Sustainability as a corporate trend has evolved through time. Since Aubrey’s inception, we have seen companies report their Scope One carbon emissions that focused on pollution caused by direct activities such as gases omitted from production processes. Then we saw the introduction of Scope Two carbon emissions which are classified as indirect emissions generated from electricity or heat used by a corporate. Now, some company managements are focused on Scope Three emissions. These are emissions generated from their customers at the end of the product’s value chain.
This development into Scope Three emissions raises an interesting question as to how far a corporate should be held responsible for third party usage of its products and consumer behaviours relating to them.
The Aubrey European Investment team recently asked management of a leading global food service and flexible packaging company about this issue. According to management, 25% of global greenhouse gases are generated from food production, and a third of this is from wasted food. As such, the company’s flexible packaging is built to preserve food from becoming spoiled. Management has developed this effective packaging through three layers: one layer is in contact with the food, the middle layer blocks out moisture and the visible outside layer makes the packaging look attractive.
The problem with this type of flexible packaging method is that it is non-recyclable. Separating these layers is extremely difficult and costly given each layer is made from a different material. As an alternative, management has introduced a new packaging concept made from fibre which is 100% recyclable. This allows the consumer to dispose of the packaging sustainably, whilst still maintaining freshness of the food. However, if the consumer does not recycle the packaging, the efforts and investment by management is unfortunately futile. Hence, this company faces a circular problem that whilst in theory increasing recyclable packaging should increase sustainability, if the consumers are not willing to recycle, there is no material benefit.
Despite this, management has piloted the product in emerging countries like India, where it is being well received. Yet volumes still represent a small portion of total revenues and there are no intentions of setting internal targets to scale this packaging across the entire group. This presents a conundrum for the Aubrey European investment team. A formal commitment by management to phase out non-recyclable packaging by a given date would make an investment in this company far more appealing from an Environment, Social and Governance (ESG) perspective.
However, management is holding back and, in its defence, argues that the non-recyclable product saves on food wastage, and consumer unreadiness to behave in an environmentally responsible way, would make a heavy financial commitment to the new product potentially pointless. Companies have a responsibility for protecting shareholders’ financial interests and investing in ESG projects that serve no immediate ESG benefit do not appeal.
On the other hand, a company the Aubrey European investment team has invested in for many years, claims their insulation systems have saved the environment the equivalent of up to 4.7x the annual electricity consumption of Greater London. They are also moving towards a 100% Net Zero Energy target by 2020. Otherwise stated, this saves the atmosphere 38m tonnes of carbon emissions which equates to savings of €5bn in energy costs.
While this company’s insulation boards and panels have been used in many buildings, responsible behaviours cannot be attributed entirely to this. Rather, regulation has been a major tail wind for the company’s increased sales of its products. On a more salutary note, the company’s products were associated with the terrible fire at Grenfell tower in London which claimed over seventy lives. While the product used was not causal and made up less than 5% of the cladding, according to management, its installation was at fault. This goes to show that a company can produce a perfectly respectable product, but if it is not used correctly, it can have a very negative impact.
The resultant tightening of regulations has encouraged the company to develop a new product which will launch in 2021. It is classified as ‘non-combustible’ which as we understand it is not necessarily a proxy for fire protection. The definitions in this area are complex and technical. According to management, Grenfell was as much about rudimentary fire safety and protection standards, i.e. lack of fire escapes or sprinklers as about the quality of product and manner of installation.
As with most things in this world, nothing is perfect, and this extends to ESG monitoring. The very best companies can fall short of ESG best performance, for reasons sometimes outside their control. We continue to engage with company managements about these issues and in our experience, they are aware this is a significant topic now, and that financial performance alone is no longer enough for most investors. The challenge for Aubrey is to make sure that they pay more than lip service to ESG goals and that there is substance behind the rhetoric.
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