Agriculture is responsible for a third of greenhouse gases, and food companies must do much more than they currently do to address their considerable Scope 3 emissions, says Kate Monahan, director of shareholder advocacy at Trillium Asset Management.
Monahan recently spoke with Julie Nash, senior program director of food and forests at Ceres, about what investors expect and how these companies can meet those expectations.
This Ceres Q&A is the second in a series for ESG Clarity, featuring investor perspectives on climate change and climate action.
How have investors traditionally prioritized and evaluated environmental and social topics within food and agriculture sectors?
Agriculture is closely tied to several major risk sources, including biodiversity, climate change, pesticides, farm worker welfare and responsible sourcing. Investors increasingly recognize the significant overlap and interconnectedness among these risks. For example, Trillium has long engaged companies on heavy pesticide use because of the links to pollinator and biodiversity declines. A more just and sustainable agricultural sector is foundational to the long-term health of our economy and society.
Agriculture contributes to climate change but is also significantly impacted by it. A third of global greenhouse gas emissions come from food systems and thus must be addressed to help ensure resilience in agricultural-dependent companies’ financial performance. As such, investors may be exposed to further risks in the rest of their portfolios if food companies do not reduce emissions in line with what science says is needed to limit temperature rise to 1.5°C and achieve the goals of the Paris Agreement.
Given the challenges facing food companies, many investors are refining their strategies for evaluating and mitigating corporate impact in this sector. But we must act quickly to avoid disruptions to our food systems.
More companies have started to set or commit to set emissions reduction targets in recent years. Are you seeing this in the food and agriculture sector and how would you grade progress so far?
The food and beverage industry faces unique challenges around Scope 3 emissions due to the complexity of measuring emissions from farms and agricultural operations across vast, global supply bases. Scope 3 emissions are indirect emissions that occur up and down the value chain, accounting for more than 90% of a packaged food company’s total emissions on average. It’s imperative that food companies keep improving measurement of their Scope 3 emissions’ sources to be able to prioritize actions that reduce their emissions hotspots. The lack of data consistency and quality has also created a challenge for investors in evaluating food companies.
Fortunately, more companies are making emissions-related commitments via standardized pathways such as the Science Based Targets initiative, and investors are also voting on shareholder resolutions that directly ask for them.
And, despite the refrain that small- and mid-cap companies lack the resources to set emissions reduction targets, and shouldn’t be held to the same standards, we’ve seen more progress from those that are in our portfolio this year, albeit on longer timelines – a promising sign.
So, companies are setting emissions reduction targets in line with climate science. What’s missing? What do you need to see more of?
Addressing these emissions will require a shift in agricultural production to more sustainable and regenerative methods, which will take time and resources. Thus, diligence and urgency are necessary for food companies to fulfill their science-based targets.
Companies will be more successful in this transition if there is complete organizational cohesion. This includes making sure capital expenditure plans, growth and innovation strategies, and particularly procurement and supplier engagement, are aligned with the company’s goals and a 1.5C trajectory.
Food companies such as grocery retailers, restaurants, packaged foods and meat producers should publish transition plans that lay out concrete strategies for addressing their largest sources of Scope 3 emissions. And they can use resources such as this investor guide for the food sector.
Disclosures of progress are important. We’re concerned a rushed effort to meet climate goals as deadlines approach would require a scramble and likely result in less effective emissions abatement investments.
With greenwashing concerns at an all-time high, how have investors’ expectations evolved around disclosure and performance expectations?
The growing expectation from investors and regulators alike is that companies provide information in a more standardized way. Many organizations have been working on their plans for years, and the Securities and Exchange Commission is considering requiring corporate Scope 3 emissions disclosures. Regulators in other jurisdictions are also ratcheting up requirements.
This is a necessary starting point from which to evaluate environmental impacts and risk exposure. It’s a precursor to get past greenwashing and make sure corporate efforts to mitigate climate and environmental impacts are genuine.
There is also a race to the top as companies compete for their share in the sustainable marketplace, set emissions reductions targets and develop practices to achieve said goals.
What progress have you seen in food companies disclosing climate transition plans or other information pointing to how they will achieve their climate-related goals? What are you encouraged by, and what do you think needs to change?
Some food companies claim to have transition plans. But their disclosures lack the metrics and context needed for investors to understand how their actions will yield emissions reductions in line with their targets. We’re also seeing insufficient attention paid to Scope 3 emissions, which is problematic on several levels. We expect companies will run into compliance issues, assuming the proposed SEC rule goes through.
A focus on procurement and supplier engagement needs to be a major component of food companies’ transition plans. One thing we’re seeing right now is companies launching pilot programs with their suppliers. Many investors want to see potential efficacy, scalability and the specifics of these projects.
More broadly, is a company enabling the low-carbon transition by providing incentives or helping subsidize the upfront costs associated with various sustainable agricultural methods? If a producer accepts responsibility and makes positive changes, are they rewarded with preferential pricing or longer contracts?
Thoughtful approaches can help pilot programs become permanent strategies that support efforts to prove climate-related initiatives are not one-off projects. They can be embedded within the business’ core decision-making processes. The interconnectedness of agricultural risk and the sector’s exposure – and contributions – to climate change are fueling investors’ desire for evidence that companies aren’t throwing darts at climate-related initiatives, but that efforts are strategy-driven and demonstrate diligence in achieving corporate goals.
