Podcast transcript: Prioritizing the planet: benefits of building a more sustainable food system
25mins 29sec | 10th Nov 2023
Hi there, and welcome to Food System Reimagined, an EY podcast that brings you valuable insight into our rapidly changing food system. In this three-part series, we speak to food industry executives about how brands can provide value in a food system that's being reshaped by consumer demand, planet-friendly initiatives and increasingly connected ecosystems. I'm Pamela DeLoach, a B2B food and restaurant expert. Sit back, and we hope that you enjoy. With the rapid reimagination of the food system, executives are navigating a multifaceted challenge that transcends traditional business boundaries. The food industry’s critical role in our planet's health is undeniable. The urgency for companies to deliver on corporate and social responsibility is more evident than ever. Yet, the food system operates within a backdrop of evolving regulations, disruptive economic challenges and fragmented consumer demand. Balancing regulatory, economic and consumer-centric factors has become a formidable task for food industry leaders implementing sustainability initiatives. However, the ones that are doing it right and leading the pack are those who view this challenge as an opportunity to evolve, rather than a box to check on an annual report. In our last and final episode of Food System Reimagined, we'll shift our focus towards a pressing question: How can food businesses thrive by prioritizing the planet? We'll be diving headfirst into the nuances, scope and strategies of corporate planet-friendly initiatives and the rewards for food businesses doing it right. We'll be joined by David Shaw, the ESG Director International at The Kraft Heinz Company, and Alison Banks, Managing Director in the Food and Beverage Sector at EY-Parthenon, Ernst & Young LLP, to discuss how they are making the planet a top priority to drive long-term value for stakeholders, consumers and the environment through reimagining operations, building more sustainable value chains, and creating products and services that are both loved by the market and have positive impacts for the planet. Why is a planet-friendly strategy for food companies no longer optional? How is pressure for a planet-friendly strategy changed in the last 10 years?
Oh, I love that question. I spend a lot of my working day trying to build a planet-friendly strategy. We have to recognize food is at the center of everyone's day-to-day lives. So naturally, it has a big impact from an environmental and a social perspective. I think for the majority of food companies, it's become a lot clearer over the last decade, on the five big societal impacts of the food sector, whether it be packaging, obesity, greenhouse gas emissions, human rights and, particularly, biodiversity loss. So as a consequence, food companies are increasingly aware of the critical role they need to play in mitigating the societal issues, and particularly climate change and addressing the destruction of nature. ESG is no longer a nice to have; it's a must do or business imperative perhaps. So there's pressure that comes from all directions: packaging standards, greenhouse gas emissions, human rights concerns, on top of future regulations or legislative pressures, and increasingly, an awakening of consumer expectations. But we don't need to go it alone. We're building strong internal and external communities of critical friends and collaborating around sustainability issues by participating in coalitions, trade associations, maybe conversations with NGOs or ongoing dialogue with investors. So when it comes to planet-friendly strategies, like achieving net-zero greenhouse gas emissions, it's really an onion, just sort of peeling back the layers as you go on this journey of discovery.
I think that's so right. And I absolutely echo that sustainability is really a growing business imperative for all companies that are relying on and impacting natural resources. David, you hit on it: concerns over pollution, emissions, waste, biodiversity loss, all of those things have been in evidence for decades. But now those concerns are really translated into action at an exponential rate. As individuals, we've all been impacted in 2023 by weather and climate, be it wildfires, floods, extreme heat, more than in any other year. So people have really been feeling it quite acutely. Meanwhile, companies’ right to operate is really being pressured by gatekeepers like governments and regulators, as well as by consumers, and sustainability standards are becoming much more extensive. Regulators are requiring deeper traceability. Companies can't use Band-Aid approaches to sustainability any longer. And with that growing scrutiny on their role in addressing the environment and social outcomes, food companies really require a deeper strategy, with real commitments to which they'll be held accountable. And as a result, I'd say we've arrived at a sustainability tipping point that's being influenced by a range of different stakeholders, being consumers who are seeking sustainable products; employees who want to work for mission-driven organizations; regulators imposing a duty of care on companies to disclose their actions; investors who say ESG information plays a pivotal role in making investment decisions; and by supply chain partners whose companies rely on for resource, quality and availability. I think the good news of all of this is that there's a real opportunity for the food system to be part of the solution. In fact, we've seen focus and awareness on sustainability. It’s one of the single greatest innovation opportunities for food companies, regardless of where they sit in the value chain, be it business model innovation, portfolio innovation, commercial or supply chain innovation. And investing in those sustainability solutions now is really critical to building that long-term competitive advantage.
Yeah, Alison, that's so true. Sustainability is one of those greatest innovation opportunities for us. When it comes to consumer, we see a larger group than ever before, aware of the planetary impact, but currently only a relatively small group of consumers acting on it. That's clearly going to change over the next decade. So we really believe that to create real change, we must create, first, bold ambitions and innovations to drive progress in many different areas where innovators find new ways to solve complex problems like packaging, waste, nutrition and reducing our operational footprint as a consequence.
Yeah, and I think the consumer point is really interesting. You know, today, you could argue that the most immediate pressure is coming from regulators. I suspect the next wave is likely to come from customers. And then finally, consumers, particularly as Gen Z becomes the primary consumer group. And I think this is, really, almost the trap that food companies need to watch out for: not positioning for that coming consumer demographic shift. EYs Future Consumer Index tracks Gen Z consumers. And what we've seen pretty consistently over the last four years, if the Gen Z does care about the environment, in any number of ways that we measure it, it's the generation where environment and sustainability factors are one of the key purchase criteria for any product. And we haven't seen that change. So, you know, it's really becoming ingrained in their purchase habits. And by 2035, Gen Z will be the primary consumer group. So all companies are going to have to figure out how to reach them over the next decade. And if they don't pose a real risk that sales could fall off a cliff in the future. So what are some of the ways in which sustainability is being redefined by the food industry?
Yeah, it's a difficult question to answer in that it implies that we all have the same definition of sustainability and that we're all moving in the same direction. In reality, different players across the food ecosystem have different starting points and are thinking about it in different ways. You know, certainly there's many leaders who are on a natural evolution. But there's others who are starting from further back. The fast followers are thinking about how the ceiling is changing and what excellence looks like. The laggards might be looking upward and seeking to understand, how big is the gap? And is the floor or the minimum requirements coming up? But I think on the flip side, it's helpful to think about what hasn't changed or been redefined, which is the fact that producers have always been and are still, in many ways, the best stewards of our land. They have the deepest understanding of the crops and their products. You know, we often treat sustainability as a new question because there's greater focus from people and companies whose primary interaction historically is the consumer. Farmers have been working on this for decades. They've long recognized the impact of inefficiency on their bottom line. The challenge is that many of the sustainability interventions in the market today don't align with those farmer producer priorities around profit, around effort and around risk. You know, certainly farmers want greater profits, but they can't take on the increased effort and risk to achieve them. So the question we really need to solve for as an ecosystem is how can other actors in the value chain support farmer-producers to make it pencil out for them?
I think it's very easy for people to underestimate the scale of the food industry, both in terms of its impact but also the space that it occupies within that value chain. As we've started unpacking our big sustainability commitments, and particularly things around net zero and greenhouse gas emissions, we've really come to understand how wide that impact potentially is. Ultimately, everything we deliver, all of our beloved products, all the products in your homes, come from nature, and to help us really reach those ambitions, there's increasingly a requirement for food companies to have a direct line of sight, from head office all the way down to the farms and the growers. This requires us to really forge a much closer connection with those on the ground. This introduces choices around localization of sourcing and shortening the value chain. We also need to predict the impact of climate change when you think about some of the challenges consumers have had to deal with in the last couple of years. We can't ignore inflation, and a lot of the inflationary pressures are stemming from the results of climate change, whether that be security of supply, whether that be energy security. And as we understand our value chain more, we can then adopt appropriate strategies, including sort of diversifying those sourcing regions to increase resilience of supply and implement concrete actions for both climate change mitigation, but hadn’t the adaptation required, as well as protecting biodiversity. We've really reduced the real cost of food over the last century, and we need to protect these elements to maintain the low prices. It's also great to see this real movement towards regenerative agriculture for food companies. It's so important to have that connection throughout the value chain. And it has a real potential to address water use, greenhouse gas emissions and, of course, biodiversity. At Heinz, we recently kicked off our regenerative agriculture initiative. But to really place the emphasis on soil health in our communication with consumers, we recently created a map within the online game Fortnite, highlighting the speed of soil degradation and the risk of future crop production. I think creating these authentic connections with brands to talk about the activity helps drive awareness for consumers beyond the standard sort of corporate communications that we have to deal with.
David, I think regenerative agriculture is a great example of the coordinated and collaborative approach that companies across the value chain need to take. Input companies need to meet farmer and producer needs. They face questions around how they can capture value through the carbon market; how they can work with downstream value chain actors. Producers, in turn, are trying to support land stewardship but face questions around what tools and technology will be required. How are they going to finance those investments? Are they going to pay off in the short term, in the long term? Processors and manufacturers need to achieve their greenhouse gas and climate targets while meeting changing consumer demands and therefore need to consider how to ensure suppliers are producing sustainably and how to drive willingness to pay among consumers, and it goes on. It really emphasizes how linked the agribusiness ecosystem is today.
Yeah, definitely. So we talked about, you know, we know that the sustainable sourcing of ingredients is a critical aspect of reimagining the food system. Wondering what strategies can food companies adopt to ensure transparency and traceability throughout the supply chain, building trust with both consumers and regulatory authorities? So one of our founders, Henry J. Heinz, famously noted, “protect the consumer by owning the product, all the way from the soil to the table.” And this is a motto that Heinz still lives up to today — 150 years later. He was a staunch believer in the importance of transparency in our food value chain, so much so he introduced the first transparent bottle at a time when food adulteration was rife. We're also uniquely placed within the supply of our own Heinz tomato seeds, so that we can engage with our growers and suppliers throughout that to develop partnerships and conversations to advance our sustainability commitments. We know that ingredients we source are integral to our business, and to the wellbeing of our consumers and the communities in which we operate. One of our commitments is to purchase 100% sustainably sourced Heinz tomatoes by 2025. And we're currently around about the 70% area. In addition to transparency and traceability, we have a very strong guidance for our suppliers through our supply guiding principles, where we look to build trust with consumers and regulatory authorities by reporting progress in our annual ESG report. But the food system has becoming incredibly complex and we cannot take traceability for granted. For example, when we look at traceability of palm oil, it tracks back to over 7,000 mills. So the level of work within the food system required to create this level of transparency across all ingredients is huge. And after all, 80% of the food we consume is grown by small holders or family-run farms. I think
David's examples are great. And I think it really reinforces the importance of end-to-end integration and engagement and greater levels of data sharing across the value chain. You know, this data element, or call it the physical digital disconnect, it's really the sticking point and the challenge that needs to be overcome as we think about transparency and traceability. David gave great examples. Most food manufacturers don't buy directly from the grower but rather from their intermediaries. Some are better than others in their ability to trace back to the source. The so-called first mile, from a data standpoint, can be elusive or difficult to capture consistently across each step of the value chain. So you have to get everyone agreeing on the metrics and have the technology and the discipline to capture the data required at each step. And that's a really complex problem. Companies historically have tended to add headcount rather than digitizing in areas like planning and demand forecasting and procurement teams. And that data is scattered across employees and spreadsheets. Those that have digitized often have disparate systems across the business that aren't speaking to each other, and externally, producers have varying levels of data sophistication and intermediaries are aggregating products from vast sources of networks. So I think this challenge really opens the door for new business models that will create the needed visibility, the verification across an ecosystem of disparate systems, different business units, different supply chain partnerships.
Speaking of challenges, companies also have the challenge to prioritize consumer needs, produce sustainably and still deliver affordable products. How can businesses actually do this effectively? And how are we seeing companies make these decisions?
I'm really glad you asked this question. Having worked in sales and promotional teams, and across supply chains as well, I think it's really important that everything we do comes down to a business case. And grounded in that rationale, both myself and Alison mentioned earlier that ESG is a business imperative, but it has to come down to actually advancing the cause. There's not a blank check to do what's required just because it's the right thing to do. It has to have the strong rationale and measured progress and outcomes to drive improvement. So when building a business case, it's really important to address the key sustainability factors. And I find it absolutely crucial to pivot from simply reporting the costs of initiatives to really looking at the return on investment. What does that mean, both in terms of value but also improvement on those outcomes. And consequently, always asking ourselves what value will be generated for the business?
Yeah, I think that's right, David, it's all about achieving those business objectives without sacrificing future prosperity. And that's really become crucial to success. I think, unlike sort of traditional or historical sustainability strategy, in which there were a lot of outside-in pressures from regulators and investors and NGOs, and having those dictate strategy, I think the future of sustainability involves more of an inside-out approach if identifying how sustainability trends just like any other geopolitical or socioeconomic trend might directly impact the business. Whereas traditionally, sustainability and value creation have been treated as two different worlds, the opportunity going forward for companies is to reframe that goal, and to really ask themselves, how do we use sustainability as a lever to amplify both short-term and long-term value creation. And in doing so, sustainability does become a value driver rather than just a cost center. And I think what we've seen in terms of the business case, you know, there's really five core value creation levers or places that we would want to look for ROI from sustainability initiatives. There's certainly the revenue upside potential that comes from new revenue streams, or increased market share or higher consumer willingness to pay, but there's also cost synergies or efficiencies for more efficient operations. There's capital and tax impacts, from access to sustainability incentives. There's talent and the increased engagement and productivity from employees who are working for a mission-driven organization. There's digital impacts, certainly from greater automation. But also on the flip side, there's a real value erosion risk to underperformance in ESG, whether it's lost revenue potential, costs associated with unsustainable operations, fines and fees due to noncompliance and labor turnover costs.
Yeah, I think that's a brilliant point, Alison. Resource and capital allocation is no less important, consideration and sustainability than anywhere else. Arguably, it's more important as we have so much to tackle. And to your point, creativity loves constraints. Bringing clarity and commitment to sustainability goals helps foster that creativity in a way that even can create value for all parties, whether that be through outright savings, or whether that's through growth and market share performance. Realistically, we've lived through a stagnant 15 years since the financial crisis. And the inflation that we're recently experiencing is probably not something that's going to go away anytime soon, particularly if we don't address some of the challenges that we have from a climate perspective. We're seeing this come through in many different forms for our business. And if I give the example in terms of crop performance, we've seen tomatoes, particularly, very badly hit in certain areas of southern Europe and California, creating huge cost pressures. And we're seeing this come through in various forms day in and day out. We have to ask ourselves, if now's not the time to act, when will we? What are the opportunities that we have to really drive difference?
That's a really good question. You both just mentioned ESG roles, and ESG leader roles at food companies have transitioned from being traditionally back-office functions to becoming more front office and integrated with commercial business units. How has this shift impacted the decision-making process and overall success of sustainability initiatives?
So my own background is almost entirely commercial with a small detail-oriented supply chain. But this gives me a really broad perspective to link ESG to business priorities and processes. When I transitioned into this role, they made it for me around about two years ago, it's the first time we'd had a role within the international business. And my own perspective was, you need somebody with an ESG background. And what I really came to realize since they originally offered me the role was that internal expertise sits in house. There's huge capabilities if you want to drive packaging change. The R&D team for packaging are the most passionate about it. If you want to drive changes in nutrition, the nutritionists are the people who are going to want to make the biggest difference. And it's true within all aspects. You've just got to find a way to connect people and bring those decisions to the right decision-makers and understand where those opportunities lie. I suggest that these transitions are probably a perfect example how ESG is increasingly seen as a commercial imperative, not just in the bottom line but also in those growth strategies. And my role intentionally sits at the intersection of ESG and corporate strategy, being part of both the global ESG team, but also sit in on our international growth team. So that's connecting with the brands and R&D to really drive change in our corporate strategy. I think the changes that we're seeing really bring opportunity, and the categories in which we operate change all of the time. Consumers change. And of course, the climate is changing. This change is the only true consistent. It's always going to happen. And it's really incumbent on business leaders, whether they be ESG or otherwise, to see where we can bring competitive advantage by adapting to change more quickly and more effectively than our peers, whether that be in a product offering or cost savings. And I think ESG has to become embedded in the DNA. It's far too big for one organization or one function to solve alone. It has to be embedded into every facet of business and work in partnership and coalition throughout the whole value chain.
I couldn't agree more with David, what you just said. Sustainability is everybody's responsibility. Everyone's help is needed to drive lasting change and create value. And the role of sustainability leaders, as you noted, is indeed undergoing a transformation, with a notable pivot towards having a much greater role in setting or influencing sustainability strategy and specific initiatives. Sustainability initiatives are unique in that they generally require support and buy-in from a wide range of individuals. And this mission really requires ESG executives and their teams to be much more integrated with their organizations than they've potentially ever been before. Commercial and growth functions need to incorporate sustainability practices into the R&D pipeline and maintain consumer positioning to improve equity. Supply chain needs to be incorporating and supporting ESG priorities across make-move-buy. IT and digital needs to be enabling tracking systems to ensure transparency from farm to shelf and support auditability. And finance and everyone else has to be thinking about how we're going to meet external capital expectations on ESG and thinking through the budgetary and tax impacts of investments and commitments. So to make this a reality, everyone needs to be speaking the same language and building that language and that vocabulary to talk about this, as an industry. And even within specific companies, you know, it’s really challenging, and it's going to take time, but it does create a lot of opportunity, as David said, and I think whoever cracks this and really is the first mover in creating a level of internal coherence around sustainability will not only create a virtuous cycle of competitive advantage but will also avoid the costs or the risks of being slow to move.
When we looked at Alison, that consistency of approach. We have a mantra as a team to be science based and consumer noticeable. That means we're really guided in our decision-making by the empirical evidence. And we try to commit to actions that are big enough or material enough to talk about them with consumers, investors, governments, to really drive change. The rest of our business is very consumer obsessed. But I think this is the one area where we try to let science be that one consistency in all of our decision-making efforts.
Yeah, and I would offer an analogy: I think digitalization’s effect on business is a great analogy for how sustainability will disrupt the business landscape in the future. I think a few years ago, everyone needed a digital strategy. Now no one even talks about it. It's really inherent to companies and how they're creating value and how they're operating. Most of us, frankly, can't imagine a non-digital world. But that's where sustainability is going. No one will want to be the company where sustainability is always a cost center. Companies are going to build sustainability into how they operate, how they commercialize products, how they create value. And it will be integral to the DNA of the business as you said David. They won't do it because somebody told them to or because they had a KPI to hit, but because they see value from a value creation lens and it makes their life easier and not harder. And sustainability will really be another lever to pull on to drive competitive advantage.
Well, I think that's a great note to end on. Thank you so much. Thank you both for being here to share your perspectives on building a more sustainable food system.
Thank you. It's been a pleasure. Thank you.
Thank you to our guests, David Shaw and Alison Banks, for their time and insights today. David Shaw is the ESG Director International at The Kraft Heinz Company. And Alison Banks is a managing director in the Food and Beverage Sector at EY-Parthenon, Ernst & Young LLP. If you want to hear more like this, make sure to subscribe to Food System Reimagined on Apple podcasts, Spotify or your podcast app of choice. You've been listening to Food System Reimagined, an Ernst & Young LLP production. This episode was produced by Clara Shannon, with audio production by Kieron Banerji. Thanks for listening.