According to data from the Ministry of Health, the annual cost of the obesity epidemic to the Israeli economy is six billion shekels. Until now, it was not the food companies that bore this cost. The cost is reflected in medical expenses, and in costs caused by absenteeism and death due to obesity-related diseases. For many years, the industry did not take responsibility for the risk it imposes on the public. But not anymore. What we are now seeing is the risk inherent in the operations of food companies coming to life: every day, everywhere in the world, a new initiative appears.
It started a few months ago when the OECD warned of the risks associated with a diet that includes processed food. In Israel, the issue gained momentum when the Ministry of Health, led by Minister Litzman, recently launched a direct attack on processed and fast food and on the companies that produce it. What began with McDonald’s and Coca-Cola has now spread to Israel’s major food manufacturers. And the public has not remained indifferent. Changes in taste have quickly reached Israeli shopping baskets, and in recent months sharp declines of dozens of percentage points have been recorded in sales of processed foods and fast-food chains – from sausages and hamburgers to snacks – alongside a significant reduction in the consumption of sugary drinks and processed salads. Aggressive discounts offered by producers of processed meats and salads did not manage to increase sales. The large-package initiative launched by Osem, reported today (June 13, 2016) as a way to address declining snack sales, might also prove to be the wrong solution to the falling demand for foods that are perceived as less healthy.
Nevertheless, food manufacturers are also trying strategies beyond lowering prices in order to respond to the public’s concern for health. As a preventive measure aimed at halting the decline in consumption of processed food, and following a similar move by the U.S. Food and Drug Administration (FDA), the media has reported that Israeli food manufacturers are soon expected to make a dramatic decision: to mark, on the front of their packaging, the problematic ingredients whose consumption may harm health. This sweeping change in food packaging is expected to cost the manufacturers a great deal of money. Since the move highlights the problematic ingredients in their own products, it would seem to run counter to their interests. Yet they, too, understand that they have no choice but to respond to the demand coming from below, before the same demand is imposed more forcefully by regulation and law from above.
In fact, we are witnessing a classic case in which the market corrects an imbalance. When insurance companies, the state, and the public are paying the costs created by food companies, they will demand that those who impose these costs take responsibility. In this case, responsibility falls on the manufacturers of foods that contribute to obesity. And as in any situation of imbalance in the market, things do not remain static forever: the rules of the game change, and in other words, the risk must be managed.
Do not think that the dramatic changes now taking place in the food market and the need to address them seriously endanger only the food producers. The circle is much wider, the risk for investors in the shares of food producers and retail chains traded on the stock exchange is increasing. The risk for the banks that provide them with credit is increasing. The risk for insurance companies that insure both the producers and the public that requires more medical services due to higher illness rates is increasing as well.
This is where the obligation of the rational investor comes into play, to look deeply and broadly at a company, and not only at its financial reports that reflect past events. Most food companies identify the change in consumer tastes and the growing awareness of health as a risk factor. However, beyond identifying the risk, it is important to understand the level of risk each company faces relative to its competitors, and what steps it takes to deal with that risk.
The level of risk depends, for example, on the ratio between fattening products and non-fattening products that a company sells. Companies that will mark 90% of their products on supermarket shelves as containing problematic ingredients will face much greater difficulties than companies that will mark only 10% of their products as such.
Companies’ efforts to reduce their risk should begin with developing a structured strategy for risk management and can include gradual expansion into other food markets or the introduction of healthier versions of their products.
Around the world, most responsible, rational investors do not automatically abandon investments in companies that produce foods that contribute to obesity. Instead, they engage in dialogue with these companies to understand how they can reduce risk and improve their practices. For example, asset managers at Robeco report on their dialogue with Danone about responsible marketing according to the standards of the International Chamber of Commerce, which prohibits marketing that promotes an unhealthy lifestyle. This type of investor behavior is intended to improve and strengthen their investments. It is based on the understanding that there are no companies that are only good or only bad, but rather trends and risks that must be managed. This approach does not label companies as good or bad but identifies areas for improvement and can promote dialogue and trust between the financial sector and the entities in which it invests, and between the public and the business sector as a whole. This trend of investors seeking to enhance their investments is already reaching Israel. The day is not far off when, instead of saying they reduced exposure to a stock because sales fell following changes in consumer taste, financial institutions will speak of having helped promote better company practices that align with market trends, public taste, and regulation.
By: Noga Levzion Nadan, CEO of Greeneye, leader of the responsible investment field in Israel.
