Coca-Cola and Pepsi face investors’ bubbling health concerns

Today I take a dive into health-related shareholder proposals, which have been on the rise in recent years. Some activists argue that the health of workers, consumers and the public at large poses a financial risk that companies have failed to digest. But it’s not yet clear that activist investors have worked out how to persuade corporate boards that health risks are financially material.

Also in today’s edition, Simon has an update on the ongoing firestorm at the Science-Based Targets initiative, and the battle over the organisation’s stance on offsets.

Thanks for reading. — Lee Harris

shareholder proposals

Health risks in focus at annual meetings

At their annual meetings today, Coca-Cola and Pepsi will hold votes on shareholder resolutions on health risks — part of a sustained push from some asset managers with implications far beyond the fizzy drinks sector.

The beverage companies face demands from two of the largest US hospital chains to evaluate their use of artificial sweeteners such as aspartame. Coca-Cola has also been asked by the non-profit group As You Sow to assess whether some US states’ restrictions on abortion and medical care for trans people could affect employees and, by extension, the company.

Also up for discussion this proxy season is whether workers in casinos should be protected from exposure to second-hand smoke. US hospital chain Trinity Health has filed resolutions at US casino operators Boyd Gaming and Bally’s to consider extending pandemic-era restrictions on smoking in gambling halls.

UK-based Legal & General Investment Management, which supported a recent health-focused resolution at Nestlé, is among the major asset managers emphasising health this AGM season. LGIM, UK-based Schroders and Japan’s Mitsubishi UFJ are among more than 40 investor signatories to Long-term Investors in People’s Health, an initiative launched by the non-profit ShareAction.

The focus on health issues, including politically contentious topics such as reproductive health, could test the limits of ESG strategies at a time when expansive claims about systemic risk are receiving pushback.

Critics say claims about systemic risk are drawing a shrug from most shareholders. If it can be a struggle to show that carbon emissions are financially material, it may be even more of a stretch to demonstrate that population health feeds through to quarterly returns.

Proponents argue that an unhealthy population can damp economic growth, ultimately weakening returns for diversified asset managers. They also cite growing risks to companies from regulatory scrutiny and consumer appetite for healthier products.

“There are way more sugar taxes than carbon taxes,” Simon Rawson, director of corporate engagement at ShareAction, told me.

“It’s not the healthcare system that’s going to fix the sick population; it’s all the social determinants of health,” he added, referring to factors such as living and working conditions, where he said employers could help raise standards.

Fake sugar under scrutiny

In its filing on soda companies’ use of artificial sweeteners, the Interfaith Center on Corporate Responsibility, a coalition that coordinates investors, cited the World Health Organisation’s International Agency for Research on Cancer, which last year classified aspartame as “possibly carcinogenic”.

The US Federal Drug Administration has disputed that finding (it first approved the artificial sweetener in 1974), noting that “aspartame is one of the most studied food additives in the human food supply”. Japanese and European food safety regulators also approve the use of aspartame. In a proxy statement opposing the filing, Coca-Cola pointed to widespread regulatory approval.

But ICCR maintained that “without stronger evidence” about health effects investors will continue to see the use of artificial sweeteners in Coke and Pepsi as “creating systemic financial risks”.

“It is true that the science isn’t there yet,” Meg Jones-Monteiro, senior director for health equity at ICCR, told me, arguing that companies should exercise caution in the absence of a clear scientific consensus.

Indulgent products

In their resolution at Nestlé, LGIM and Luxembourg-headquartered Candriam took a different tack, arguing that the world’s biggest food company by sales is not delivering on its public commitment to make its offerings more nutritious. That could expose Nestlé to regulatory, reputational and legal risks, the resolution suggested.

In a video message to shareholders, Nestlé’s chair Paul Bulcke said that ShareAction, which co-ordinated the proxy filing, was asking the company to “disengage from indulgent products”.

“This is wrong,” he said. “We have always been helping consumers make informed choices as part of a balanced diet. Of course, this also includes enjoying moments of indulgence, with our good chocolate, for example.”

Nestlé last September announced an effort to boost sales of more nutritious foods 50 per cent by 2030. But according to ShareAction, that target is in line with Nestlé’s forecast growth of 4 to 6 per cent per year for its overall food business, implying little or no change in the overall nutritional mix of products.

In a statement to shareholders, the KitKat owner retorted that its diverse product lines boost research, which in turn “supports growth within the more nutritious segment”. In other words, it suggested, sales of less healthy products can help finance the development of healthier foods.

ShareAction also said that Nestlé was not complying with Health Star Rating, a nutrition grading system the company has voluntarily adopted across its global portfolio. According to ShareAction, it has incorrectly counted two of its fastest-growing product categories — coffee and “specialised nutrition”, such as baby food — as nutritious.

“We aren’t making a judgment pro or against coffee. All we’re asking is that they apply the methodology as written,” Rawson said. “Danone does this, Unilever does this, but Nestlé has decided it wants to shoehorn some of its biggest product categories into the Health Star Rating.”

In April, 88 per cent of shares were voted against the proposal. Rawson said it could still be a “leading indicator” of more pressure to come. (Lee Harris)

corporate climate targets

SBTi strife: Unhappy advisers fire a warning shot

When the board of the Science-Based Targets initiative last month announced a major change to its stance on carbon offsets, it set off a firestorm within the organisation and far beyond. A new letter to the board, from several official advisers to the body, suggests that fire is still burning.

SBTi’s internal protocol states that such a change to its standards should only be made after SBTi’s internal experts and external advisers have conducted a rigorous process.

Since then the board has issued two “clarifications” to its statement — calling it a “strategic steer”, and stressing its respect for SBTi’s standard operating procedures. But the original statement still stands unretracted — with its declaration that “SBTi has decided to extend” the use of environmental credits by companies to offset carbon emissions, under its widely followed net zero standard.

Now, several members of the SBTi’s external advisory groups have sent a letter to the board, which has been seen by Moral Money, urging it to formally withdraw the statement. The letter states that, while the board has now declared that the SBTi’s position on offsets will not change until the ongoing formal process is complete, its refusal to retract the statement is undermining the integrity of that process.

“Given the original statement has not been withdrawn, it is hard to see how the board is not treating the decision as a fait accompli, which it should not be,” they wrote.

In an email response to my request for comment, an SBTi spokesperson said that the body was “fully committed to its technical procedures and governance rules. No standards have been changed and any changes will be the result of a rigorous process of research, consultation and independent technical review and approval by its technical council.”

The spokesperson added that advisory group members periodically contribute expertise but “do not constitute part of SBTi governance structure, unlike the technical council, which is an independent body responsible for technical decision-making”.

Sceptics of carbon offsetting warn that the impact of “avoided emissions” carbon credit schemes are often exaggerated, and that allowing companies to count offsetting towards net zero goals could reduce their incentive to reduce their own emissions.

Others see carbon credits as a key tool in the global climate fight — including SBTi’s major funder the Bezos Earth Fund and former US climate envoy John Kerry, both of whom encouraged the SBTi to be more open to offsets.

The new letter was signed by seven members of the technical and scientific advisory groups, including Holger Hoffmann-Riem of Swiss non-profit Go for Impact, Mary Stewart of consultancy Energetics, and Saphira Rekker of the University of Queensland. All were writing in their capacity as SBTi advisers.

The letter noted that legal advice had been sought “from within our number” from a specialist firm advising on charity law. It also suggested that the reputational damage to SBTi means the board must now file a “serious incident report” to the Charity Commission of England and Wales, where SBTi is legally incorporated. SBTi did not comment on this suggestion.

“You can only have credible standards if there is a credible governance process,” Hoffmann-Riem said. (Simon Mundy)

Smart read

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