Foundational Shift in Business Models
Using the recently implemented sugar tax as an example to demonstrate efficacy of an environmental, social and corporate governance, or ESG, framework. This is because it directly addresses the root cause of the issue, which is what a company produces and sells to individual consumers.
Our predisposition for sweet food products in combination with modern sedentary lifestyles has led to alarming levels of obesity and diabetes. So much so, there are around two billion adults overweight, of those 650 million are affected by obesity. This equates to 39 per cent of adults aged 18 or over who are overweight, with 13 per cent who are obese. The worldwide prevalence of obesity nearly tripled between 1975 and 2016.
According to the Harvard School of Public Health, consuming just one sugary drink a day could lead to a weight gain of up to five pounds per year and increase the risk of non-communicable diseases (NCDs). Obesity is linked to myriad NCDs, including type 2 diabetes, heart disease and stroke. The World Health Organisation has declared that obesity is a global epidemic impacting emerging and developed economies, since the prevalence of obesity has doubled since 1980 and is set to double again by 2030.
To address this issue, countries such as Chile, France, Hungary, Ireland, Malaysia, Norway, Philippines, South Africa and American cities such as Berkley in California as well as Philadelphia have imposed a sugar tax to tackle excessive sugar consumption. The sugar tax ranges from seven per cent and up to 100 per cent based on type of drink. However, a sugar tax is effective at reducing consumption for only certain groups of consumers, such as moderate sugar consumers. The consumption by those with a high total amount of dietary sugar is relatively price inelastic, and therefore, they don’t lower their sugar consumption in response to tax increases.
As an alternative, the environmental, social and corporate governance (ESG) framework, especially the social factors, seems to be more productive in tackling the issue of excessive sugar intake. This is because it directly addresses the root cause of the issue: what a company produces and sells to individual consumers. One example is Coca-Cola.
According to the S&P Global Rating ESG Industry Report Card for 2019, Coca-Cola, through Coca-Cola Femsa S.A.B. de C.V., reformulated its products, reduced packaging sizes and increased prices in response to changes in consumer tastes toward low or no sugar products and categories because of health concerns. In addition, the company invested in promoting nutrition and healthy habits, reaching five million people across its markets.
PepsiCo has also recognised the importance of social responsibility to its reputation. Thus, PepsiCo is helping consumers to make informed purchase decisions by making it easy for consumers to find and understand information through simplified labelling. By 2025, as part of its sustainability agenda, PepsiCo will have reduced the amount of added sugar throughout its beverage portfolio. Its drinks will have 100 calories and less added sugar per 12-ounce serving.
These companies have sustainability programs that are based on their readiness to meet the sustainability challenges of the 21st century. The programs are measured by criteria such as the ESG framework, among others. Although these companies have a major impact on obesity and diabetes, they have shown that they are committed to promoting the ESG framework. Malaysian companies shouldn’t be left behind but contribute to tackling these issues.
Moreover, the 2019 study by Bouslah et al showed that focusing on social factors to create positive outcomes, such as increasing individual health and improving social health, can improve a company’s financial stability. To make this happen, public authorities, such as the Ministry of Health and the Ministry of Entrepreneur Development and Corporative should encourage businesses to adopt an ESG framework in their business models.
A 2016 research by Chelawat et al on the correlation between the ESG performance and the financial performance of listed companies in India showed that companies with good ESG performance did better financially and their stocks did better too. This finding is supported by Harvard Business School, which found better future stock performance and higher growth in profitability for the companies that scored well on material sustainability factors.
The examples of Coca-Cola and PepsiCo illustrate how some companies use ESG framework to contribute to the society and benefit from a foundational shift in their business model, leading to more sustainable long-term economics.
Author is part of the investment research team at UOB Kay Hian Wealth Advisors
Main photo by Artem Beliaikin on Unsplash