The Sustainable Development Goals (SDGs) were formulated by the United Nations (UN) and adopted by all the member states in 2015. The aim is to highlight and progress the universal call to action over ending poverty, protecting the planet, and ensuring all people across the world can enjoy peace and prosperity by 2030.
Overall, the SDGs act as a blueprint to address the global challenges we face today and due to their integrated nature, help balance development through social, economic, and environmental sustainability. Over the past twelve months we have focused on how to better measure and assess if an investee company is having a positive or negative impact on society through its business activities. Having engaged with several companies, charities and academics on the usefulness of the SDGs for ESG risk analysis, we came to the conclusion that the SDGs effectively capture the most material systemic risks to society.
Due to the overarching nature of the themes covered, we decided to use the SDGs as a framework to guide us through the disclosures made by our investee companies. Overall, the SDGs themselves are positive however, it is important to note that they are broad, which is why we use them as a guide to our ESG analysis for the businesses we invest in, rather than as a concrete structure. This helps allow for flexibility across both companies and industries. For our process, we are using each company’s SDG framework - provided there is one available - to better understand their individual goals and what they are working towards as a business. This helps guide our own understanding in how we analyse the environmental and social impact our investee companies are having on society. It is important to note that although it is positive for a company to align themselves to the SDG framework and the respective sub-targets, they wouldn’t necessarily be downgraded if they are choosing to set their own internal targets that better align to their business model and/or industry.
As a starting point for the project, we highlighted companies within the Evenlode portfolios that we felt had the most material issues, as well as how these related to the SDGs. An example of this is PepsiCo, whereby the most material issues highlighted were water, agriculture, and packaging. From there we analysed PepsiCo’s SDG framework and the associated alignment to the goals, as well as the objectives they have surrounding these issues going up to 2025. In PepsiCo’s case, the company has chosen to align itself to what it believes are the ten most important goals relative to its business activities and from this has bundled them further into six categories which include, agriculture, water, packaging, products, climate, and people.
Following a review of PepsiCo’s goals and the alignment to the SDGs we highlighted both risks and opportunities that presented themselves. On the risk side we highlighted that some of PepsiCo’s goals could be classified as ‘overly ambitious’, whereas others may be easier to reach before the goal due date. This is important as it signals that the company may need to focus on setting more appropriate goals, or on working harder to reach the goals set. In turn this raises the question on how PepsiCo would then progress going forward. The example here is PepsiCo’s goal on the 35% reduction of virgin plastic content across the beverage portfolio by 2025. In 2019 PepsiCo reported this reduction figure to be running at only 1%, significantly below the 35% target and a reputational risk given the global push towards the reduction of packaging and plastics at an industry level as well as the overall role PepsiCo has to play in reaching those targets. Conversely, PepsiCo has goals over delivering safe water access to 25 million people by 2025, a goal which in 2019 was already reached, with the number of people reached totalling 44 million. This is positive for PepsiCo given the importance of water as a resource, as well as the importance of providing safe water access to as many people as possible. However, the company may not have set an ambitious enough goal to start with, and now they have surpassed the goal there may also be a temptation to dial back the efforts in this area. We also noted significant opportunities for PepsiCo which presented themselves throughout the analysis. There was strong alignment and progress towards the company targets on product, climate (Scope 1 & 2) and people. In the product category, the company are on track to achieve their 2025 targets on reducing calories from added sugars, reducing sodium per calorie, and reducing saturated fats per 100 calories. The company has good Scope 1 and 2 goals on reducing absolute greenhouse gas (GHG) emissions by at least 20% by 2030, with PepsiCo reporting a 9% reduction in 2019. PepsiCo also has an additional goal on Scope 3 GHG emissions, with the aim to reduce absolute GHG emissions by at least 20% by 2030. It is important to note goals surrounding Scope 3, as it shows the company recognises and acknowledges the result of activities that the organisation indirectly impacts in its value chain. Finally, on people, PepsiCo has actively been engaging with stakeholders on human rights within the supply chain and has key goals on achieving gender pay parity by 2025 in management roles, all of which are key positive points in terms of opportunity. One of the most important outcomes of the analysis is the ability to further engage on key issues surrounding business activities and goal setting. In the case of PepsiCo, the company appears to have made a solid effort in setting sufficient goals relating to its business as well as outlining how these align with the SDGs. However, we saw the importance of further engaging to help understand some of the other material points that arose from the analysis.
From the engagement it was clear that the company is making incremental improvements year-on-year on all of its goals, but it did highlight that reaching the goals in some cases may be extremely challenging. It was also noted that goals around packaging are of high importance given PepsiCo’s business model and the company did mention that the goal surrounding the reduction in virgin plastics is inevitably a tough one. Further, the levers required to reduce virgin plastics require different capabilities over using more recycled content. However, PepsiCo emphasised its strength as a company that is pushing hard in this area. Overall, it is clear from the analysis that for companies and industries setting goals and aligning to SDGs, this is still very much a learning process. As a result of this, we note the importance of continuing to both highlight and monitor ongoing opportunities and risks across companies and industries going forward. The real question for us is how does the analysis integrate into and further strengthen our current investment process? Following the analysis, we wanted to engage with companies on the risks/opportunities we identified in the analysis and create a plan of mitigation and/or implementation if any of those factors materialised. These include systemic risks such as climate change, water scarcity or plastic pollution. In the case of PepsiCo and the Fast-Moving Consumer Goods (FMCG) industry as a whole, there were several key issues that stood out. These issues predominately place emphasis on the environmental pillar surrounding the areas of packaging, food waste, water usage and the carbon intensity of supply chains. All of these areas are of high importance to FMCG business models and need to be consistently addressed by the companies operating within the sector. Because of this, these areas of focus have been flagged for companies like PepsiCo, explained in risk score commentary and in turn filtered into our ESG risk score. Points surrounding the potential inability to meet virgin plastic reduction goals can be monitored as an ongoing risk and will in turn contribute to PepsiCo’s overall score. We currently have this system in place to keep track of any environmental, social or governance topics in relation to the business. This then helps drive the A to E scoring system for each company with each score varying based on the outcome of key issues relating to a company’s specific individual business model. Overall, this not only helps us drive positive change with the companies we engage with by highlighting to them key areas for focus and improvement, but also increases the qualitative input and contribution to both risk scoring and decision making within the Evenlode investment process
Bethan Rose, Investment Analyst
2020
Please note, these views represent the opinions of the Evenlode Team as of 2020 and do not constitute investment advice. Where opinions are expressed, they are based on current market conditions, they may differ from those of other investment professionals and are subject to change without notice. This document is not intended as a recommendation to invest in any particular asset class, security or strategy. The information provided is for illustrative purposes only and should not be relied upon as a recommendation to buy or sell securities. Every effort is taken to ensure the accuracy of the data in this document, but no warranties are given.