Transparency has become a watchword separating good from bad behaviour on sustainability issues. An example of this is to explain something in clear unambiguous terms so that the intended audience is not misled about a company’s activity.
Consider the word ‘Sustainable’. What does it mean when a company claims to be following a sustainable strategy? This sounds wonderful, but it’s too often a meaningless statement.
A universally agreed taxonomy for defining the terms and a legal requirement to publish annual reports are needed. Creating greater transparency and informing consumers, who have made it clear they do not want to purchase chocolate or coffee products that harm the environment or people in the supply chain, would be beneficial.
This is, in part, what the world achieved with the International Financial Reporting Standards (IFRS), which created a global standard for defining terms so that crafty company accountants were boxed in by these standards.
Companies who want to sell their products into key markets (the EU and US in particular) will need to prepare for new reporting requirements. These will include reporting supply chain risk in order to meet the requirements of the financial markets.
Finally, we might see an end to the ambiguous terms chocolate companies in particular use to describe their green credentials. These new rules have been brought in, under the umbrella term of ‘ESG’, by the EU because of the need to meet massive new green investment targets.
Environmental, Social and Governance (ESG) refer to the three founding principles that, to a corporation, comprise the non-financial information that measures its sustainability and societal impact.
For some time the corporate world referred to ‘Corporate Social Responsibility (CSR), but more recently, ESG has become the preferred means of referring to these specific non-financial risks. Another associated term might be double-materiality, but we’ll stick with ESG.
The new regulation is supposed to align corporates with their stakeholders and investor interests.
One advantage of using the ESG term is that it allows the grouping of all the non-financial risks and opportunities into the three categories.
ESG is Big Money
The EU Green Deal, a plan to make the European Union more sustainable through investment in areas such as clean energy, and biodiversity through actions to halt deforestation, for example, was announced in December 2019. The plan commits to achieving net-zero neutrality by 2050.
To meet this goal, the EU plans to invest a minimum of €1 trillion over the next decade, but this alone will not be enough. The OECD (Organisation for Economic Co-operation and Development) estimates that by 2030 € 6.35 trillion will need to be invested annually to reach the goals of the Paris Agreement
Because a lot of this money will come from the private sector, the EU in particular knows this level of investment needs to be carefully monitored.
The chart below tracks the progress of the reporting legislation, but of key interest is the box marked in the red dotted line. The EU Sustainability Action Plan, and in particular the EU Taxonomy, is likely to have an impact on how the chocolate or coffee companies will be required to report their ESG activity.
ESG itself presents both risk and opportunity. Risk, in the form of losing the support of your financial and investor base, and opportunity from competitive gains and potentially lower rates of interest on borrowing.
The new regulations will apply to any company with offices in either UK or Europe, the most important of which is the EU Taxonomy – a law that has been described as the ‘most significant piece of ESG-related legislation ever created’. The obligations will encompass companies, investors, banks and governments.
The EU Taxonomy
The EU taxonomy is a framework for classifying ‘green’ economic activities to ensure they are genuinely sustainable. We have commented frequently on the purposeful vagueness of terms like ‘sustainable’ in our industry. To address this problem, the taxonomy provides clear guidelines on what constitutes ‘green’ or ‘environmentally sustainable’ practices.
“To achieve this, a common language and a clear definition of what is ‘sustainable’ is needed. This is why the action plan on financing sustainable growth called for the creation of a common classification system for sustainable economic activities, or an “EU taxonomy” “
It is not just consumers, who the EU are concerned are being misled, but investors in ‘green’ financial instruments, as well as policymakers themselves.
The Taxonomy Regulation has six areas of focus:
- Climate change mitigation
- Climate change adaptation
- The sustainable use and protection of water and marine resources
- The transition to a circular economy
- Pollution prevention and control
- The protection and restoration of biodiversity and ecosystems
But the benefit of demonstrating ESG credentials is also substantial. Investors are flocking to ethical ESG funds, and eager to lend money at low rates to companies who are active in pursuing green strategies. Currently, some €22 trillion of ESG allocated funds are being managed – a 1000% increase from 10 years ago.
On September 3rd 2021, Mondēlez International successfully issued €2 billion of Green Bonds.
I am proud to announce that we successfully placed our first green bond offering – the largest issuance to date within our industryDirk Van de Put, Chairman and Chief Executive Officer
Obligations of Public and Responsible Private Companies
As each company is unique, there is no universally applicable ESG assessment approach. There are ESG metrics that have specific importance in certain industries and companies.
If you are a public company, you must abide by the rules of the stock exchange on which you are listed, for example, the FTSE 100 in the UK, or the NYSE in the US. These exchanges have regulators, the Financial Conduct Authority (FCA) in the UK and the Securities and Exchange Commission (SEC) in the US.
The regulators monitor how companies communicate their potential future financial performance, which is a crucial part of maintaining a fair and healthy market. Companies that mislead, mischaracterise, play down or play up events, will fall foul of the regulator.
A company might withhold either purposefully, or through negligence, information that would affect the share price. Facebook stock plunged after a whistleblower testified that Facebook put profits above people. The company internally knew the damage they were doing to society through algorithms that favoured harmful news, when investors (and the public) found out, the share price plummeted.
What would happen if a chocolate company found itself the subject of a television documentary that uncovered illegal deforestation in their supply chain? Their goods could be seized at the port, administrative fines could be imposed, and they could be put onto a list of higher risk companies resulting in a reduced credit rating and higher borrowing costs.
Investors might initiate civil lawsuits against the Directors, and the actual cost, as well as reputational damage, might be severe.
Consequently, companies that meet the size criteria, will be required to fill out annual statements about their sustainability programmes, highlighting risks and progress. These are made public so they can inform both investment decisions and be used by ESG rating agencies.
The rating agencies will use these reports, combined with other information, to assign each company a risk rating. Much in the same way as the credit rating agencies give credit scores to businesses.
The most frustrating part of covering the chocolate industry in particular, although it can apply to coffee companies too, is trying to uncover the meaning of specific words in their press releases. Frequently, they are not to be found, or if they exist, are buried under layers of nested references. So, I personally, am very much looking forward to seeing how the industry adopts these reporting changes.