Why Food Companies' Environmental Action is Not Only About the Environment, But Also About Money

Research shows that companies’ financial performance is increasingly intertwined with environmental performance. Failure to prioritise sustainability initiatives may result in significant risks for food companies. The time to accelerate engagement is now.

As climate change intensifies, the global food system is more and more recognised as a significant contributor to harm inflicted upon the climate, nature, and society. Yet, it is also one of the sectors most impacted by the persistent exceeding of our planetary boundaries. The most recent IPCC report calls for urgent and unprecedented action to limit climate heating to +1.5oC by 2050 and achieve the UN's Sustainable Development Goals, including 'zero hunger', by 2030 - “everything, everywhere, all at once”, as emphasised by the UN Secretary-General. (1) This urgency extends beyond environmental sustainability, encompassing financial sustainability for companies in the food sector.

In the world of corporate decision-making, financial benefit has traditionally been the most prominent driving force. As the renowned economist Milton Friedman stated over half a century ago, the goal of businesses is to "make as much money as possible while conforming to the basic rules of society." (2) In this context, sustainability initiatives are still often seen as peripheral to core business strategy, and may be relegated to the realm of marketing or viewed as cost creators. (3) With increased regulations, visible impacts of climate change on food companies' operations, and changing consumer expectations, the basic rules of society to which companies must adhere may be evolving. However, we think it is not overly bold to claim that an increasing interdependence of environmental and financial performance serves as the most important incentive for businesses to take swift action. While studies are not yet fully comprehensive, evidence from diverse sources indicates this interdependence. These are a few examples:?

• A recent report by Race to Zero highlights that food companies at the centre of the global food supply system could face a potential loss of up to 26% of their value if food system transition risks are not mitigated. (4) The report analyses 40 of the largest and most influential food and agriculture companies worth a combined USD 2.2 trillion, and estimates a sector average hit of over 7% compared to a business-as-usual scenario, amounting to a potential loss of USD 152 billion across the selected companies.
• A study by Bednig, Wagner, and Lau (2022) finds a positive association between corporate carbon emission performance and corporate financial performance for firms with science-based emission-reduction targets (SBTs) from 2015 to 2020, indicating a positive relation between decarbonisation efforts and financial results. (5)
• A recent McKinsey & Company study shows that companies which improved their environmental, social, and governance (ESG) ratings over multiple years tend to have higher shareholder returns compared to their industry peers in the period after the improvement. This finding aligns with previous academic research and was consistent across multiple ratings and scores providers. (3)

Based on the evolving nature of SBTs, ESG ratings, and sustainability reporting, further research is needed to conclusively establish their connection to financial performance. Nevertheless, companies are increasingly recognizing the potential benefits of improving sustainability performance for long-term financial gains, focusing on aligning improvements with their business models.

Among the most influential environmental actions to start with for food companies commonly are: improving traceability of supply chains, reducing food loss and waste, stopping deforestation, investing in alternative proteins, and making agricultural systems regenerative (e.g., 6). Klim is not an expert in tackling all of these issues, but certainly the last one. If your company is looking for support in mastering the regenerative transition, please do not hesitate to reach out.?

The risks of not prioritising environmental initiatives are significant (that holds true also for social concerns, we are focusing on the environmental part here though). Food companies cannot afford to wait for perfect data to base their decisions on. Companies that do not proactively address environmental sustainability concerns may face existential threats in the long run. Therefore, the best time to start accelerating your engagement is now.?

Resources: (1 ), (2 ), (3 ), (4 ), (5 ), (6 )