Wednesday 15 March 2017 9:56 am

The deadly risk of sugar: It's time investors reassessed food and drinks companies

In a year where major political earthquakes have moved markets and dominated the news agenda, it’s easy to overlook an investment risk posed from a more mundane source. Overconsumption of sugar, an everyday household item, has consequences both for businesses and their investors that could leave a bitter taste.

In 2014, more than 1.9bn of the world’s adult population were classified as overweight and an estimated 41m children were overweight or obese. According to the World Health Organisation (WHO), global obesity has more than doubled since 1980. This has huge implications for life expectancy, and health and wellbeing.

When it comes to causes, a large proportion of the blame was initially directed at our increasingly sedentary lifestyles and high fat diets.

However, over the last decade, overconsumption of sugar has emerged as a major area of concern in the obesity debate. The costs to society have become so great that governments in affected countries have been forced to act, translating into regulatory actions such as the UK government’s high-profile “sugar tax” on the soft drinks industry.

As the increasingly clear impact of the world’s obesity problem has become more of a policy and governmental issue, so too is it becoming clear that exposure to sugar could be a material risk to the financial performance of many of the world’s largest companies.

There are three main catalysts that could trigger lower sales, put pressure on margins, and potentially expose companies to expensive legal disputes: one, consumer and public health awareness; two, healthcare burdens; and three, scientific consensus linking free sugar intake to ill health.

Arguably, the first two have already been triggered. The UK is in the midst of a shift in consumer behaviour when it comes to eating “well”, with sugar intake at the very front of people’s minds. But beyond notoriously fickle consumer tastes there is a growing awareness of the massive cost burden imposed on healthcare services by poor diets. In announcing its landmark Childhood Obesity Strategy in 2016, the UK government stated that the NHS spent over £5bn treating overweight and obesity related ill-health in 2014-15.

But there is also an increasing risk of litigation against food and beverage companies. Emerging scientific evidence combined with the awareness of healthcare costs could see state level actions against sugar consumption targeting the food industry in the US. Such state level actions to recover healthcare costs were key in the fight against the tobacco industry.

The parallels with the tobacco industry can be overstated, however. While we can survive without cigarettes, we cannot survive without food, and there is significant opportunity for businesses to reinvent themselves as healthy food companies.

That’s why investors are pushing big brands to do better, to spend more on R&D, and reformulate their portfolios. Some major brands have already reformulated products to promote reduced sugar intake and ultimately safeguard their business from taxation. For example, AG Barr announced this month that it would accelerate its sugar reduction programme so that 90 per cent of its brands would fall below the threshold for the UK Soft Drinks Levy.

The right attitude

Reformulation and innovation is the right approach, turning a risk into an opportunity. In conjunction with Schroders, we have developed a formal set of investor expectations aimed at supporting engagement on the risks and opportunities posed by excess sugar consumption, and providing a common set of guiding questions.

By building a framework for gathering information and setting baseline expectations for companies to follow, we hope to raise the profile of sugar-related health concerns and seek to identify leaders and laggards in the relevant sectors. We are also aiming to encourage more consistent reporting of sugar-related risk by companies.

As voluntary efforts such as the Public Health Responsibility Deal of 2011 have stalled, the pressure on companies from investors to respond has been increasing. Even the UK government’s long-awaited childhood obesity strategy was met with widespread disappointment from policymakers. Investors, however, are now armed with the tools they need to conduct rigorous, ongoing engagement with the industry. Through this work, corporate accountability on sugar-related obesity will be greatly increased, and management of risks can be assured. Companies that follow these guidelines will help ensure they keep the patience and trust of their investors. Those that don’t run the risk of facing problems far more damaging than tooth decay.