies, whether the risk of legal disputes is being discussed by the board and what the most material sugar-related risk for the company is.

It requests that companies develop “governance processes which routinely review risks from increased regulation of unhealthy food, sugar in particular” and encourages them to ask for greater transparency over how food and beverage companies lobby governments, as has happened in the oil and gas industry.

Some 28 investors with £1.8tn in assets have said they will use it and Ms Irving says one benefit is that they are asking similar questions.

“We felt we didn’t have enough information from companies,” she said. “How do you quantify sugar risk? We wanted to start with one standardised approach.”

A recent progress report by Schroders concluded that companies are doing more to explain how boards are assessing the risks linked to sugar and adapting their strategies but that there was less progress on how they lobbied in private.

Coca-Cola emerged as the top performer out of 11 companies examined, as the business was deemed to have made the most progress in expanding into sugar-free products and being more transparent.

Many investors also draw a link between the need for the food industry to make changes and the need to address climate change. Agricultural production accounts for at least a fifth of global emissions, according to the UN Food and Agriculture Organization, making it a significant sector in meeting the Paris agreement’s goals.

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“Food production has a massive impact on the environment,” says Agne Rackauskaite, a research analyst for the sustainable food strategy at Impax Asset Management, citing intensive water use, reliance on fertilisers and chemicals, and the methane emissions produced by beef and dairy farming.

The company behind the proposed vegan ETF argues it could have a broader appeal for precisely this reason, being attractive to consumers who care about climate change as well as those following plant-based diets.

“You don’t have to be vegan to buy the product,” says Claire Smith, chief executive of Beyond Investing, who points to increased consumer interest in leading a healthy lifestyle. “The overlap is pretty strong.”

Scandals such as safety scares at food groups can cost them dear, as companies such as New Zealand dairy exporter Fonterra and Nestlé have discovered, but Ms Chapman says there is increasingly a reputational risk for investors that fund companies with products deemed undesirable.

The UK’s Essex County Council pension fund attracted scrutiny in 2014 when local media reports flagged investments it had in fast food and sugary drinks companies, as well as tobacco, despite the council having a mandate to improve public health.

Ms van Lamoen does not think investors will divest wholesale from food manufacturers in the way some have done from tobacco given the former have a range of products that can be adjusted.

Ms Irving agrees but does not rule out future exits by investors. “The broader trends are trying to understand where the risks are,” she says.

Via Financial Times

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