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Commentary

ESG Investment Program

Third Quarter 2019

Key Takeaways
  • Innovation is changing the ways we produce, distribute and consume food and creating opportunities and challenges for investors to consider.
  • Food covers many industries and offers ClearBridge many avenues for understanding and engaging with portfolio companies on changes that may have environmental and social consequences.
  • Our engagements across the food supply chain seek to reduce greenhouse gas emissions, improve efficient use of herbicides in agricultural production, scale sustainable packaging and smooth labor tensions and delivery logistics.
Disruption is Changing the Food Industry

As recent growth of plant-based protein products suggests, there is an appetite for change in the food industry. Many consumers are seeking to reduce the environmental effects of meat production, or just eat less meat, and newly available burgers, hardly distinguishable from real meat but made with pea, soy or potato proteins, are proving to be a popular solution. But the development of plant-based proteins is just one example of how the food industry is being disrupted by innovation that may have environmental and social consequences.

From the field to the table, and increasingly from the restaurant counter to your door, the changing ways we produce, distribute and consume food are creating opportunities and presenting challenges for investors to consider. As an active owner of companies across the food supply chain, ClearBridge is finding economic opportunity in food industry innovation as companies seek to reduce greenhouse gas (GHG) emissions, improve efficient use of herbicides in agricultural production, scale sustainable packaging and smooth labor tensions and delivery logistics. At the same time, it is important to understand these dynamics in a balanced manner and to scrutinize evidence as it arises.

Changing Consumption Habits May Have Environmental Benefits

Arguments against the current amount of meat production focus on the role livestock plays in GHG emissions. One estimate — from a vast 2013 United Nations study and therefore potentially
a conservative figure — puts the amount of carbon dioxide equivalent per year produced by livestock globally at 7.1 gigatons, or 15% of all human-produced GHG emissions (Exhibit 1).In addition to the release of GHG emissions, industrialized animal agriculture can also have other environmental impacts such as water contamination from waste (bacteria, chemicals, hormones and antibiotics). Concerns about environmental impact, negative health consequences, high resource use and animal welfare have even encouraged some countries to consider meat taxes, similar to taxes on alcohol and tobacco.

 

Exhibit 1: Global Estimates of Emissions by Species

Source: Tackling Climate Change Through Livestock, a report by the Food and Agriculture Organization of the United Nations, 2013.

 

The environmental benefits of plant-based meat products could be significant. A study by Beyond Meat and the Center for Sustainable Systems at the University of Michigan suggests a Beyond Burger generates 90% less GHG emissions, requires 46% less energy, has 99% less impact on water scarcity and uses 93% less land than an equivalent quarter pound of ground beef.

The excitement about plant-based proteins has encouraged traditional packaged food companies to take another look at reinvesting in their somewhat neglected veggie burger brands. Kraft Heinz has reformulated and rebranded its Boca Burger and Kellogg has updated its portfolio of plant-based protein products with the introduction of Incogmeato. ClearBridge holding Nestle is adding its own Awesome Burger to the lineup. Given Nestle’s scale and infrastructure as arguably the largest food company in the world, the impact of a plant-based meat product from the company could be considerable.

Additionally, several restaurants have been launching successful limited-time offerings in partnership with Impossible Foods (currently privately owned) and Beyond Meat. In another opportunity to scale plant-based protein, McDonald’s recently announced it will offer the P.L.T. (plant, lettuce and tomato) burger with Beyond Burgers.

At the same time, it’s important to acknowledge the environmental impacts of large-scale switching to plant-based proteins. These include deforestation, runoff of herbicides and pesticides into ground water and the dangers of monoculture farming, all of which should be considered before
accepting meatless “meat” products as a panacea and monitored by investors for risks as plant-based protein businesses grow.

Similarly, the health benefits of switching to meatless burgers may not be so clear cut, as most meatless burgers are heavily processed and high in saturated fat and sodium. At the same time, part
of the disruption in plant-based proteins is their increased ability to substitute for meats in vegetarian diets through the addition of vitamins and minerals, such as B12 and zinc (in the Impossible Burger), often found in animal proteins.

Precision Agriculture Reduces Herbicide Use

In a recent engagement with the management of ClearBridge holding John Deere, we discussed how companies in the agricultural supply chain are using technology to improve food production. Deere is a leader in precision agriculture, which applies new technologies in planting, spraying and irrigation tasks to yield more harvest and use less water and pesticides. Its AutoTrac steering system, for example, reads the soil and steers planters to nearly eliminate overlapping passes on the field, reducing unnecessary fuel, seed and chemical use. Similarly, Deere has a technology that improves spraying precision and reduces double-spraying. Its ExactEmerge planter is designed to increase the accuracy of spacing, depth and population of seeds, making for larger and more efficient yields.

In 2017 Deere acquired Blue River Technology, a small company applying machine learning, computer vision and robotics to agriculture. Blue River’s precision sprayer, currently in development, uses computer vision and artificial intelligence to precisely spray herbicides only where they are needed. The sprayer is expected to reduce herbicide application rates by over 30% for all major crops, including a 90% reduction for cotton — in our meeting we learned of one field trial for cotton in which herbicide consumption costs declined to $25,000 compared to $250k the previous year. It is slated for a potential 2021 launch.

Since some of Deere’s farm equipment innovation relies on connectivity, the lack of broadband coverage in rural areas has been a challenge. ClearBridge holding Microsoft’s FarmBeats program is offering one solution in this regard by helping farmers improve their digital technology. FarmBeats is an Internet of Things (IoT) platform that uses unused TV white spaces to create broadband links between a farmer’s home internet connections and a solar/battery-powered IoT station on the farm. Greater internet connectivity on the farm better enables technology-enhanced solutions and, ultimately, more efficient and sustainable agriculture.

Big Things Could Come in Small Packages

Adapting to fast-changing tastes has typically been difficult for larger, more established players in the food industry, but some are becoming nimbler to better compete with startups and are adding the power of scale to innovation. Nestle’s Yes Bar, for example, is a vegan-focused snack bar with plant-based protein designed to appeal to health- and environment-conscious consumers. To meet this market Nestle developed a sustainably sourced recyclable paper wrapper, the first of its kind that can be used in the high-speed flow wrap machines necessary to produce the product at scale. The paper wrapper also guarantees product quality and freshness over its shelf life. The push from smaller disruptive forces helped enable a confectionary packaging innovation that greatly reduces plastic use in the food industry.

Food Along the Last Mile

The technological disruption that brought us rideshare companies like ClearBridge holding Uber is also enabling a large platform for online food delivery aggregators. For companies with both rideshare and food delivery businesses, the proportionate role of food delivery is increasing (Exhibit 2).

 

Exhibit 2: Food Delivery Increasingly on the Menu

Source: ClearBridge Investments, Bloomberg LP.

 

This is not surprising: food delivery sales in the U.S. for online aggregators are taking off. We are now at $20 billion in gross annual sales, just counting DoorDash, Uber Eats, Grubhub and Postmates, to name four of the larger players (Exhibit 3). Sales through these platforms are growing at around 60% year over year. While this is small compared to overall U.S. restaurant sales (which are an estimated $800 billion a year, including delivery, dine in and drive through), the total pie of digital-enabled delivery is slated to grow.

 

Exhibit 3: U.S. Online Food Delivery Is Growing Steadily

Source: YipitData. YipitData provides informational services for institutional investors and other corporations and entities and is not registered as an investment advisor in any jurisdiction.

 

At the same time, as online food delivery aggregators are offering enhanced convenience and expanded food selection to consumers, new questions have arisen about food safety and protection for drivers and couriers in the gig economy. Food safety questions run the gamut from whether drivers can maintain correct hot or cold temperatures for food in their cars to concerns around food tampering from couriers. Labor questions surround benefits and pay for delivery drivers and couriers, most of whom are working part-time.

Ultimate success of online delivery companies may depend on the strength of partnerships with restaurants, in effect bringing drivers’ incentives into closer alignment with those of the restauranteurs, and the ability to leverage technology to reduce food safety incidents and improve
delivery efficiency. ClearBridge holding Grubhub looks to be well-positioned in both regards. Through our regular engagements with Grubhub, we remain in active dialogue on best practices with regards to both food safety and labor relations.

Consumers Are Playing an Increasing Role

The role of the consumer in these changing dynamics should not be forgotten. Consumers voting with their wallets have been successful at changing, or at least helping steer, a whole industry, and this has occurred largely only in the past few years. While a common criticism is that more sustainably sourced foods are usually more expensive and more available to affluent consumers, this situation may be changing, if slowly. ClearBridge holding Costco, is both the largest warehouse food retailer in the U.S. and a top organic food retailer. Given its scale, Costco is making organic and natural food products more price competitive, helping to overcome some cost barriers. At the same time, shopping for organic or sustainably sourced products can be confusing. For example, little consensus and few useful laws regarding organics labelling make determining which products are truly organic a challenge.

From production to consumption, food covers many industries and offers ClearBridge many avenues
for understanding and engaging with companies we own both on best practices and on disruptive innovations that are both offering economic opportunities and potential solutions to pressing environmental problems. We continue to work with our portfolio companies to create more ways in which consumers and investors can truly change the food landscape.

Mary Jane McQuillen

ESG Head, Portfolio Manager
23 Years experience
23 Years at ClearBridge

Robert Buesing

Senior Research Analyst - Consumer Staples
8 Years experience
3 Years at ClearBridge

Erica Furfaro

Senior Analyst - Media & Internet
14 Years experience

Related Perspectives

  • All opinions and data included in this commentary are as of the publication date and are subject to change. The opinions and views expressed herein are of the author and may differ from other portfolio managers or the firm as a whole, and are not intended to be a forecast of future events, a guarantee of future results or investment advice. This information should not be used as the sole basis to make any investment decision. The statistics have been obtained from sources believed to be reliable, but the accuracy and completeness of this information cannot be guaranteed. Neither ClearBridge Investments, LLC  nor its information providers are responsible for any damages or losses arising from any use of this information. 

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    Tackling Climate Change Through Livestock, a report by the Food and Agriculture Organization of the United Nations, 2013. The breadth of the study does not enable frequent replications.