PLANT-BASED PROFITS: INVESTMENT RISKS & OPPORTUNITIES IN SUSTAINABLE FOOD SYSTEMS FAIRR Briefing, February 2018 www.fairr.org @FAIRRinitiative DRIVERS CONTENTS FOREWORD Foreword 3 At Nestlé, we recognize that for a business like ours to be successful, INVESTORS we must take a long-term view. As a global food company, we have the Introduction 4 responsibility and the opportunity to shape the sustainable production and Investment Drivers 8 consumption of food to preserve our planet for future generations – which Market opportunities in alternative proteins 10 is why we are evolving our portfolio of products based on sustainable protein sources. Innovation in food technology 16 Diversifying our protein sources helps us respond to growing consumer and ESG impacts 22 stakeholder concerns on the impacts of increased animal protein production COMPANIES “This report shows Advocacy and regulation 26 Duncan Pollard, and consumption on both health and the environment. It also helps us that alternative How investors are responding 28 AVP, Stakeholders capitalize on enormous opportunities in plant-based foods: in 2017, Nielsen proteins are rapidly Engagement in found that over the course of 12 months, sales of plant-based alternatives How companies are responding 38 going mainstream. Sustainability, to animal proteins rose 8.1%, in contrast to declining food sales in the 1 From meatpackers FAIRR sustainable protein engagement 44 Nestlé same category. to supermarket About the companies in the engagement 46 Across the food industry, we are seeing the early days of a sector-wide stackers the global response to the challenge of increasing exposure to alternative proteins. For Engagement process 48 food sector is rapidly food companies and their investors, no roadmap exists to help us navigate ENGAGEMENT taking notice of Findings 52 the complexity associated with protein diversification. A key first step will be plant-based Corporate actions on protein diversification 58 to evolve a shared understanding of what corporate best practice in this area alternatives to animal looks like across four strands: strategy, innovation, engagement and metrics. protein products, and References 61 One of Nestlé’s strategic priorities is to build out its portfolio of vegetarian that is driving 8% and flexitarian choices. In 2017, we acquired Sweet Earth, a plant-based annual growth in the foods manufacturer, which gave us immediate entry into the plant-based alternative proteins foods segment in the US. This complements our existing European focused market.” brand Garden Gourmet. We are dedicating a significant part of our R&D Jeremy Coller budget to the topic of plant proteins and have already acted to reformulate Founder of the FAIRR existing product ranges to substitute animal-derived ingredients where Initiative and CIO possible. This has included reformulations in our health science, of Coller Capital beverage and food businesses. DRIVERS INVESTORS COMPANIES See page 8 See page 28 See page 38 On metrics, Nestlé is currently in the early stages of defining a tracking method to monitor development of our sales in plant protein. We already track the origin of our protein sources, and we are actively looking to increase the share of plant-based proteins. The development of the protein supply chain is an issue with the potential to radically reshape the supermarket shelf of the future. We very much welcome the support of those investors who want to act today to stay ahead of the curve in the economy of tomorrow. We look forward to continuing to work with FAIRR’s investor network 1Source: Nielsen, 2017. ‘Plant-based proteins are gaining dollar share among North Americans.’ Accessed 24 January 2018. http://www.nielsen.com/us/en/insights/news/2017/plant-based- to ensure we support sustainable consumption and act as responsible proteins-are-gaining-dollar-share-among-north-americans.html stewards of the world’s natural resources for future generations. 3 DRIVERS INTRODUCTION INVESTORS One of the greatest challenges facing the world today is to ensure that the growing population has access to adequate, sustainable and nutritious food. COMPANIES The global food system is under increasing pressure in trying IN 2018, THE AVERAGE AMERICAN to meet this challenge. This pressure is particularly evident in livestock WILL CONSUME ALMOST 10 OUNCES production, given the sector’s substantial external impacts, its interaction OF MEAT AND POULTRY EACH DAY – TWICE THE RECOMMENDED AMOUNT with sustainability megatrends, and a growing global middle class that is IN USDA’S NUTRITIONAL GUIDELINES. demanding more meat. In the last 15 years, global Global meat consumption consumption of beef, veal, HOW WE DEFINE SUSTAINABLE PROTEINS ENGAGEMENT poultry and pork is We define sustainable proteins as protein-rich food sources that are: 370,000 estimated to have risen by 30%. The latest projections • consistent with nutritional requirements by the Organisation for • produced to high environmental and ethical standards Economic Co-operation and 330,000 • diversified in their sourcing Development (OECD) and the Food and Agriculture The most sustainable form of proteins do not involve large-scale Organization of the United livestock or fish production, primarily because of the difficulties Million tonnes 290,000 Nations (FAO) show demand of producing animal protein sources that are carbon-neutral, will continue to grow, high-welfare, environmentally responsible and efficient. primarily due to rising For this reason, our report and investor engagement incomes and population in 250,000 has a specific focus on alternative proteins, which include developing countries. In 2006 2011 2016e 2021e 2026e plant-based foods and protein sources, fermented proteins developed economies like and cultured meat. We believe these sources provide among the US, demand is also Consumption is projected to increase + 13% in the next ten years the most promising solutions for feeding the world sustainably Source: OECD-FAO Agricultureal Outlook 2017-2026 Statistics expected to continue to and nutritiously. increase, albeit at a slower pace. Overall, global meat consumption is projected to rise by over 13% in the next ten years (OECD/FAO 2017). Meeting this demand will continue to exacerbate the industry’s environmental, health and social impacts as producers scale up and intensify their operations. 5 INTRODUCTION DRIVERS RISKS AND OPPORTUNITIES IN PROTEIN PRODUCTION For these reasons, investor interest in this issue is expanding. We see four Conventional (i.e. industrial) livestock production systems have enjoyed key drivers that will shift the food system from its dependence on animal uninterrupted growth over the last few decades. While this trend is proteins towards alternative protein sources: INVESTORS expected to continue in the short term, resource constraints may dampen • growing market opportunity to meet demand for plant-based foods; expansion in the long term. Furthermore, the sector is increasingly ripe • accelerated innovation in food technology; for disruption. The issue of protein diversification is therefore key to managing the risks of climate-affected supply chains and for seizing • increasing awareness of ESG impacts linked to intensive opportunities for market growth. livestock production; Livestock production presents reputation and market risks for companies • and advocacy and regulation to moderate growth that are over-reliant on animal proteins to drive revenue growth. The in the animal protein sector. sector is heavily dependent on unpriced externalities associated with COMPANIES the inputs to, and resultant outputs from, this type of system, which have Main drivers of protein diversification enabled its dramatic expansion. These include deforestation, unregulated antibiotic use, poor animal welfare practices, and low scrutiny of air and water pollution on surrounding communities. These externalities and impacts are incompatible with the Sustainable Development Goals (SDGs). Market Innovation Thus it is increasingly likely that governments could use some form of Opportunity Potential taxation to combat meat’s negative contributions to climate change and health epidemics such as obesity and cancer. ENGAGEMENT Alongside the growing risk profile of livestock production, there are also opportunities to be seized from the burgeoning plant-based foods market and, more broadly, alternative proteins, which offer a more sustainable food production model. The growing trend of millennials adopting flexitarian and meat-free diets signals a change in purchasing habits that ESG Advocacy and is a significant shift from that of earlier generations. Companies across Impacts Regulation the food value chain, from producers to retailers, are already investing in these opportunities. In the short to medium term, advances in technology and innovation will open entirely new areas of investment opportunity that will likely transform the protein sector in a fundamental way. This shift is highlighted by the growing investor support for FAIRR’s Protein diversification has the potential to transform a food engagement with 16 global food companies to diversify protein sources. company’s core business and value proposition: its growth, We launched our engagement in September 2016, supported by 40 profitability, risk exposure and ability to compete and innovate. investors with $1.25 trillion in combined assets under management (AUM). At the time of writing, AUM support has almost doubled with 57 investors now managing