The sustainability positioning of an imperfect giant

In early December 2020, activists from Greenpeace deposited a big sculpture of Nestlé’s* logo, made entirely of plastic waste from Nestlé’s products, in front of its headquarters, alongside a banner with a powerful simple message - ‘Stop feeding the world with plastic’1.

In the 2020 the ‘Break Free from Plastic’ movement’s brand audit, Nestlé maintained its undesirable position at number 32. And as a recent report from the Ellen MacArthur Foundation reminded us, Nestlé’s use of recycled plastic for its packaging needs has remained stuck at 2%, far from its 2025 target of 30%3.

Providing necessary goods and services

One of the ways we think about our investment universe is to look for companies that offer necessary goods and services. The recent pandemic provided a useful reminder of what this meant as consumers globally rushed to stock up on everyday necessities in the face of lockdowns. Nestlé, for example, experienced a significant surge in demand for its products, and continued to supply its customers,  even while facing disruptions in many areas of its operations. 

Another significant but underappreciated aspect of Nestlé’s global reach is its sourcing breadth and manufacturing footprint. As the world’s largest food company, it works directly with over 550,000 farmers globally4 and its sourcing decisions, as well as behaviour, directly impact many of the Sustainable Development Goals (SDGs), ranging from human development to climate change. Further, with more than 400 factories in 86 countries, over half of which are located in emerging markets, and 291,000 employees, it is very much embedded in the fabric of many local communities where every person it interacts with is a likely consumer5. It is easy to forget that it sells over a billion products every day6. This is not a faceless trading behemoth hiding in a tax-sheltered alpine home. Over the years, the company has faced many issues in several markets, and has had to confront and resolve them to the satisfaction of all stakeholders. A good example of how this manifests itself is that in 2019 over 80% of its factories globally achieved zero waste5.

However, the company is far from perfect. For the world’s largest food company, there is a lot in Nestlé’s product portfolio that is of questionable nutritional value, despite the company topping the Access to Nutrition rankings7. Thankfully, it is apparent the company recognises this and in recent years it has commenced a significant transformation effort to reorient its businesses towards products offering better nutrition and healthier outcomes. 

Imperfect giants can contribute towards bigger societal shifts

There is certainly an argument for allocating society’s savings to companies bringing fresh product ideas, technology and new ways of solving problems. However, for achieving impact on a planetary scale, without significant improvement from the bigger companies, we do not have much hope of averting the tragedy of the commons8, on this planet we call home. In this context, some of the giants, who desire to, can make a material difference.

As an analogy, it might help to look at the sustainable human development framework that we use to guide our investment philosophy. This is a chart (below) of the ecological footprint per capita of countries, mapped alongside the level of human development. The planetary boundary is the bottom-right shaded section. As is clear from this chart, if China continues to follow the United States’ resource intensive model of development, it will not matter that an advanced smaller nation like Denmark is punching well above its weight.

Source: Global Footprint Network, 2021 National Footprint and Biocapacity Accounts www.footprintnetwork.org and https://data.footprintnetwork.org/?_ga=2.218470873.137653673.1614780619-1273534926.1610728620#/sustainableDevelopment?cn=all&yr=2017&type=BCpc,EFCpc. 

Latest country data for the Ecological footprint is 2017. Graph scale is limited to 10 on the ecological footprint axis and excludes Luxembourg and Qatar.

Nestlé is a company with a long-term time horizon, able to recognise these risks, embrace and invest in change, and do it with rigour and at scale, and unlike fashionable sustainability darlings, it sits in a neglected corner of the investment universe.

Concerns about greenwashing

For companies with considerable marketing prowess, greenwashing is something we have to be aware of when analysing sustainability credentials. In addition to our own research, we educate ourselves with work from non-traditional sources, like non-governmental organisations (NGOs) and consumer protection groups. Over the years, we have also commissioned independent third-party research to look into issues relating to the sustainable sourcing of soya and palm oil, deforestation and plastic packaging. So far, the company scores reasonably well, is transparent in its reporting, willing to discuss these issues, and shows a desire to improve further. 

It is welcome that the company aims to help 50 million children lead healthier lives, improve 30 million livelihoods directly connected to its business activities, while striving for zero environmental impact4. Some of these, like the environmental impact, or sugar content in foods, are easy to measure and hold them accountable to. However, the supply chain is a lot harder, when it is apparent that so many households that depend on agriculture do not eke out a living wage. To help us understand this better, we have recently commissioned external research to investigate sourcing practices in coffee. This is an ongoing exercise and we continue to look for evidence of real change in difficult areas, rather than simply relying on glossy sustainability reporting. 

What about the risks?

The biggest risk is that consumers turn away from its products due to their content, packaging, or sourcing practices, and the company is slow or unable to implement the necessary change. 

The best companies are always on a journey of evolution. If Nestlé was not, the company would not have lasted for 150 years. We believe that companies who are demonstrating a willingness to evolve and transform, despite their size and successful past can deliver positive investment outcomes and contribute positively towards long-term sustainable development.

Mohan Gundu
March 2021


Download a PDF of this article >

Important Information

This document has been prepared for general information purposes only and is intended to provide a summary of the subject matter covered. It does not purport to be comprehensive or to give advice. The views expressed are the views of the writer at the time of issue and may change over time. This is not an offer document, and does not constitute an offer, invitation, investment recommendation or inducement to distribute or purchase securities, shares, units or other interests or to enter into an investment agreement. No person should rely on the content and/or act on the basis of any matter contained in this document.

This document is confidential and must not be copied, reproduced, circulated or transmitted, in whole or in part, and in any form or by any means without our prior written consent. The information contained within this document has been obtained from sources that we believe to be reliable and accurate at the time of issue but no representation or warranty, express or implied, is made as to the fairness, accuracy or completeness of the information. We do not accept any liability for any loss arising whether directly or indirectly from any use of this document.

References to “we” or “us” are references to Stewart Investors. Stewart Investors is a trading name of First Sentier Investors (UK) Funds Limited, First Sentier Investors International IM Limited and First Sentier Investors (Ireland) Limited. First Sentier Investors entities referred to in this document are part of First Sentier Investors, a member of MUFG, a global financial group. First Sentier Investors includes a number of entities in different jurisdictions. MUFG and its subsidiaries do not guarantee the performance of any investment or entity referred to in this document or the repayment of capital. Any investments referred to are not deposits or other liabilities of MUFG or its subsidiaries, and are subject to investment risk including loss of income and capital invested.

Past performance is not a reliable indicator of future results. 

Reference to specific securities (if any) is included for the purpose of illustration only and should not be construed as a recommendation to buy or sell. Reference to the names of any company is merely to explain the investment strategy and should not be construed as investment advice or a recommendation to invest in any of those companies. 

Hong Kong and Singapore

In Hong Kong, this document is issued by First Sentier Investors (Hong Kong) Limited and has not been reviewed by the Securities & Futures Commission in Hong Kong. In Singapore, this document is issued by First Sentier Investors (Singapore) whose company registration number is 196900420D. This advertisement or publication has not been reviewed by the Monetary Authority of Singapore. Stewart Investors is a business name of First Sentier Investors (Hong Kong) Limited. Stewart Investors (registration number 53310114W) is a business division of First Sentier Investors (Singapore).  

Australia

In Australia, this document is issued by First Sentier Investors (Australia) IM Limited AFSL 289017 ABN 89 114 194 311 (FSI AIM). Stewart Investors is a trading name of FSI AIM.

United Kingdom 

This document is not a financial promotion. In the United Kingdom, this document is issued by First Sentier Investors (UK) Funds Limited which is authorised and regulated in the UK by the Financial Conduct Authority (registration number 143359). Registered office: Finsbury Circus House, 15 Finsbury Circus, London, EC2M 7EB, number 2294743.

European Economic Area (“EEA”)

In the EEA, this document is issued by First Sentier Investors (Ireland) Limited which is authorised and regulated in Ireland by the Central Bank of Ireland (registered number C182306) in connection with the activity of receiving and transmitting orders. Registered office: 70 Sir John Rogerson’s Quay, Dublin 2, Ireland, number 629188.

Middle East

In certain jurisdictions the distribution of this material may be restricted. The recipient is required to inform themselves about any such restrictions and observe them. By having requested this document and by not deleting this email and attachment, you warrant and represent that you qualify under any applicable financial promotion rules that may be applicable to you to receive and consider this document, failing which you should return and delete this e-mail and all attachments pertaining thereto.

In the Middle East, this material is communicated by First Sentier Investors (Singapore).

Kuwait

If in doubt, you are recommended to consult a party licensed by the Capital Markets Authority (“CMA”) pursuant to Law No. 7/2010 and the Executive Regulations to give you the appropriate advice. Neither this document nor any of the information contained herein is intended to and shall not lead to the conclusion of any contract whatsoever within Kuwait.

UAE - Dubai International Financial Centre (DIFC)

Within the DIFC this material is directed solely at Professional Clients as defined by the DFSA’s COB Rulebook.

UAE (ex-DIFC)

By having requested this document and / or by not deleting this email and attachment, you warrant and represent that you qualify under the exemptions contained in Article 2 of the Emirates Securities and Commodities Authority Board Resolution No 37 of 2012, as amended by decision No 13 of 2012 (the “Mutual Fund Regulations”). By receiving this material you acknowledge and confirm that you fall within one or more of the exemptions contained in Article 2 of the Mutual Fund Regulations.

United States of America 

In the United States, this document is issued by First Sentier Investors International IM Limited, as SEC registered investment adviser. Stewart Investors is the trading name of First Sentier Investors International IM Limited. This material is solely for the attention of institutional, professional, qualified or sophisticated investors and distributors who qualify as qualified purchasers under the Investment Company Act of 1940 (hereafter the “1940 Act”), as accredited investors under Rule 501 of SEC Regulation D under the US Securities Act of 1933 (“1933 Act), and as qualified eligible persons as defined under CFTC Regulation 4.7. It is not to be distributed to the general public, private customers or retail investors. 

Other jurisdictions 

In other jurisdictions where this document may lawfully be issued, this document is issued by First Sentier Investors International IM Limited which is authorised and regulated in the UK by the Financial Conduct Authority (registration number 122512). Registered office 23 St. Andrew Square, Edinburgh, EH2 1BB number SC079063.

Investment terms

View our list of investment terms to help you understand the terminology within this document.

*Source for company information: Stewart Investors investment team and company data. For illustrative purposes only. Reference to any companies mentioned in this communication is merely for explaining the investment strategy, and should not be construed as investment advice or investment recommendation of those companies. Companies mentioned herein may or may not form part of the holdings of Stewart Investors.