While we would not describe our investment style as ‘activist’, we do practice ‘active ownership’. We will, and do use our position as a large shareholder to engage with companies to bring about change on ESG (Environmental, Social and Governance) issues when we think it will protect and enhance the risk-adjusted return on our clients’ capital.
A prime example of our engagement activities in action is our ongoing work over the last 2 years with the Board of Coca-Cola Amatil (CCL) on the obesity and related health implications from their predominately full-sugar drinks in developing markets.
Strong ESG Credentials but Lack of Progress in Developing Markets
CCL is based in Australia and is one of the largest bottlers of non-alcoholic ready-to-drink beverages in the Asia-Pacific region, operating also in New Zealand, Indonesia, Papua New Guinea, Fiji and Samoa.
CCL have a strong pedigree in ESG, with carbon foot printing, improving packaging weight and composition, recycling programs, and sustainable agriculture programs.
On the topic of nutrition and health, CCL took an industry leading position in 2018 and made a public commitment to a 10% reduction in sugar content by 2020 and a 20% reduction by 2025 for the Australian market. They have launched a number of low-calorie alternatives, such as Coke Zero, and innovative sparkling waters to reduce the distribution of products causing obesity (and related health issues) and to take advantage of growing demand for healthier beverages.
While we applaud CCL's approach to sugar reduction in the developed markets, we were concerned with the lack of explicit sugar targets for developing markets. CCL stated the reason for this absence of targets was a 'lack of demand'. As ESG conscious shareholders, that reasoning wasn't sound.
Why is this important?
Food & beverage producers are under immense pressure to reform, both from stricter government regulations and consumers demanding healthier choices.
While developing markets are slower in making these changes, shifting trends in a region that makes up almost 50% of their volumes will offer both a risk and an opportunity for CCL.
What action did we take?
We first initiated a discussion with the CCL Board in early 2018, voicing our concern about the lack of an equivalent strategy for reducing sugar in developing markets compared to in Australia and New Zealand. We followed this up with a letter to management in May 2018 which set out our request for action on this issue.
Interestingly, we understand that we may be the only major shareholder engaging with the company on the topic of sugar reduction in developing markets, with no other local investors championing this topic.
The CCL management acknowledged our letter at a meeting in August 2018, but we were concerned that CCL’s justification for a lack of reduction strategy was based on a belief that the local communities had a ‘need’ to supplement their daily calorific intake with full-sugar beverages.
Following up on this matter at a meeting in February 2019, CCL confirmed that the CEO had met with representative of the Fiji and PNG Governments. She directly discussed with them the issue of sugar and obesity and obtained a clearer understanding of the community’s true calorific ‘needs’. The prospect of participating in health education was also raised.
We met with the CCL chair in April 2019 and she shared their plans to look at how to measure calorific content for developing markets, as this has been a hurdle in developing a strategy to reduce the sugar intake.
What was the outcome?
At our most recent engagement in August 2019, we met with the CEO, CFO and IR. They confirmed they are now working on specific developing markets targets for the 2020-2025 period, and have also upgraded their targets for Australia/New Zealand for 2020-2025.
What are the next steps?
We will continue to engage with the CCL Board on this matter until we are satisfied that relevant targets and strategy are in place for the developing markets, and we will monitor their success in reaching these targets.
We also continue to follow CCL on their industry leading ESG work in sugar reduction, energy consumption and plastic recycling initiatives, and look forward to these being rolled out in developing markets.
Embedding ESG in our investment process
Excluding and punishing so called ‘bad’ sectors by divestment can often deny us the opportunity to have a seat at the table with management to discuss ESG issues.
We believe that true credibility for ESG investing can only come from having it deeply embedded in the investment process, and active ownership provides the best way to understand how a company creates value for both its shareholders and its wider stakeholders.
The MCA team have over 1,000 meetings annually with the management teams of the companies in our investable universe. To us, engagements like these with CCL are an essential part of being an active owner.
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Legg Mason Asset Management Australia Ltd (ABN 76 004 835 849 AFSL 240827) is part of the Global Legg Mason Inc. group. Any reference to ‘Legg Mason Australia’ is a reference to Legg Mason Asset Management Australia Limited. The information in this article is of a general nature only and is not intended to be, and is not, a complete or definitive statement of the matters described in it. The information in this article does not constitute specific investment advice and does not include recommendations on any particular securities. These opinions are subject to change without notice and do not constitute investment advice or recommendations.