Climate action is always on the menu

Unsurprisingly, in Italy we have multiple saying dedicated to food. One of my favourites is “Parla come mangi” (speak as you eat). It is an invitation to speak simply and clearly, avoiding unnecessary and pretentious complexity. We kept this saying in mind while writing this blog about the complex topic of decarbonization and the food sector. Why and how does PGGM engage with its investee companies and this topic? What are the key challenges and some best practices to overcome them?

Decarbonization of the food sector
According to findings by the UN Food and Agriculture Organization, approximately 31% of greenhouse gas emissions caused by human activities can be traced back to the global agri-food systems. This is why at PGGM we are engaging with companies in this sector, along the entire supply chain as part of our climate active ownership program.

This engagement effort - composed by bilateral conversation with companies, collective engagement together with other investors and the exercise of our voting rights during General Annual Meetings - is a key tool for implementing the Climate plan of our client PFZW.

In our climate ambitions, PFZW and PGGM committed to reducing our absolute CO2 emissions of our public markets portfolio of 50% by 2030. By engaging with listed companies, we aim to push companies to transition towards a low-carbon business model and decarbonize. Our purpose goes beyond meeting our own commitment; we want to create a positive impact on the ground.

So, what do we expect from companies in the food sector regarding decarbonization?

• The company commits to reducing direct and indirect emissions (absolute scope 1,2,3) in line with the Paris Agreement
• Such high level commitment is supported by medium-term decarbonization targets
• The company commits to achieving a deforestation-free supply chain by 2030 for all high-risk commodities
• These commitments need to be supported by clear and transparent action plans and evidence of implementation and allocation of appropriate financial resources

Now, even when the right targets are in place, the road to Paris is not straightforward for food companies. The complexity of this sector is well illustrated in the figure above. The intricacy of global food supply chains means that it can be difficult to trace emissions and makes it hard to track whether production complies with environmental and social standards. For there to be transformative progress across this sector, there needs to be coordinated and collaborative action among this diverse set of actors along complex supply chains and across different geographies.

Below we list some key challenges in this sector and some best practices from companies in addressing them.

The role of farmers
Transition towards a sustainable food system means supporting and encouraging farmers in doing so. Why is this challenging?
First, it implies short-term economic loss and can lead to controversies and debate. The example of the nitrogen crisis in the Netherlands and the following tensions made this very evident.

Second, on a global scale, two thirds of the population living below the poverty line are farmers, workers in agriculture and their dependants. It is clear that, in order to incentivize the transition to a sustainable agriculture, it necessary to provide an economic motivation for people. If you are struggling to feed your family and cutting a tree is more profitable than leaving the tree standing, you will cut the tree. It is logical.

For this reason it is very important for companies to support the smallholders they are sourcing from during the transition. An example of best practice in this sense comes from Unilever. The food giant acknowledged that social and environmental sustainability goes hand in hand, and have developed a program to support its suppliers in achieving a living wage.

Food security
The unsustainable and carbon intensive way we produce food now is the result of centuries of technological development with the overarching goal of producing more and more. However, plenty of people still suffer from hunger. The Food and Agriculture Organization of the United Nations tells us that almost 600 million people will be chronically undernourished in 2030. We can expect this problem to increase in the future as the world population continues to grow.

In this context, it is typical to perceive a trade-off between the goal of achieving food security vs the goal of contrasting climate change. The impact of climate change on agricultural productivity is devastating and the current way of farming will simply not be appropriate in the long term. This is why an increasing number of companies are working with their suppliers to shift towards regenerative agricultural practices, meaning applying management techniques to restore the ecosystem (e.g. the quality of the topsoil).

To paraphrase a company with whom we had an engagement call recently: “Either farmers shift to regenerative agriculture or they will be left without a farm in the future”.

From an investor perspective, the term “regenerative agriculture” lacks a well-endorsed definition and regenerative practices are context specific, and so it can be tricky to assess whether corporates are actually investing in this or if they are using it as buzz word. A good example of best practice is Danone because it provides a transparent list of practices that are considered regenerative, and they disclose how they engage with their suppliers on this matter.

Dietary shifts
Going back to the basics of economic theory, supply is one side of the story and demand is the other. Every single food company that we ever had a dialogue with referred to the key role of consumers’ preferences in their transition: “Based on our research “taste” and “price” are the drivers of consumers’ choices, not sustainability”.

These are fair concerns; all the scenarios modelling a transition to a sustainable food system rely on sustainable diets as an enabling factor. Dietary choices are often emotional for people, linked to cultural identity and belonging.

Even if we acknowledge that this is indeed a challenge, we also think food companies (in particular restaurants and retailers) can contribute to this by educating their consumers and facilitating the access to low carbon alternatives to unsustainable options. Some examples are provided by retailer Ahold Delhaize. The company includes this dimension in its climate plan.

If you are personally interested in eating more sustainably, check the tips of the World Wildlife Fund.