A crucial part of our fixed-income investment process is to undertake analysis of environmental, social and governance (ESG) factors which could have a material impact on an issuer’s credit risk, and to engage with companies on these topics either to find out more information or to encourage positive change.
Background: the start of a journey
Iceland Foods is a private company, and as such is not subject to the same mandatory ESG disclosure requirements as its public peers, nor did it regularly engage with investors on ESG topics – in fact, we were the first investors to ever engage with the firm on such topics in 2018.
As a food retailer, the company has a wide range of environmental and social impacts, ranging from deforestation in its supply chain to workers’ wages. Its family-run private company status also brings with it governance considerations that investors must take into account.
Finally, as a prominent name in many high streets across the UK, its high-profile status has often made it a target for negative attention in an environment where consumers are increasingly aware of the environmental impact of the foods they buy. The Covid-19 pandemic has only heighted consumers’ awareness of the impact that supermarkets have on their everyday life.
As a small private company, Iceland has historically lacked the resources of its larger, public peers, and therefore developing a holistic sustainability strategy which touches every potential environmental or social impact the company might have has not been the priority.
First round of engagement: palm oil, disclosure and banned Christmas ads
Historically, Iceland has chosen to tackle individual causes in a highly public way, often far ahead of the industry, starting with artificial colours and preservatives in the 1980s, genetically modified foods in the 1990s, and, more recently, plastics and palm oil.
In 2018, Iceland pledged that it would remove palm oil from its own-brand products (around 450 products in total), and the company released its orangutan Christmas advert stating this decision, which was subsequently banned (and thus of course went viral), attracting both praise and criticism from different corners. While there has been a global movement to try to develop a sustainable source of palm oil, many at the time viewed this as ineffective and highly bureaucratic.
Our initial views on this announcement were not clear-cut. We would usually expect to see a company working with industry groups to try to tackle issues such as this. Added to this, we feared the environmental impact of switching to other oils might not have been sufficiently considered. More generally, we were also concerned this could lead to accusations of ‘greenwashing’, especially as Iceland was so vocal on this particular topic yet notably quiet on others. It lacked a formal comprehensive sustainability strategy.
We therefore opened a dialogue with the company in order to better understand the company’s rationale for choosing to boycott palm oil, and what efforts it had made to understand the environmental impact of replacing palm oil with alternatives, as well as the consumer response.
Throughout all our engagement activity we have also urged Iceland to communicate its other sustainability-related efforts to all stakeholders and, where no efforts existed, to develop a strategy which incorporated clear, time-bound targets.
We were highly encouraged on the outcomes of these engagements. On palm oil, we were comfortable that the company is justified in its approach, and that the decision to remove palm oil was taken with sustainability in mind, rather than just commercial interests. The company felt it could have a significant impact on the industry by raising awareness. This has certainly been effective, bringing an unfamiliar issue into the public consciousness. In fact, in the weeks that followed the launch of Iceland’s campaign, online searches for the term ‘palm oil’ increased by 10,000%.
Stakeholder communication and the development of a more holistic sustainability strategy are two areas on which we have seen impressive progress over the course of our engagement. Over this period, the company launched and continues to refine a dedicated sustainability website that outlines its approach and ambitions on a wide range of material environmental and social factors – information that was notably missing from the public sphere, and which was leading to regular accusations of hypocrisy in the press. Furthermore, we were delighted that in 2020 the company announced time-bound targets in relation to material topics such as plastics, food waste and carbon emissions.
The next stage: governance and healthy food
Building upon our previous successful engagement and our constructive relationship with the company, we continue to highlight topics where we want to seek further information or to influence improvements.
Following a change of shareholder structure, in which Brait (an investment group) exited its holding, Iceland appeared to have reverted to being a more private company. Given that corporate governance is also a focus for us, we therefore spoke to management to ensure there would be no change in its strategy or sustainability initiatives. The company reiterated its commitment to its ‘Doing It Right’ plan and now sees itself as a family business once again. Iceland believes it can increase its scope of sustainability initiatives and as a small private company it can move quickly and implement changes even where it does not generate a profit.
In addition, we flagged our concerns regarding the lack of any independent board members and explained our belief that more diversity and external scrutiny would be beneficial for all.
Going into 2021, it was clear to us that the current food system is unsustainable – both from an environmental and a social perspective. Our aim is to achieve improved nutritional content of food without placing a greater strain on the environment, as well as access to affordable, nutritious and sufficient food for global populations. We have been working alongside ShareAction’s Healthy Markets initiative, which focuses on improving the health of society and view a collaborative approach as an effective way to engage with companies.
In assessing the UK’s supermarket landscape, and with growing regulation on the topic, we flagged Iceland as a relative laggard on the topic of nutrition. Many of its peers, which we were also engaging with, have set public targets on the proportions of sales from healthy food and drinks. We were concerned that Iceland could be more exposed to changing consumer tastes and potential regulatory change.
It was positive to hear from the company that it was actively involved in the UK government’s National Food Strategy around restrictions that are set to come into place on foods that are high in fat, sugar and salt (HFSS). Iceland has now evaluated its own product line and has set reformulation/redevelopment plans for the products that score badly on a healthy basis. We were also encouraged that the company is investing in alternative protein products and has created its own vegan brand.
Iceland has continued to improve and develop its stakeholder communication over the years, culminating with the company hosting its first ESG day in October 2021. Here the company presented on numerous sustainability efforts and positively announced it would report on healthy food sales, as we had encouraged through engagement on nutrition. The increased openness and further insight into the business was welcomed by all and should help in growing the business’ reputation. We believe that Iceland has been doing significant constructive work, but it has not communicated this effectively externally.
The need to democratise sustainability is a topic that Iceland believes very strongly in and is driven from the very top of the business, with Managing Director Richard Walker also sitting on the UK government’s Council for Sustainable Business. However, providing healthy, environmentally and socially friendly products at an affordable price for the company’s core low-income consumer is a difficult task. Very often, sustainably or ethically produced food items cost much more, putting them out of reach of some consumers.
While we commend any business that seeks to lessen its environmental and social impacts, as bondholders these sustainability initiatives also raise concerns that Iceland would either have to pass on this cost to customers, potentially leading to a drop in sales, or have to absorb the cost itself, lowering margins. These factors would all affect its ability to pay back its bondholders. However, Iceland believes that, through innovation, collaboration and experimentation, this cost-versus-sustainability dilemma can be overcome.
Conclusion and future plans
Our engagements with Iceland over the last four years have helped us form our investment case for the company. We have pushed it towards more transparent and thorough reporting of its sustainability initiatives, encouraged it to take a more holistic approach to its environmental and social impacts, and understood more deeply its business rationale and commitment to sustainability. Crucially, we have also become more comfortable that such initiatives will not negatively affect its ability to pay back creditors such as ourselves.
Our work with Iceland is certainly not complete, and we will continue to hold it to account on its promises so far. We have witnessed its sustainability strategy mature, and, in turn, we have also raised our expectations and focused in greater detail on more specific areas. A topic on which we have already started our next engagement process is Iceland’s living wage effort and the pay of frontline staff. This is especially pertinent now, given the cost of living is rising sharply owing to high inflation and the post-pandemic realisation of the ‘essential worker’ status of many low-paid workers.
Newton Investment Management Ltd (NIM) will make investment decisions that are not based solely on ESG considerations. Other attributes of an investment may outweigh ESG considerations when making investment decisions. The way that ESG considerations are assessed may vary depending on the asset class and strategy involved. The research team performs ESG Quality Reviews on equity securities prior to their addition to NIM’s Research Recommended List (RRL). ESG Quality Reviews are not performed for all fixed income securities. The portfolio managers may purchase equity securities that are not included on the RRL and which do not have ESG Quality Reviews. Not all securities held by NIM’s strategies have an ESG Quality Review completed prior to investment, although since 2020 it has been a requirement for all (single name) equity securities to have an ESG Quality Review before they are purchased for the first time.
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Newton manages a variety of investment strategies. Whether and how ESG considerations are assessed or integrated into Newton’s strategies depends on the asset classes and/or the particular strategy involved, as well as the research and investment approach of each Newton firm. ESG may not be considered for each individual investment and, where ESG is considered, other attributes of an investment may outweigh ESG considerations when making investment decisions.
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