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PROCESSED FOODSResearch Brief
Sustainable Industry Classification System™ (SICS™) #CN0103
Research Briefing Prepared by the
Sustainability Accounting Standards Board®
June 2015
www.sasb.org© 2015 SASB™
TM™
PROCESSED FOODS
Research Brief
SASB’s Industry Brief provides evidence for the disclosure topics in the Processed Foods industry. The
brief opens with a summary of the industry, including relevant legislative and regulatory trends and
sustainability risks and opportunities. Following this, evidence for each disclosure topic (in the
categories of Environment, Social Capital, Human Capital, Business Model and Innovation, and
Leadership and Governance) is presented. SASB’s Industry Brief can be used to understand the data
underlying SASB Sustainability Accounting Standards. For accounting metrics and disclosure guidance,
please see SASB’s Sustainability Accounting Standards. For information about the legal basis for SASB
and SASB’s standards development process, please see the Conceptual Framework.
SASB identifies the minimum set of disclosure topics likely to constitute material information for
companies within a given industry. However, the final determination of materiality is the onus of the
company.
Related Documents
• Processed Foods Sustainability Accounting Standards
• Industry Working Group Participants
• SASB Conceptual Framework
INDUSTRY LEAD
Evan Tylenda
CONTRIBUTORS
Andrew Collins
Henrik Cotran
Anton Gorodniuk
Sonya Hetrick
Eric Kane
Jerome Lavigne-Delville
Nashat Moin
Himani Phadke
Arturo Rodriguez
Jean Rogers
Levi Stewart
Quinn Underriner
SASB, Sustainability Accounting Standards Board, the SASB logo, SICS, Sustainable Industry
Classification System, Accounting for a Sustainable Future, and Materiality Map are trademarks and
service marks of the Sustainability Accounting Standards Board.
• industry jargon whenever possible] • [Delete any issue categories for which there are no issues]
I N D U S T R Y B R I E F | P R O C E S S E D F O O D S
Table of Contents
Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Industry Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Legislative and Regulatory Trends in the Processed Foods Industry . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Sustainability-Related Risks and Opportunities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Environment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Energy & Fleet Fuel Management . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Water Management . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Social Capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Food Safety . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Health & Nutrition . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Product Labeling & Marketing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
Business Model and Innovation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
Packaging Lifecycle Management . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
Leadership and Governance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
Environmental & Social Impacts of Ingredient Supply Chains . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
Appendix
Representative Companies : Appendix I . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
Evidence for Sustainability Disclosure Topics : Appendix IIA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
Evidence of Financial Impact for Sustainability Disclosure : Appendix IIB . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
Sustainability Accounting Metrics : Appendix III . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
Analysis of SEC Disclosures : Appendix IV . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
References
I N D U S T R Y B R I E F | P R O C E S S E D F O O D S
INTRODUCTION
Processed foods companies play an essential role
in society by supplying consumers with affordable
and convenient sources of food that meet various
dietary needs. As consumers are becoming
increasingly busy, innovations in processed foods
have provided for an efficient source of key
nutrients in their diet.
Regulatory and societal trends suggest a rising
concern over the health and safety of processed
food products as well as concerns over the
environmental and social externalities that result
from the manufacturing and sourcing of products
and ingredients, which can threaten a company’s
social license to operate.
During manufacturing, environmental impacts
arise from the use of energy and water, essential
inputs for food production. This reliance on
natural resources can contribute to operational
risks as the cost of such resources rises, which
places an emphasis on efficiency. Additionally,
the use of these resources generates greenhouse
gas (GHG) emissions and potential water
pollution. The industry is highly exposed to and
contributes to social and environmental issues
within its supply chain. Climate change and water
scarcity present challenges for sourcing key
ingredients. Additionally, the farming of key
ingredients contributes to many environmental
and social issues within companies’ supply chains.
The consumer-facing nature of the industry
makes the management of key sustainability
issues an important driver for long-term company
success. The management (or mismanagement)
of material sustainability issues, therefore, has
the potential to affect company valuation
through impacts on sales, profits, reputation,
assets, liabilities, and cost of capital.
Investors will obtain a more holistic and
comparable view of performance if processed
foods companies report metrics on the material
sustainability risks and opportunities that could
affect value in the near and long term in their
regulatory filings. This would include both
positive and negative externalities and the non-
financial forms of capital that the industry relies
on for value creation.
Specifically, performance on the following
sustainability issues will drive competitiveness
within the Processed Foods industry:
• Improving energy and fleet fuel
efficiency;
• Managing water use, particularly for
operations in water-stressed areas;
• Ensuring food quality and safety;
• Managing a product’s health and
nutrition characteristics to capture
shifting customer demand;
SUSTAINABILITY DISCLOSURE TOPICS
ENVIRONMENT
• Energy & Fleet Fuel Management
• Water Management
SOCIAL CAPITAL
• Food Safety
• Health & Nutrition
• Product Labeling & Marketing
BUSINESS MODEL AND INNOVATION
• Packaging Lifecycle Management
LEADERSHIP AND GOVERNANCE
• Environmental & Social Impacts of Ingredient Supply Chains
I N D U S T R Y B R I E F | P R O C E S S E D F O O D S | 1
• Building customer confidence and trust
by maintaining integrity in labeling and
marketing practices;
• Packaging lifecycle management and
innovation to reduce costs and improve
environmental impacts of packaging; and
• Addressing supply chain management
risks associated with climate change and
water scarcity.
INDUSTRY SUMMARY
The Processed Foods industry includes companies
that process and package foods such as bread,
frozen foods, snack foods, pet foods, and
condiments for retail consumer consumption.
Typically, these products are made ready to
consume, marketed for retail consumers, and can
be found on food retailers’ shelves.I
Globally listed processed foods companies
generated revenues of more than $515 billion in
2014. The two largest segments of the industry
are Snack Food & Confectionary items and
Frozen, Canned & Perishable food, which
generated 34 and 27 percent of total industry
revenue, respectively.1 The industry’s five largest
companies by revenue are PepsiCo Inc., Nestlé,
Mondelez International, ConAgra Foods, and
General Mills. These companies generated
processed food revenues between $16.5 and
$45.5 billion, together representing more than 27
percent of global industry revenue in 2014.2
Large companies in the industry generate sales
globally, and international opportunities are
driving growth. For example, Mondelez
International generated more than 80 percent of
its revenue outside the U.S. in 2014.3 General
Mills has expanded its operations in fast-growing
I Industry composition is based on the mapping of the Sustainable Industry Classification System (SICSTM) to the
external markets such as China, India, and
Indonesia. The company’s international sales have
been growing around 10 percent annually, while
domestic sales have only grown between one and
three percent, which highlights the opportunities
of operating internationally.4 Large companies
such as Campbell Soup Co. have global
manufacturing operations in countries such as
China, Australia, France, and Germany, which
demonstrates the global footprint that many
companies have in this industry.5
Companies in the industry transform raw
ingredients into packaged products. For snack
food companies like Mondelez and PepsiCo,
these raw ingredients include large quantities of
sugar, wheat, corn, vegetable oil, flour, oats,
potatoes, seasonings, cocoa, and other fruits and
vegetables.6 For frozen food producers like
ConAgra, raw ingredients include wheat, corn,
soybeans, pork, poultry, and beef.7 As a result of
the industry’s reliance on agricultural products,
company supply chains are susceptible to
changing weather patterns, water scarcity, and
climate change, which can lead to high degrees
of input price volatility.
The largest customers of the Processed Foods
industry include grocery stores and large retail
chains such as Walmart, which alone made up
more than 18 percent of PepsiCo’s total revenue
in 2014 and 17 percent of ConAgra’s.8 The
industry is driven largely by key external drivers
like raw material input prices, the healthy eating
index, and consumers’ disposable income and
leisure time.9 These external drivers are shaping
the industry landscape in a number of ways. For
example, consumers are becoming increasingly
health conscious, and as a result, they are
demanding products made with fewer calories
Bloomberg Industry Classification System (BICS). A list of representative companies appears in Appendix I.
I N D U S T R Y B R I E F | P R O C E S S E D F O O D S | 2
and less sodium and trans fats, which are
typically found in snack foods. Healthy snacks
have made up the industry’s fastest-growing
segment over the past five years.10 Demand for
healthy products has led to the launch of new
companies such as Popchips and SkinnyPop,
which specifically target consumer demand for
less processed snack foods with fewer artificial
additives.11
The industry is highly capital intensive, as large
investments in equipment, machinery,
technology, and buildings are needed to produce
processed foods at scale. Additionally, large
operational costs include the purchase of raw
ingredients used to manufacture food products,
which represent roughly 50 percent of the
industry’s total costs.12 Other materials such as
packaging represent a large cost for the industry.
For example, PepsiCo spends $6.9 billion on
packaging, representing 10.5 percent of total
sales.13
The industry has been facing rising pressure from
higher input costs, particularly for raw
ingredients, packaging materials, and energy.14
This has contributed to gross margins remaining
relatively flat for larger industry players over the
past five years. For example, Mondelez
International generated a 36.8 percent gross
margin in 2014, a small increase from 2008’s low
of 33 percent and in line with pre-recession levels
of around 36.2 percent.15 Industry players
recognize the financial risk to operations of these
increasing costs, especially if they cannot
effectively increase efficiency or pass on rising
costs to consumers.16 Larger companies are better
able to pass costs to consumers, as reputation
and perceived value over small- to medium-sized
companies are greater. This phenomenon has led
to a decrease in the number of small- to medium-
sized companies in the industry and represents a
barrier to entry for smaller companies.17
Significant levels of capital are necessary in order
to operate heavy equipment and machinery in
production, leading to high barriers to entry for
new companies. New entrants also face hurdles
with establishing key grocery relationships and
building a sufficient brand reputation to attract
consumer demand.18
The Processed Foods industry has seen some
levels of consolidation as companies acquire
other companies in the industry in order to build
economies of scale and cut costs. For example,
ConAgra purchased private food label producer
Ralcorp in a deal worth $6.8 billion and created
one of the largest food companies in the U.S.19 In
2013, Heinz was acquired in a buyout by
Berkshire Hathaway and 3G Capital Management
in a deal worth $28 billion, the largest in food
industry history.20 In 2015, Heinz and Kraft
agreed to merge operations in a deal estimated
to be worth $49 billion. The deal is currently in
development and has not been finalized, but
would create the fifth-largest food company in
the world and would generate combined
revenues of more than $28 billion.21
Industry outlook remains mixed across the various
segments of the processed foods market. Some
segments are expected to improve and others to
decline in the near future as disposable income
and consumer trends shift. Revenue for the cereal
segment of the industry is expected to increase
marginally at 0.8 percent annually over the next
five years to $11.5 billion in the U.S.22 Healthy
alternatives and new establishments are expected
to drive future revenue growth in the snack food
segment of the industry 2.6 percent annually over
the five years leading to 2019, up to $39.4
billion.23 Consumers’ disposable income is
expected to increase, driving demand away from
frozen food segments as consumers become able
I N D U S T R Y B R I E F | P R O C E S S E D F O O D S | 3
to afford to eat out at restaurants more often.
Revenue from the frozen food segment of the
industry is thus expected to decline marginally by
0.7 percent annually leading up to 2019, to
$27.9 billion.24 For chocolate producers like
Nestlé and Hershey, industry revenue is expected
to grow one percent annually over five years,
reaching $16.3 billion in 2019.25
Companies in the industry are typically valued
based on financial multiples, such as Price to
Earnings or EV to EBITDA.II The industry as a
whole has been trading at a premium to other
industries, as the Processed Foods industry is
experiencing a favorable outlook due to large
cost cutting initiatives and low commodity prices,
which are predicted to boost industry
profitability.26
In order to protect shareholder value over the
long term, companies will have to navigate key
competitive pricing trends, along with specific
regulations and significant environmental and
social issues affecting the industry or its
customers. Companies that manage these trends
successfully will be able to capture opportunities
for growth and attain a stronger competitive
position.
LEGISLATIVE AND REGULATORY TRENDS IN THE PROCESSED FOODS INDUSTRY
Regulations in the U.S. and abroad represent the
formal boundaries of companies’ operations, and
are often designed to address the social and
environmental externalities that businesses can
create. Beyond formal regulation, industry
II Enterprise value to earnings before interest, taxes, depreciation, and amortization III This section does not purport to contain a comprehensive review of all regulations related to this industry, but is intended
practices and self-regulatory efforts act as quasi-
regulation and also form part of the social
contract between business and society. In this
section, SASB provides a brief summary of key
regulations and legislative efforts related to this
industry, focusing on social and environmental
factors. SASB also describes self-regulatory efforts
on the part of the industry, which could serve to
pre-empt further regulation.III
Existing and emerging regulation in the U.S. and
abroad relating to health, obesity, food safety,
product labeling, and environmental concerns has
the potential to further emphasize the
importance of managing material sustainability
issues. The following section provides a summary
of recent developments that are likely to impact
the industry going forward.
U.S. food and beverages industries have all been
under pressure by consumers and regulators to
address obesity and the nutritional content of
food products. Recently, the U.S. Department of
Agriculture (USDA) banned multiple forms of
snack foods in schools, allowing only products
that meet certain limits for sugar and calorie
content. Allowable products include foods and
snacks in which whole grains, protein, or fruits
and vegetables are the primary ingredients, and
the amount of calories, sugars, sodium, and fat is
limited.27 Other countries have begun to
implement junk food taxes, or “fat taxes,” to
address obesity concerns. For example, Mexico
approved a five percent tax on unhealthy snack
food in 2013 to abate the country’s rising obesity
levels and the associated burden on health care
costs. Obesity-related health issues cost the
country more than $3.2 billion in health care
costs in 2008. This is expected to increase to $7.7
to highlight some ways in which regulatory trends are impacting the industry.
I N D U S T R Y B R I E F | P R O C E S S E D F O O D S | 4
billion by 2017, according to estimates.28 Other
jurisdictions have implemented similar taxes on
high-fat products. Taxes and bans on snack foods
to address obesity concerns are affecting industry
profitability and forcing processed foods
companies to address health and nutrition
concerns about their products.
Food safety is also a major concern for the
industry, as millions of Americans are exposed to
foodborne illness and thousands are hospitalized
every year.29 On January 4, 2011, President
Obama signed into law the Food Safety
Modernization Act (FSMA), which allows for Food
and Drug Administration (FDA) oversight of food
safety issues in the areas of prevention,
inspection and compliance, recall response, and
traceability.30 Companies have begun to focus
heavily on food safety issues, as failing to do so
can result in costly recalls and fines.
The Processed Foods industry is also facing
increasing scrutiny from parents and the U.S.
government regarding advertising to children
under the age of 12. In 2006, a U.S. government
task force was established to address the impact
of media on childhood obesity. The task force
aimed to develop a voluntary industry standard to
reduce the amount of advertising for unhealthy
food and beverages targeted toward children.
The same year, the Better Business Bureau
launched the Children’s Food and Beverage
Advertising Initiative (CFBAI) to address growing
concerns about food and beverage advertising to
children, calling for industry self-regulation. The
initiative hopes to shift the focus of food and
beverage advertising aimed at children under age
12 to healthier options. It currently has 16
members including food companies ConAgra,
Kellogg, General Mills, Hershey, Campbell Soup,
and Nestlé. Members agree to follow five
components, including stipulations that
advertising directed solely at children must
promote “healthier dietary choices,” companies
must not advertise unhealthy snack food
products in elementary schools, and companies
must not actively seek placement of products in
entertainment directed at children.31
The U.S. government and consumers are
demanding more stringent rules relating to food
labeling, advertising, packaging, and other
claims. Failure to abide by these laws can
seriously impair a producer’s credibility and can
result in expensive product recalls that open up
producers to civil or criminal penalties.
Additionally, there is pending enforcement of
new FDA regulations around labeling that would
limit food producers’ opportunities to make
misleading health claims intended to harm
competitors. Producers that respond proactively
to regulations may boost their company image
and earn credibility and trust among consumers.
Concerns over deceptive and false advertising
have led to class action lawsuits for processed
food producers.32
The FDA has jurisdiction over food and food
labeling, ingredients, nutritional content, and
health claims. Health claims that promote the
benefits of a particular ingredient must be
substantiated by the FDA for approval in product
promotion.33 The FDA recently placed restrictions
on the use of partially hydrogenated oils, trans
fats, as they are no longer generally recognized
as safe.34
The Supreme Court unanimously decided that
competing producers may sue for unfair
competition if other food and beverage
producers make misleading claims, legislation
known as the Lanham Act.35 Additionally,
companies operating internationally are exposed
to new forms of regulation that influence a
I N D U S T R Y B R I E F | P R O C E S S E D F O O D S | 5
company’s ability to operate. For example, the
European Commission launched Health Claim
Regulations that limit the health claims
companies can make on their products.36 These
new rulings may lead to further litigation for
processed foods companies that make false or
misleading health claims on their products,
adding to regulatory pressure.
Some 30 states around the U.S. have been
considering laws requiring companies to label
food products that contain genetically modified
organisms (GMOs). This presents a risk to food
companies, as consumers are increasingly
concerned over the use of GMO ingredients in
their food. Currently, only Maine, Connecticut,
and Vermont have passed legislation requiring
GMO labeling, however other states must pass
similar legislation before the laws take effect.
More than 60 countries worldwide have some
legislative restrictions on GMOs, although these
measures are often opposed by companies.37 The
safety concerns of GMO consumption are widely
debated, but these new legislative proposals and
bans are putting pressure on the Processed Foods
industry to acknowledge the use of GMOs in its
products and label them accordingly.
The industry is also subject to environmental
legislation as a result of running large-scale
operations and relying heavily on clean water.
The Clean Water Act’s (CWA) increasingly
rigorous standards for discharging wastewater
are the primary environmental regulatory
concerns for the Processed Foods industry. Unless
located in remote areas, most food processing
facilities pre-treat and discharge wastewater
directly to a publicly owned treatment plant.
When a facility discharges wastewater to the
environment, it is required to have a National
Pollutant Discharge Elimination System permit as
mandated by the CWA.38
Many companies in the industry have committed
to addressing key environmental, social, food
quality, safety, and nutritional concerns to
comply with regulations. Others have begun
implementing sustainability programs as a key
strategic initiative to drive overall business
success.39
SUSTAINABILITY-RELATED RISKS AND OPPORTUNITIES
Industry drivers and recent regulations suggest
that traditional value drivers will continue to
impact financial performance. However,
intangible assets such as social, human, and
environmental capital, company leadership and
governance, and the company’s ability to
innovate to address these issues are likely to
increasingly contribute to financial and business
value.
Broad industry trends and characteristics are
driving the importance of sustainability
performance in the Processed Foods industry:
• Health and nutrition: The industry’s
social license to operate is earned by
providing society with efficient, healthy,
and enjoyable foods for consumption.
This license is increasingly threatened by
obesity and health concerns related to
the consumption of unhealthy food.
Shifts in consumer preferences and tastes
are materially altering the Processed
Foods industry as producers begin to
address the health and nutritional value
of their current food portfolios.
• Consumer safety and awareness:
Evolving consumer concerns around
product ingredients and food safety are
driving regulation to create more
transparency in product formulation and
I N D U S T R Y B R I E F | P R O C E S S E D F O O D S | 6
safety performance. These concerns are
driving the industry to adopt new
product formulations and procedures
around safety innovations.
• Exposure to climate change and
water scarcity: Climate change and
water scarcity are fundamentally
affecting the cost of raw materials for the
industry. This exposure presents the
industry with operational financial risks
that threaten long-term profitability.
As described above, the regulatory and legislative
environment surrounding the Processed Foods
industry emphasizes the importance of
sustainability management and performance.
Specifically, recent trends suggest a regulatory
emphasis on product labeling, consumer health,
and food safety, which will serve to align the
interests of society with those of investors.
The following section provides a brief description
of each sustainability issue that is likely to have
material implications for companies in the
Processed Foods industry. This includes an
explanation of how the issue could impact
valuation and evidence of actual financial impact.
Further information on the nature of the value
impact, based on SASB’s research and analysis, is
provided in Appendices IIA and IIB.
Appendix IIA also provides a summary of the
evidence of investor interest in the issues. This is
based on a systematic analysis of companies’ 10-
K and 20-F filings, shareholder resolutions, and
other public documents, which highlights the
frequency with which each topic is discussed in
these documents. The evidence of interest is also
based on the results of consultation with experts
participating in an industry working group (IWG)
convened by SASB. The IWG results represent the
perspective of a balanced group of stakeholders,
including corporate professionals, investors or
market participants, and public interest
intermediaries.
The industry-specific sustainability disclosure
topics and metrics identified in this brief are the
result of a year-long standards development
process, which takes into account the
aforementioned evidence of interest, evidence of
financial impact discussed in detail in this brief,
inputs from a 90-day public comment period, and
additional inputs from conversations with
industry or issue experts.
A summary of the recommended disclosure
framework and accounting metrics appears in
Appendix III. The complete SASB standards for
the industry, including technical protocols, can be
downloaded from www.sasb.org. Finally,
Appendix IV provides an analysis of the quality of
current disclosure on these issues in SEC filings by
the leading companies in the industry.
ENVIRONMENT
The environmental dimension of sustainability
includes corporate impacts on the environment.
This could be through the use of natural
resources as inputs to the factors of production
(e.g., water, minerals, ecosystems, and
biodiversity) or environmental externalities and
harmful releases in the environment, such as air
and water pollution, waste disposal, and GHG
emissions.
Companies utilize large amounts of natural
resources, including water and various forms of
energy, to transform ingredients into finished
products. The use of these natural resources may
create environmental externalities that lead to
tangible material risks and opportunities for
processed foods producers. For example, the
I N D U S T R Y B R I E F | P R O C E S S E D F O O D S | 7
heavy reliance on energy as a key input for value
creation for the industry has led to pressure on
margins from rising energy costs. With risk comes
the opportunity to address companies’ use of
natural resources, which can improve overall
operational efficiency.
Energy & Fleet Fuel Management
The Processed Foods industry is highly reliant on
energy and fuel as primary inputs for value
creation, both in manufacturing food products
distributing finished products to consumers.
Energy is needed to operate large manufacturing
facilities for use in steps such as cooking,
refrigeration, packaging, and transporting.
Energy production and consumption contributes
to significant environmental impacts, including
climate change and pollution, which have the
potential to indirectly yet materially impact the
results of operation of processed foods
companies. Material impacts can come in the
form of incentives for energy efficiency and
renewable energy, rising costs associated with
various forms of energy, and the risk of heavy
reliance on specific forms of energy that are
facing significant regulation. Therefore, energy
management, understood as the way in which a
company manages its overall energy efficiency, its
fuel consumption, its reliance on different types
of energy, and its ability to access alternative
sources of energy, is becoming increasingly
material for the industry.
Energy efficiency in production and distribution
can mitigate exposure to volatile energy costs
and limit a company’s contribution to direct and
indirect GHG emissions. Producers may be able to
further reduce the risk posed by volatile fossil fuel
energy costs—particularly natural gas, which is
used heavily in the industry—by diversifying their
energy portfolio across a range of sources.
Additionally, companies in the industry rely on
third-party distribution as well as directly owned
systems to transport their products to consumers.
Efficiencies can be gained in fleet fuel
management to reduce costs and limit the carbon
footprint associated with product transportation.
Company performance in this area can be
analyzed in a cost-beneficial way through the
following direct or indirect performance metrics
(see Appendix III for metrics with their full detail):
• Operational energy consumed,
percentage grid electricity, and
percentage renewable; and
• Fleet fuel consumed, percentage
renewable.
Evidence
The Processed Foods industry utilizes various
forms of energy to transform raw ingredients into
finished products. Currently, industry participants
maintain an even split between purchased
electricity and energy generated directly from
purchased fuels, mainly natural gas. For example,
ConAgra currently generates roughly 51 percent
of its GHG emissions through electricity
purchases and 49 percent through direct
emissions.40 A majority of the industry’s direct
Scope 1 emissions are released as a result of
burning natural gas to generate heat and
electricity. Companies use natural gas to power
food processing ovens and production facilities.41
Additionally, some companies manage their own
fleet of vehicles to transport finished products,
which further contributes to overall energy
usage.
Processed Foods industry expenditures on fuel
and electricity represent roughly 1.07 and 1.80
percent of total cost of materials, respectively,
representing a combined 2.87 percent of costs
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spent on energy.42 As a result of a relatively high
reliance on energy to generate finished products,
companies in the industry recognize the risk of
rising energy prices and constrained supply as
material concerns for their operations in their
Form 10-K filings. Specifically, PepsiCo stated in
its 2015 form 10-K that “[i]f commodity price
changes result in unexpected or significant
increases in raw materials and energy costs, we
may not be able to increase our product prices or
effectively hedge against commodity price
increases to offset these increased costs without
suffering reduced volume, revenue, margins and
operating results.”43
Currently, the U.S. food processing sector spends
roughly $7 billion annually on energy costs alone,
representing significant opportunity for
companies to implement projects to improve
energy efficiency and generate cost savings. 44 For
example, ConAgra received Energy Star ratings
for three of its potato processing plants, which
utilize 20 percent less energy than comparable
food processing plants. Through the company’s
initiatives, the three plants are expected to save
ConAgra more than $10 million in energy costs
each year, equivalent to roughly one percent of
its net income in 2014,45 and reduce annual
emissions by 40,000 metric tons.46
Companies have begun setting goals to reduce
energy intensity within operations. For example,
General Mills set a goal to reduce energy usage
by 20 percent by 2015 from 2005 baseline levels.
The company is implementing numerous energy-
saving projects, including optimizing machinery
such as dryers, ovens, freezers, heating and
cooling equipment, and lighting. In 2013, such
efforts at seven of the company’s locations saved
$3.7 million and reduced electricity usage by six
percent. By 2015, the company plans to
implement energy-saving processes in 15 of its
largest plants and expects to save an additional
$20 million in energy costs.47 These energy-
efficiency initiatives are part of a larger cost-
saving program that General Mills’ Chief Financial
Officer (CFO) believes is a “first line of defense to
offset input cost inflation and protect gross
margins.”48 PepsiCo’s energy-efficiency initiatives
resulted in $70 million in energy-cost savings in
2012.49 These initiatives have the potential to
provide shareholders with millions in reoccurring
cost savings every year, providing significant
value to the firm.
Companies have adopted various initiatives to
address rising energy costs and GHG emissions,
including hedging, efficiency, and renewable
energy initiatives. For example, Mars Inc., a
popular producer of chocolate candy and pet
food products, has launched an initiative to be
carbon neutral by 2040 in an effort to limit the
company’s carbon emissions and exposure to
fossil fuel energy sources. In April 2014, the
company invested in a large-scale, 118-turbine
wind farm in Texas that will generate more than
100 percent of the electricity needs of the
company’s U.S. operations. The project is
currently the largest commitment to renewable
energy made by any food producer in the U.S.50
Nestlé is pursuing similar initiatives in Mexico,
where it is investing in large-scale wind projects
to reduce the company’s energy use by 39
percent per ton of food. Currently, wind power
accounts for 85 percent of Nestlé’s operational
electricity needs in Mexico.51 On-site renewable
energy makes up 13.3 percent of the company’s
total facility energy use.52 In 2011, Snyder’s-Lance
Inc., a pretzel manufacturer, completed the
largest solar project in Pennsylvania outside the
company’s headquarters. The 3.5 MW solar
project is projected to eliminate more than 230
million pounds of CO2 emissions over a 25-year
period and save the company an estimated 30
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percent annually in energy costs.53 The company
received $4.2 million in federal grants to
complete the project.54
Improving fleet fuel efficiency is also important
for processed foods companies that operate large
vehicle fleets to distribute finished products to
consumers. Frito-Lay currently operates a fleet of
more than 20,000 vehicles, making it the
seventh-largest privately owned fleet in the U.S.,
and the company has a goal of making it the
most fuel-efficient fleet in the country. At the
end of 2013, the company had more than 269
all-electric trucks, the largest electric fleet in the
U.S. This initiative will save the company 500,000
gallons of fuel annually and will reduce GHG
emissions by 75 percent compared to diesel
trucks.55 Both Frito-Lay and General Mills have
invested in compressed natural gas (CNG)
vehicles to reduce carbon emissions and improve
operational efficiency. While the network for
CNG refueling is sparse in some areas around the
U.S., the companies have launched test fleets and
invested in CNG infrastructure to improve the
reliability of this new form of fuel.56 General Mills
believes there are not only emissions benefits
from CNG vehicles, but also cost savings and
reduced risk compared to diesel vehicles.57
Through fuel and transportation efficiency
initiatives, the company hopes to reduce its fuel
usage rate (fuel use per metric ton of product) by
35 percent by the end of 2015 from 2009 levels.
By the end of 2014, the company reduced fuel
usage by 22 percent from 2009.58
Value Impact
Energy management can have ongoing impacts
on operating costs due to volatile energy prices
and rising energy consumption associated with
increasing processed food production. In the face
of rising electricity costs, processed foods
companies that develop more energy-efficient
methods of production can gain a competitive
advantage by offsetting rising costs and
protecting margins. In addition to impacts on
operating costs, there could be one-time effects
on cash flows through capital expenditures for
energy-related projects. Through energy
efficiency and the use of alternative energy,
companies can benefit from significant cost
reductions and reduce operational risks arising
from fluctuations in fossil fuel prices.
Another source of operational risk is the reliability
of future energy supplies, which can influence
decisions about generating power on-site and
diversifying energy sources versus purchasing
electricity from the grid. The more a company
relies on purchased fuels and electricity from
traditional sources of energy, the more vulnerable
it is to cost increases for specific energy sources
as well as the indirect impact of utilities’ costs for
internalizing carbon prices. The use of
independent (non-grid) energy sources also
indicates that a company has a degree of control
over its energy sources and demonstrates its
ability to provide continuous energy for its
facilities. The percentage energy generated from
renewable sources indicates a firm’s ability to
mitigate its environmental footprint and its
exposure to energy cost increases as well as its
energy independence. Additionally, improving
vehicle fleet efficiency can help to reduce
operating costs and emissions. Due to the
consumer-facing nature of this industry, these
initiatives can improve companies’ brand value in
the long term.
The probability and magnitude of these impacts
could increase in the future as emerging
governmental regulations on environmental
impacts continue to influence energy costs.
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Water Management
Water management is an increasingly material
issue for companies in the Processed Foods
industry, as large amounts of water are required
for cooking, processing, and cleaning finished
goods. The total use of water depends on the
type of food being prepared. Companies may
face additional risks associated with discharging
polluted water from the food-making process,
which can lead to costly fines and stricter
regulations.IV
As the global population is predicted to grow to
9.2 billion by 2050, the demand for water will
increase.59 At the same time, increasing pollution
and climate change will create major operational
risks for processed foods companies, especially
those operating in water-scarce regions.
Company performance in this area can be
analyzed in a cost-beneficial way through the
following direct or indirect performance metrics
(see Appendix III for metrics with their full detail):
• Total water withdrawn and total water
consumed, percentage of each in regions
with High or Extremely High Baseline
Water Stress;
• Number of incidents of non-compliance
with water quality and/or quantity
permits, standards, and regulations; and
• Discussion of water management risks
and description of strategies and
practices to mitigate those risks.
Evidence
According to MSCI research data on industries
exposed to water-use risk, the packaged food
industry ranks sixth behind other industries
including brewers, water utilities, paper products,
IV This issue does not cover water scarcity as it relates to the company’s agriculture supply chain, which is covered later in the
and independent power. While the majority of
the risk lies with upstream agriculture operations,
processed foods companies also utilize large
volumes of water for food processing.60
Companies in the industry recognize the risk of
changing weather patterns and their impact on
the availability of clean water.61 Specifically,
Diamond Foods, a snack food company, stated in
its 2014 Form 10-K that “water shortages, raw
material shortage or any other reason, whether
or not covered by insurance, could interrupt our
manufacturing operations, disrupt
communications with our customers and
suppliers and cause us to lose sales and write off
inventory,” and “[i]ncreases in the cost of water,
electricity, natural gas, fuel or labor and failure to
ship products on time, could increase our costs of
production and adversely affect our
profitability.”62
Processed foods companies have begun
implementing programs to reduce water
consumption in order to address these risks in
direct operations. For example, in 2007, Heinz
was able to reduce water consumption by 50
percent at a plant in Australia as a result of
installing motion sensors and new equipment
that regulated and turned off water when a line
was not in use.63 Campbell Soup Company has
set a goal of reducing its water use by 50 percent
per ton of food produced by 2020 from 2008
baseline levels. So far, the company’s initiatives
have produced savings of more than 20.7 percent
and reduced water usage by more than one
billion gallons annually. The company reported
saving more than five billion gallons since 2009.64
Hershey implemented water-efficiency projects in
a number of its plants, which the company
brief in the Environmental & Social Impacts of Ingredients Supply Chain section.
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expects will save more than $900,000 a year
starting in 2014.65
In addition to the cost efficiency of limiting water
consumption, companies are recognizing the
need to understand the risks of water scarcity
throughout their operations. Campbell Soup
Company worked with the World Business
Council for Sustainable Development to map
water-risk exposure for its entire operation.66
ConAgra assesses water scarcity around its
production facilities, and in 2013, the company
estimated that 7.4 percent of its operations were
located in water-scarce and water-stressed
regions, 3.6 percent in medium-stressed regions,
and the remainder in low-stressed regions.67 In
2014, the company reassessed its water-risk
exposure and highlighted the fact that 38
locations, representing 37.5 percent of the
company’s total water usage, were located in
medium- to high-risk regions. Additionally, the
company had 10 locations in high-risk regions,
representing 3.3 percent of the company’s total
water usage.68 Companies with operations in
water-stressed regions can implement water-
efficiency initiatives to reduce the risks of
shortages and price increases in these regions.
For example, Heinz was able to reduce water
usage in its San Joaquin, Venezuela, plant,
located in a water-stressed region, by 56
percent.69
Companies that utilize significant quantities of
water must ensure that the water they release
meets local quality standards. If companies fail to
manage wastewater effectively, they may face
significant fines. Seneca Foods, a producer of
canned fruits and vegetables, was fined $9
million by the city of Modesto, California,
because the level of biochemical oxygen in its
wastewater exceeded city regulations. The
company has since installed new equipment to
properly treat its wastewater in compliance with
local limits.70 Similarly, ConAgra paid a $475,000
settlement for violating the CWA’s Spill
Prevention, Control, and Countermeasure
requirements. As part of the settlement, the
company must submit annual reports verifying
compliance.71 In 2013, ConAgra disclosed that
the company received 20 Notices of Violations
(NOVs) at 13 of its operating facilities, a 30
percent reduction from the previous year’s
violations.72 In 2014, the company received 36
NOVs and paid a total of $1,109,500 in
environmental fines. Half of the NOVs received
were associated with wastewater parameters.73
Value Impact
Water use and contamination can affect ongoing
operating costs and can impact cash flows
through one-off capital expenditures or
regulatory penalties. Additionally, companies may
face unexpected capital expenditures, water-
treatment costs, regulatory compliance costs, and
an increased cost of capital for operations in
water-stressed regions. Water-use efficiency can
reduce overall costs and improve gross margins.
Disclosure around a company’s total water
withdrawal and exposure to water-stressed
regions can help identify direct cost savings
associated with water efficiency, as well as risks
related to operating in water-stressed regions.
Additional disclosure around fines and water
quality violations can help to identify direct costs
from fines as well as identifying corporations that
are better at managing compliance risks.
Due to increasing water scarcity and the potential
for increases in water prices, the probability and
magnitude of the impact of water management
on financial results in the Processed Foods
industry are likely to increase in the near term.
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SOCIAL CAPITAL
Social capital relates to the perceived role of
business in society, or the expectation of business
contribution to society in return for its license to
operate. It addresses the management of
relationships with key outside stakeholders, such
as customers, local communities, the public, and
the government. It includes issues around public
health, responsible business practices in
marketing, and customer safety.
Consumer preferences and tastes ultimately have
the largest influence over the products produced
and sold by the Processed Foods industry. The
quality and nutritional content of these food
products, however, have a direct influence on the
health of consumers. Food allergies and adverse
health and safety effects of processed food
ingredients are shifting consumer purchasing
decisions and perceptions of the industry, and if
poorly managed, these concerns may lead to
erosion of a company’s brand value and social
license to operate. Additionally, inaccurate
labeling and misleading marketing of products
can further erode brand value and a company’s
social license to operate, as consumers maintain a
certain level of trust in processed food producers
to label their products with accuracy and
integrity.
Food Safety
Food safety, as it relates to production quality,
spoilage, contamination, supply chain traceability,
and allergy labeling, can affect company
operations through product recalls, lawsuits,
fines, and capital expenditures. Food safety
recalls can happen for numerous reasons,
including packaging defects, food contamination,
spoilage, and mislabeling. Adding to the
complexity of the issue, food safety issues often
arise within a company’s supply chain, yet
ultimately end up causing recalls of final
products. Because of this, supply chain
traceability and inspection of suppliers is
beneficial for processed foods companies in order
to mitigate the potential reputational risks
associated with poor safety performance of
suppliers and comply with proposed legislation.
The FDA maintains oversight of the operations of
companies that process food in order to ensure
that proper procedures are followed and unsafe
food is prevented from being distributed.
Additionally, the FDA oversees product recalls
and procedures to remove and correct issues
when they occur, presenting an added layer of
regulatory burden for the industry.
Poor management of food quality and safety may
lead to recalls and lawsuits that can materially
impact a processed foods company’s operations
through fines and tarnished brand reputation.
Disclosure around the topic of food safety may
give investors a better understanding of a
company’s operational risk characteristics and the
potential impact of recalls on future operations.
Company performance in this area can be
analyzed in a cost-beneficial way through the
following direct or indirect performance metrics
(see Appendix III for metrics with their full detail):
• Global Food Safety Initiative (GFSI) audit
conformance: major non-conformance
rate and associated corrective action rate
and minor non-conformance rate and
associated corrective action rate;
• Percentage of ingredients sourced from
supplier facilities certified to a GFSI
scheme;
• Notice of food safety violations received,
percentage corrected; and
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• Number of recalls issued, total amount of
food product recalled.
Evidence
While many companies have procedures in place
to address food quality and safety, issues still
occur. There about 48 million cases of foodborne
illness in the U.S. every year, suggesting that one
in six Americans is exposed. According to the
FDA, roughly 128,000 cases involve
hospitalization and more than 3,000 result in
death every year, and many of the illnesses result
from improperly canned foods and mishandling
during manufacturing.74
Nearly every company in the Processed Foods
industry recognizes the risk of product recalls in
their Form 10-K filings, in addition to the
potential for product liability claims, which can
cost millions in added expenses and tarnished
brand reputation.75 Specifically, Mondelez
International stated in its FY 2013 Form 10-K that
it “could decide to, or be required by law or
regulation to recall products due to suspected or
confirmed product contamination, spoilage or
other adulteration, product misbranding, or
product tampering. Any of these events could
materially and adversely affect [its] reputation,
product sales, financial condition, and results of
operations.”76
According to analysis of recent recalls, the
average food recall costs a company $30 million,
which drops directly to the bottom line,
highlighting the direct business risk that recalls
pose to companies.77 Most notably, Kellogg
Company, in its Form 10-K, provided insight into
the reduction in sales, added expense, and
impact on earnings per share that were
associated with a product recall resulting from
the presence of metal fragments in packages of
its Mini-Wheats cereal. The company disclosed
that the recall resulted in a reduction of sales by
$14 million and increased cost of goods sold by
$12 million, a total impact of $26 million. This
resulted in a reduction in company value by five
cents per share in 2012.78
Another noteworthy example is a 2007 peanut
butter recall by ConAgra. The company engaged
in a 100-percent recall of its Peter Pan brand of
peanut butter after the product was linked to
600 cases of salmonella. The company spent
more than $78 million recalling the product and
indemnifying consumers. The recall also resulted
in missed opportunities and lost sales of $55
million. When ConAgra identified the source of
contamination, it spent an additional $15 million
to correct the problem.79 Overall, this recall led to
more than $148 million in additional costs and
missed opportunities for the company, not
including damage to brand reputation. ConAgra
has since made progress on food safety initiatives
and in 2013 conducted more than 250 audits in
both company-owned and supplier operations to
ensure compliance with GFSI standards.80 The
Peter Pan peanut butter line has recovered since
the incident and was the fastest growing peanut
butter brand in 2011, according to the
company.81 In 2015, the company pled guilty to
lawsuits brought by the U.S. Department of
Justice for distributing the contaminated peanut
butter and settled by agreeing to pay an
additional fine of $11.2 million.82 This highlights
the long-term impacts that food recalls can have
on a company’s operations.
Recalls can be particularly troubling for smaller
companies, with costs representing a relatively
significant portion of company sales and net
income. For example, in Q1 2015, Inventure
Foods Inc. voluntarily recalled a portion of its
frozen food products after products were
exposed to Listeria moncocytogenes, a harmful
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bacteria. This recall cost the company $15.9
million and represented 20 percent of its $77.6
million quarterly sales, leading to a Q1 loss of
$14.6 million.83 By comparison, the company
generated total net income of $10.6 million and
$6.6 million in 2014 and 2013, respectively,
highlighting the large impact recalls can have on
a company’s profitability.84
Companies take food safety seriously and
appropriate specific budgets for food-safety
initiatives. General Mills currently spends three
percent of its capital budget every year on food
safety initiatives, equating to $15 million in 2013.
Currently, General Mills certifies 100 percent of
its facilities using globally recognized food-safety
criteria to ensure the highest quality of its
products.85 These initiatives may not only help
companies prevent safety issues but also position
them ahead of future regulation.
As described in the Legislative and Regulatory
Trends section of the brief, the FSMA allows for
FDA oversight of food safety issues in the areas
of prevention, inspection and compliance, recall
response, and imports.86 The FSMA also
addresses issues associated with food chain
visibility and effectively requires companies to
improve the traceability of their supply chain for
products and ingredients, from farm to final
consumer. 87 Beyond satisfying regulation
requirements, an improved level of traceability
can also provide a company with direct business
benefits. As food safety issues can arise
throughout a food company’s value chain,
companies that improve the traceability and
auditability of their supply chains may be better
positioned to avoid and mitigate crises as they
occur. These companies will have better vision
into the troubled areas of their supply chains and
can more quickly make sourcing decisions to
mitigate risks and protect their brand
reputation.88
Appropriate allergy warnings and labeling are
considerable concerns for processed food
manufacturers, as mislabeling a product’s
ingredients can result in costly recalls and harm
to consumers. Product mislabeling and
undeclared allergens were the second- and third-
largest causes of food recalls in the fourth
quarter of 2013, each representing 16 percent of
total recalls.89 An estimated nine million adults
and nearly six million children have food allergies
in the U.S., representing roughly five percent of
the population. Currently, there are about eight
foods responsible for 90 percent of food allergic
reactions, namely milk, eggs, peanuts, tree nuts,
wheat, soy, fish, and shellfish.90 Allergic reactions
can be fatal, representing serious risk to
companies if products are not appropriately
labeled.
Value Impact
Food recalls resulting from contamination,
packaging defects, or improper labeling can lead
to costly recalls and write-downs, directly
harming company profitability. This can result in
liabilities that lead to significant one-off costs and
fines to compensate consumers for harm done. In
the long term, recalls can lead to diminished
brand reputation, which can result in the loss of
customer trust and, ultimately, decreased product
demand. This can lead to a decline in sales in the
short to long term. Firms that have a high
percentage of ingredient suppliers that meet or
exceed the GFSI requirements may be seen by
investors as lower risk because such companies
have a more robust ability to track the
ingredients in their products that could lead to
recalls.
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Companies prone to food recalls and safety issues
may be viewed as more risky, resulting in an
increased cost of capital. Companies that focus
on quality and food safety within their operations
and those of their suppliers may be better
positioned to avoid costly recalls and strengthen
their brand reputation.
Health & Nutrition
Key nutritional and health concerns such as
obesity, ingredient safety, and nutritional value
are shaping the Processed Foods industry’s
competitive landscape. Health and nutrition are
real concerns for consumers, regulators, and the
healthcare system. These concerns about food
products can affect a company’s license to
operate and its ability to provide long-term value
to shareholders.
Processed foods producers are recognizing the
consequences of consumers’ shifting preferences
and increased awareness of the health of their
products. New regulations or imposed taxes on
processed foods such as snack foods have the
ability to influence industry profitability and pose
risks for industry participants. Studies, as
discussed below, have suggested adverse health
consequences from consuming large quantities of
food with little nutritional value, which can lead
to health issues such as higher levels of
cholesterol, increased risk for heart disease, and
higher levels of obesity.91 These studies have
begun to change perceptions of the industry’s
products, which can lead to long-term shifts in
consumer demand. Addressing shifting diet
trends may also create new opportunities in the
food industry and long-term value for
shareholders.
Company performance in this area can be
analyzed in a cost-beneficial way through the
following direct or indirect performance metrics
(see Appendix III for metrics with their full detail):
• Revenue from products labeled and/or
marketed to promote health and
nutrition attributes;
• Revenue from products that meet Smart
Snacks in School criteria or foreign
equivalent; and
• Description of the process to identify and
manage products and ingredients of
concern and emerging dietary
preferences.
Evidence
The Processed Foods industry is facing increased
scrutiny from consumers and regulators regarding
health and nutritional concerns about the
industry’s products. While there are multiple
causes of obesity, including work schedules, lack
of exercise, and diet, high-calorie snack foods
and other unhealthy foods are targets of
regulatory scrutiny due to their high density of
calories and lack of nutritional value relative to
other options. The consumption of unhealthy
food can contribute to high rates of obesity,
which place a burden on a country’s healthcare
system. It is estimated that obesity-related
medical costs amount to $190 billion a year, or
roughly 20 percent of U.S. healthcare
expenditures. In addition to leading to higher
medical costs, obesity leads to lost productivity.
Research found that obese men and women bear
an additional $1,152 and $3,613 a year in
medical expenses compared to their non-obese
counterparts.92
Avoiding the burden that obesity can have on
society overall has been a high priority for many
regulators. The USDA banned multiple forms of
unhealthy snack foods in schools, allowing only
products that are below certain thresholds for
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sugar and calorie content.93 As mentioned
previously in the regulatory section, some
countries have begun to implement junk food
taxes to address obesity concerns. In 2013,
Mexico approved a five percent tax on unhealthy
snack food to abate the country’s rising obesity
levels and the associated burden on health care
costs.94 Other countries and cities have
implemented similar taxes on high-fat products.
Snack food companies including PepsiCo and
Snyder’s-Lance recognize material risks associated
with regulation and taxes on their products and
ingredients, which can result in increased costs or
weakening demand from customers.95
Concerns about the long-term health effects of
food additives, preservatives, and artificial
ingredients are also shaping the Processed Foods
industry. Concerns about partially hydrogenated
oil, a controversial artificial ingredient that is the
primary source of trans fats, have led the FDA
restrict its usage as an ingredient, as studies
showed that it is not “generally recognized as
safe” for use in processed foods.96 The restriction
requires food companies to seek approval
beginning in 2018, before the ingredient can be
included in various processed foods.97 Partially
hydrogenated oil is used widely in desserts,
popcorns, frozen pizza, snack foods, and other
processed foods, largely to improve texture and
taste for consumption. Reduction in the intake of
trans fats can prevent thousands of heart attacks
and deaths, according to the FDA.98 Negative
health effects have also been linked with the
consumption of monosodium glutamate (MSG),
which is used widely as a flavor enhancer in many
processed food products including chips and
canned soups. Studies have shown that
consuming MSG can lead to obesity and has
other negative health effects such as headaches
and nausea. Research published in the American
Journal of Clinical Nutrition followed 10,000
adults in China for more than five years to
monitor their intake of MSG. They found that
men and women who consumed the most MSG
were 30 percent more likely to become
overweight.99
These potentially harmful ingredients can present
unnecessary risk to both consumer health and
corporations that produce processed foods.
Nestlé faced a $5 million class action lawsuit for
its use of trans fats in frozen pizza products after
a mother claimed the product presented
unnecessary health risks to her children and other
consumers.100 While the lawsuit was dismissed, it
shows the potential liabilities associated with
unintended health impacts. The case was
dismissed after the plaintiff failed to present
evidence of direct harm to her situation,
presenting only facts from long-term health
studies.101 The J.M. Smucker Company, producer
of Crisco oil and fats and Jif peanut butter, faced
several lawsuits over a two-year period as a result
of using trans fats in its products while
misleading customers about the nutritional
characteristics of its products.102 While the claims
were ultimately dismissed, the company
reformulated some of its products to remove
trans fats.103 This evidence highlights just a
portion of the harmful ingredients used in
processed foods and the unnecessary risks they
can create for consumers, and ultimately for food
producers as well.
Companies in the Processed Foods industry are
beginning to recognize these risks as well as
opportunities associated with addressing the
health and nutritional characteristics of their
products. Processed foods companies regularly
compete to offer new products that meet the
quality, taste, and nutritional value preferences of
customers.104 In their Form 10-K filings, nearly
every company in the Processed Foods industry,
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including large snack, confectionary, and
packaged food companies, recognizes the risk of
failing to address shifting consumer demands and
tastes as they relate to product health and
nutritional preferences.105 Specifically, General
Mills stated in its 2014 Form 10-K that ”[o]ur
success depends in part on our ability to
anticipate the tastes and eating habits of
consumers and to offer products that appeal to
their preferences. Consumer preferences and
category-level consumption may change from
time to time and can be affected by a number of
different trends and other factors.” The company
further states that “demand for our products
could be affected by consumer concerns
regarding the health effects of ingredients such
as sodium, trans fats, genetically modified
organisms, sugar, processed wheat, or other
product ingredients or attributes.”106
In response, companies are shifting their product
formulas to introduce healthier and more natural
alternatives. For example, Nestlé USA announced
a plan to remove artificial ingredients from its
candy by the end of 2015, as the company
recognizes that consumer preferences are
trending toward products with fewer artificial
ingredients. Market research conducted by
Nielsen found that 60 percent of Americans say
the absence of artificial colors and flavoring is
important in their food-buying decisions.107 Frito-
Lay, a producer of popular snack foods including
potato chips, tortilla chips, and pretzels, has
broadened 50 percent of its snack food portfolio
to include all-natural ingredients, meaning that
these products contain no artificial ingredients,
preservatives, or controversial ingredients like
MSG.108 Mondelez International has launched
“mindful snacking” goals for 2020, which
include offering 25 percent more of its “better
choice” products, reducing sodium and saturated
fat by 10 percent, increasing whole grains by 25
percent, and increasing the number of its
products that contain 200 calories or less by 25
percent.109 General Mills stated in its 2015
Sustainability Report that 76 percent of 2014
sales consisted of products that have been
“nutritionally improved” since 2005. This
includes products that have been reformulated to
reduce calories, fat, sugar, and sodium as well as
products that have been enhanced with
beneficial nutrients such as vitamins, minerals,
and fiber.110
Additionally, demand for organic products has
been a growing trend in the industry, presenting
opportunities for companies to capture shifting
consumer preferences. Organic packaged and
prepared food products that contain no artificial
ingredients or additives and do not contain
genetically modified ingredients experienced
double-digit sales growth from 2005 to 2014,
compared to only three percent growth in non-
organic food categories, further expressing
consumers’ interest in products that address
ingredient health concerns.111 Experts estimate
that the organic food segment of this industry
will grow 14 percent annually from 2013 to
2018, representing significant opportunity for
processed foods companies.112
Value Impact
Addressing obesity and other health concerns
may provide the Processed Foods industry with
opportunities to build better reputations and
strengthen its social license to operate. Bans and
added taxes present material risks for processed
food producers, especially if more governments
adopt policies to address obesity concerns.
Products that contain targeted ingredients may
face significant declines in sales volume.
Health characteristics of ingredients can influence
public perception, leading to shifts in demand for
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unhealthy products and increasing demand for
healthier alternatives. Lawsuits stemming from
product health and safety concerns may result in
costly fines and settlements as well as negative
perceptions and reputational harm, affecting
long-term sales. As demand for products that
meet higher health and nutritional standards
continues to increase, the probability and
magnitude of the impact on financial results in
this industry are likely to increase in the near
term. To capture these growth opportunities,
processed foods companies may need to increase
their expenses towards research and
development of new products.
Disclosure around a company’s approach to
improving the health and nutritional profile of its
product portfolio can help analysts determine the
effectiveness of that company’s approach to
addressing consumer health trends, which drives
future revenue potential. Additional disclosure
around the ingredients used in production can
help analysts determine companies’ level of
overall risk from customer and regulatory
scrutiny.
Product Labeling & Marketing
Processed foods producers make product claims
aimed at winning customers by demonstrating a
perceived benefit of consumption. Companies
have often made claims about their products that
may have been misleading and untruthful,
resulting in fines and litigation that could be
materially harmful to operations. Concerns over
increasing rates of childhood obesity have also
raised questions about the marketing practices of
processed foods companies to this sensitive
subset of the population. This has led to
regulatory initiatives that monitor the marketing
of unhealthy food to children, which present new
challenges to the industry.
Additionally, new laws and regulations regarding
the use and labeling of GMOs have a direct
impact on the industry, as many of the
ingredients in processed foods are derived from
GMO ingredients. Consumers are concerned
about the fact that GMO crops are artificially
created, which creates trepidation about adverse
health effects and increases demand for GMO
labeling. These issues can affect the competitive
landscape of the industry, as companies may be
subject to litigation and criticism if they make
misleading statements, advertise toward children,
and don’t label their products containing GMOs.
Company performance in this area can be
analyzed in a cost-beneficial way through the
following direct or indirect performance metrics
(see Appendix III for metrics with their full detail):
• Number of child advertising impressions
made, percentage promoting products
meeting the Children’s Food and
Beverage Initiative (CFBAI) Uniform
Nutrition Criteria;
• Revenue from products labeled as (1)
containing genetically modified
organisms (GMOs) and (2) non-GMO;
• Notice of violations received for non-
conformance with regulatory labeling
and/or marketing codes; and
• Amount of legal and regulatory fines and
settlements associated with marketing
and/or labeling practices.
Evidence
The Federal Trade Commission (FTC) and FDA
have oversight of the truthfulness of advertising
in the food industry, and that includes holding
advertisers accountable. The Federal Trade
Commission Act requires that “(1) advertising
must be truthful and non-deceptive; (2)
advertisers must have evidence to back up their
claims; and (3) advertisements cannot be
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unfair.”113 Processed foods producers make
multiple health claims and advertise their
products in unique and sometimes misleading
ways in order to capture demand from
consumers. For example, foods labeled as
“natural” generated more than $40 billion in
retail sales during 2013, ranking second only
behind foods labeled as “low in fat.” Currently,
however, the FDA does not have a consistent
definition of the term “natural,” and so the use
of this term by companies has led to confusion
among consumers.114 This type of claim can
create unnecessary risks for companies and result
in costly lawsuits and tarnished brand
reputations.
In 2013, it was estimated that there had been
more than 100 class action lawsuits over the
preceding two years against food and beverage
companies as a result of their use of the term
“natural” in product labeling. For example,
Kellogg’s Kashi product line, known for its health
and nutrition claims, faced a class action lawsuit
over the use of the term “all natural,” because
consumers claimed that the company’s products
contained synthetic versions of naturally
occurring substances and were not actually
natural. While admitting no liability, Kellogg
settled and agreed to remove the “all natural”
and “nothing artificial” wording from some of its
Kashi products. As part of the settlement,
Kellogg agreed to pay $5 million to consumers.115
The Kashi brand faced additional criticism for
using genetically modified ingredients, which
consumers said was in conflict with the brand’s
healthy image. Sales for the line have since
suffered due to brand criticism and a weak cereal
market, according to company CEO John Bryant.
The company is hoping to address the criticism by
using more non-GMO ingredients.116 Campbell
Soup Company, Frito-Lay, and General Mills have
all been subject to similar lawsuits based on their
use of the term “natural.”117 While the
companies maintain no wrongdoing, the risk of
tarnishing a brand’s reputation by making
misleading or non-scientifically proven claims
remains.
Additionally, childhood obesity has tripled since
1980, and there is a growing expectation of non-
predatory marketing toward children. New
initiatives have been launched by industry
participants to voluntarily monitor and control
advertising toward children, which is changing
industry marketing dynamics.118 As addressed in
the regulatory section of this brief, a U.S.
government task force was established in 2006 to
address the impact of media on childhood
obesity. As addressed in the regulatory section of
this brief, a U.S. government task force was
established in 2006 to address the impact of
media on childhood obesity, and the Better
Business Bureau launched the CFBAI to
encourage the industry to self-regulate its
advertising aimed at children.119 In 2007, Kellogg
Co. stated that advertising to children under 12
represented 27 percent of its advertising
spending, or $206 million, according to the
company’s total advertising budget. Kellogg has
since agreed to self-regulate its marketing aimed
at children and advertise only products in which
the number of calories and the amount of fat and
sugar per serving are limited, potentially altering
the advertising mix of its products, which is
something investors would be interested in.120
Consumers have grown increasingly concerned
about the use of GMOs in their food and
beverage products. As a result, states around the
U.S. have been considering laws requiring
companies to label food products containing
GMOs.121 An NPD Group research report found
that more than half of American consumers have
some level of concern about genetically modified
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food products, yet many are still unclear about
the definition of GMOs.122 There are currently 30
states in the U.S. with legislative proposals
regarding GMO labeling, and more than 60
countries around the world have restrictions or
bans on the use of GMOs.123 For example, China
recently issued GMO labeling policies, as food
safety concerns in the country are growing. In
2012, more than 41 percent of Chinese
consumers considered food safety a “very big
problem.” This number is up from only 12
percent in 2008. The GMO labeling requirement
may provide increased demand for premium
brands that do not contain GMO ingredients.124
The European Union also maintains strict GMO
legislation that requires safety assessments and
clear labeling of all GMO products placed on the
market.125
Currently, many companies openly oppose GMO
labeling.126 While the safety concerns of GMO
consumption are widely debated, these new
legislative proposals and bans present pressure
for the Processed Foods industry to acknowledge
the use of GMOs in its products and label them
accordingly. Companies that oppose GMO
labeling and fail to recognize the growing trends
and concerns regarding the use and labeling of
GMO ingredients may expose themselves to
unnecessary risks that could materially harm
operating results in the future. Conversely,
companies that diversify their ingredient portfolio
into non-GMO sources may capture additional
opportunities to fulfill consumer demand for non-
GMO food products.
Value Impact
Chronic instances of presenting false or deceptive
information when advertising a product could
invite additional oversight and litigation, leading
to higher one-time costs and increased
compliance expenses that harm profitability.
Government and legal actions toward companies
with poor advertising practices are likely to have
a negative impact on reputation, leading to a
long-term deterioration of brand reputation and
a loss of market share. Conversely, proper
management of the issues can lead to new
opportunities, as consumers prefer food products
that are labeled truthfully and that align with
their health and nutritional goals.
Policies for responsible marketing toward children
present opportunities for companies to build
stronger brand reputations and strengthen their
social license to operate, while avoiding negative
regulation and litigation aimed at the company’s
products. As newer or more stringent FTC and
FDA regulations are implemented, the probability
and magnitude of these impacts are likely to
increase in the near to medium term.
Additionally, regulation around the labeling of
GMOs could impact revenue and market share, as
consumers may be less inclined to purchase
products with genetically engineered ingredients.
Outright bans on GMO ingredients present
supply chain risks that may result in increased
prices for raw materials, harming processed foods
companies’ profitability. Companies that fail to
address growing concerns about the use of GMO
ingredients may suffer from missed opportunities
and diminishing customer demand.
Disclosure around a company’s labeling and
marketing violations can help analysts determine
financial costs and risks associated with
misleading marketing policies, which harm a
company’s reputation. Disclosure around a
company’s use of GMOs can help analysts
determine the company’s exposure to risks
associated with pending and future regulation
that requires labeling of these ingredients.
Additionally, understanding of the company’s
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practices regarding marketing geared toward
children can help analysts determine the exposure
to potential regulation and public outcry.
BUSINESS MODEL AND INNOVATION
This dimension of sustainability is concerned with
the impact of environmental and social factors on
innovation and business models. It addresses the
integration of environmental and social factors in
the value-creation process of companies,
including resource efficiency and other
innovation in the production process. It also
includes product innovation and efficiency and
responsibility in the design, use-phase, and
disposal of products. It includes management of
environmental and social impacts on tangible and
financial assets—either a company’s own or
those it manages as the fiduciary for others.
Emerging environmental and social trends,
stricter regulatory requirements, and increased
scrutiny of the disposal of food containers and
packaging are creating new innovation and
business opportunities for the industry. The
Processed Foods industry produces hundreds of
millions of disposable containers, which end up in
landfills, creating environmental externalities.
Industry participants are utilizing multiple
opportunities and innovative solutions to address
their packaging’s lifecycle impacts, which can
improve operating efficiency and long-term brand
value.
Packaging Lifecycle Management
Purchasing packaging materials represents a
major business cost and contributes to the
environmental footprint of processed foods
companies. Each stage of a package’s lifecycle,
including design, transportation, and disposal,
presents its own unique environmental challenges
and opportunities that should be considered by
processed foods companies. Environmental
benefits can include reducing the resources
needed for packaging materials, reducing GHG
emissions in transportation, and reducing the
amount of solid waste consumers send to
landfills, as food containers and packaging are
responsible for a significant amount of waste in
the U.S. every year.127
While many processed foods companies do not
manufacture their own containers and
packaging, they are often responsible for
designing and sourcing them, which provides
them an opportunity to engage suppliers to
reduce the negative environmental externalities
associated with packaging manufacturing and
end-of-life waste. Processed foods companies can
also be directly affected by legislation around
end-of-life treatment of containers.
The demand for packaging products is
increasingly driven by the use of materials that
require less energy and fewer non-renewable
resources, as well as packaging innovations that
requires less material. While the sustainability
performance of packaging depends largely on the
type, use, and ultimate disposal of materials,
companies that effectively manage the
sustainability characteristics of their product
packaging may be better positioned to capture
shifting consumer demand, while also potentially
reducing input and transport costs.
Processed foods companies can work with
packaging manufacturers to improve the
environmental characteristics of their packaging
through better design, which helps build a better
brand reputation and generate cost savings.
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Innovations such as light-weighting materials can
result in cost benefits during the purchasing and
transportation phase for processed food
products. Other innovations can result is better
end-of-life management, e.g., through use of
recyclable or compostable materials.
Company performance in this area can be
analyzed in a cost-beneficial way through the
following direct or indirect performance metrics
(see Appendix III for metrics with their full detail):
• Total weight of packaging sourced,
percentage made from recycled or
renewable materials, and percentage that
is recyclable or compostable; and
• Description of strategies to reduce the
environmental impact of packaging
throughout its lifecycle.
Evidence
Processed foods companies can spend a
considerable amount of resources on packaging.
PepsiCo spent more than $6.9 billion, or 10.5
percent of its sales, on packaging for its beverage
and snack food segments in 2013, representing a
significant expense for the company.128 Pinnacle
Foods stated in its Form 10-K that packaging
costs represent more than 21 percent of the
company’s cost of goods sold.129 Other
companies recognize the risk of increasing
materials costs and the importance of packaging
design in the competitive food industry.130
Companies are setting packaging innovation
goals to improve efficiencies and reduce the
negative environmental impacts of packaging.
ConAgra has a research and development team
dedicated to sustainable packaging and
improving the company’s packaging and
environmental performance. Through multiple
initiatives, the company has reduced its use of
packaging material by 7.8 million pounds, which,
combined with other initiatives such as water and
waste management, saved the company more
than $30 million in 2013.131 The company has set
goals to reduce packaging by 10 percent per
pound of product, increase the amount of
packaging made with renewable resources, and
increase the amount of recycled content in
packaging by 25 percent from 2009 baseline
levels.132 Nestlé’s packaging initiatives reduced
the company’s use of packaging materials by
more than 133 million pounds, leading to more
than $170 million in cost savings in 2013.133
Even small changes in packaging design can
translate to real business value. For example,
General Mills redesigned its Bisquick package by
removing a handle, which reduced the amount of
material needed. This small design feature saves
the company more than $900,000 in material
and logistics costs a year.134 These costs savings
are largely permanent, recurring every year,
representing significant value for shareholders.
Additionally, as companies compete to create
appealing packaging, more companies are
beginning to experiment with new packaging
technology to meet environmental performance
goals. Heinz partnered with Coca-Cola to
produce ketchup in bottles using Coke’s
PlantBottle plastic packaging technology. Up to
40 percent of the resin used to make the
PlantBottle comes from bio-based renewable
plant materials, and the bottles are believed to be
better for the environment than traditional fossil
fuel-based plastic containers.135
Currently, packaging generates nearly 33 percent
of the total non-industrial solid waste sent to
landfills every year, a significant amount of waste
that contributes to methane emissions from
landfills.136 Processed foods producers are
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responsible for much of this waste, namely paper
and paperboard, which are key to protecting
food products and which represented 28 percent
of total discarded municipal solid waste in
2011.137 The industry as a whole may be at risk
from extended producer responsibility laws,
which essentially require companies to internalize
the cost of disposing of their packaging at the
end-of-life stage. Companies have also been
targeted by shareholder resolutions seeking to
improve the recyclability of packaging. For
example, Mondelez International utilizes various
disposable packaging materials that are
sometimes unrecyclable. This spurred a
shareholder resolution vote in 2014 to improve
packaging recyclability, which received more than
28 percent support, representing more than $11
billion in shareholder value.138 Walmart recently
launched a $100 million Closed Loop Fund to
improve the recycling infrastructure for many of
the products it sells, including food packaging.
Many large processed foods companies signed on
to support Walmart’s initiative, including Kellogg,
Campbell Soup Company, General Mills, and
PepsiCo.139 Companies are also implementing
new voluntary programs, such as the
How2Recycle Label, in order to help improve the
recycling rates for their product packaging. This
labeling gives consumers convenient information
about the recyclability a product’s packaging,
including boxes and plastic liners used to protect
cereal, and the availability of recycling centers.
The program, led by GreenBlue, has been found
to be easy to understand and leads to recycling
action by consumers while also improving the
reputation of companies and their products.140
Value Impact
Collaborating with packaging partners to develop
innovations in material technology and light-
weighting may provide producers with
opportunities to address environmental concerns
and capture recurring cost savings by reducing
material usage. This effectively lowers the cost of
goods sold and can improve margins.
Companies that voluntarily improve and account
for the environmental impacts of their products’
containers across their lifecycle, especially during
end-of-life stages, may be better positioned to
build stronger brand reputation with customers
and avoid burdensome recycling legislation that
can hinder industry profitability. The level of
material impact on companies is likely to increase
in the future as the public becomes more
environmentally cautious.
Disclosure around packaging efficiency, the
percentage of packaging that is recycled, and the
amount that is made from renewable sources can
help analysts evaluate a company’s cost-saving
potential and assess its exposure to potential
regulations associated with end-of-life
management.
LEADERSHIP AND GOVERNANCE
As applied to sustainability, governance involves
the management of issues that are inherent to
the business model or common practice in the
industry and are in potential conflict with the
interest of broader stakeholder groups
(government, community, customers, and
employees). They therefore create a potential
liability, or worse, a limitation or removal of
license to operate. This includes regulatory
compliance, lobbying, and political contributions.
It also includes risk management, safety
management, supply chain and resource
management, conflict of interest, anti-
competitive behavior, and corruption and bribery.
Processed foods companies’ ingredient supply
chains are exposed to risks from climate change.
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Companies also potentially contribute to
environmental and social injustices, which can
present long-term operational risks. Companies in
the industry are beginning to engage suppliers to
improve the resiliency of their supply of raw
ingredients and ensure ingredients are ethically
sourced. Through engagement with suppliers,
companies may limit their exposure to shifting
weather patterns that can cause ingredient
supply disruptions.
Environmental & Social Impacts of Ingredient Supply Chains
Companies in the industry utilize a significant
amount of agricultural inputs that are susceptible
to shifts in weather patterns, many of which are
produced in areas affected by drought. This
exposure can lead to price inflation and can
affect company profitability. Ultimately, climate
change, water scarcity, and land-use restriction
present risks to a company’s long-term ability to
source key materials and ingredients. Companies
are recognizing these risks and engaging with key
suppliers to implement sustainable agricultural
practices in order to generate a more resilient
supply of key ingredients. As defined by the
USDA, sustainable agriculture entails farming
systems “capable of maintaining their
productivity and usefulness to society indefinitely.
Such systems must be resource-conserving,
socially supportive, commercially competitive, and
environmentally sound.”141 Additionally,
companies are continually competing on ethical
sourcing practices and certifications for their
products, which address labor issues and worker
rights. Responsible sourcing and fair trade
practices have the potential to offer companies
opportunities to capture growing demand from
socially conscious consumers, while also securing
a steady supply of key ingredients.
Managing a company’s exposure to these
environmental and social risks can lead to
improved supply chain resiliency and enhanced
reputation, which provide value to shareholders.
Company performance in this area can be
analyzed in a cost-beneficial way through the
following direct or indirect performance metrics
(see Appendix III for metrics with their full detail):
• Percentage of food ingredients sourced
from regions with High or Extremely High
Baseline Water Stress;
• Percentage of food ingredients sourced
that are certified to third-party
environmental and/or social standards, by
certification scheme;
• Suppliers’ social and environmental
responsibility audit conformance: major
non-conformance rate and associated
corrective action rate and minor non-
conformance rate and associated
corrective action rate; and
• List of priority food ingredients and
discussion of sourcing risks due to
environmental and social considerations.
Evidence
As processed foods producers are large direct
purchasers of many agricultural ingredients, they
have a vested interest in the operations and
performance of key ingredient suppliers. The
Processed Foods industry recognizes that climate
change and water scarcity in the supply chain can
have a material impact on ingredient prices.
Nearly every company in the industry recognizes
the key risk of supply chain disruptions and
increasing prices of raw materials as a result of
climate change and water scarcity in their
Form 10-K filings.142 Specifically, ConAgra states
in its 2014 Form 10-K that “[t]here is growing
concern that carbon dioxide and other
greenhouse gases in the atmosphere may have an
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adverse impact on global temperatures, weather
patterns, and the frequency and severity of
extreme weather and natural disasters. In the
event that such climate change has a negative
effect on agricultural productivity, we may be
subject to decreased availability or less favorable
pricing for certain commodities that are necessary
for our products, such as corn, wheat, and
potatoes.”143
A recent report by Oxfam states that the price of
Kellogg’s Corn Flakes and General Mills’ Kix
cereals could rise 44 and 24 percent, respectively,
over the next 15 years due to ingredient supply
disruption caused by climate change.144 General
Mills has identified more than 10 ingredients that
are crucial to its success, with which the company
can have the greatest impact through sustainable
sourcing strategies. These ingredients include
palm oil, wheat, oats, sugar beets, vanilla, cocoa,
corn, and sugarcane. Through company
partnerships and supply chain analysis for
individual ingredients, General Mills hopes to
sustainably source 100 percent of its 10 priority
ingredients by 2020, representing more than 50
percent of annual raw material purchases.145 This
effort may help the company secure a long-term
supply of key ingredients, providing it with a
competitive advantage relative to its peers.
Currently, 87 percent of corn produced in the
U.S. is grown in regions with high or extremely
high water stress, which highlights the challenges
and potential supply disruptions for industries
that depend on the crop.146 The price of corn has
risen dramatically over the past 10 years,
increasing from $2 per bushel in 2005 to around
$4 per bushel in 2007, and again in 2012,
reaching an all-time high of $8 per bushel after
severe droughts. The price of corn has since
stabilized after a record harvest in 2013, pushing
prices down to between $4 and $5 per bushel,
yet the risk remains for high levels of price
volatility in the future due to drought concerns,
presenting significant risks for processed foods
companies.147 General Mills and ConAgra both
disclose their direct and supply chain exposure to
water-stressed regions in their sustainability
reports.148 For example, ConAgra stated that
more than 42 percent of its “tier-1” suppliers are
located in regions with medium to high water
stress.149 This sort of disclosure may give investors
a better understanding of the inherent risks in
the company’s supply chain.
Beyond the risks of external exposure to climate
change, the farming of agricultural ingredients
has large environmental impacts, such as
pollution, heavy water usage, and GHG
emissions. By purchasing sustainably farmed
ingredients, engaging with suppliers, and
harnessing innovations in sustainable agriculture,
processed foods companies can have a direct
influence on their supply chains in order to
address many of the environmental impacts of
their ingredients. For example, companies may
choose to purchase organic ingredients that are
produced without synthetic pesticides and
fertilizers, helping to protect soil and local
ecosystems, or they can seek more direct
involvement in the growing process.150 H.J. Heinz
Company has developed its own proprietary
tomato seeds through traditional, non-genetically
modified breeding techniques that are adaptable
to various climates around the world. These seeds
produce higher yields that are more resistant to
disease, remain ripe longer, and require less
water, improving the overall quality and cost of
the company’s main ingredient. Heinz maintains
an influence on the planting and cultivation
process, allowing the company to improve
product quality and farmer well-being, thus
further strengthening its supply of tomatoes. The
company currently distributes its seeds to more
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than 30 countries and believes that more than 30
percent of the world’s tomatoes are grown using
HeinzSeed.151 Mars Inc. has been recognized for
its supplier engagement efforts to improve cocoa
yields in Africa. The company hopes to engage
with more than 150,000 farmers in Ivory Coast in
order to triple cocoa yields in the region, a task
the company believes is feasible, requiring only
better plant materials, fertilizer resources, and
farmer training, which Mars will provide.152
Responsible sourcing initiatives can lead to direct
environmental, social, and business benefits for
companies in the Processed Foods industry. The
demand for palm oil rose after the FDA
implemented trans-fat labeling requirements, as
palm oil is a viable replacement for trans fats in
many food products. Palm oil is now the most-
produced edible oil in the world.153 The rising
demand for palm oil has led to an increase in the
rate of deforestation and increased GHG
emissions in Indonesia. As a result, Indonesia is
now the third-largest GHG emitter in the world.
The expansion of palm oil plantations in
Southeast Asia has also contributed to harming
endangered species and local communities in the
region.154 Companies in the Processed Foods
industry are recognizing these externalities and
addressing them through responsible and
sustainable sourcing initiatives. Nearly every
major user of palm oil in the Processed Foods
industry is setting goals to responsibly source 100
percent of palm oil. For example, General Mills
and Kellogg have both set full traceability and
100-percent responsible sourcing goals for their
palm oil supply chains, aiming to use only palm
oil that is from legal sources and is produced in a
way that preserves high-value lands and meets
company supplier codes of conduct. These
companies are looking to comply with various
certifications through the Roundtable on
Sustainable Palm Oil (RSPO) principles.155
Responsible sourcing initiatives also cover other
ingredients and various social and environmental
externalities. Chocolate companies, for example,
are also recognizing the need to address child
labor concerns in their supply chains, as these
may tarnish brand reputation. Nestlé is leveraging
its purchasing power to address child labor
concerns in African cocoa regions. The company
has partnered with the Fair Labor Association to
address the issue, which can be harmful to
children and local communities in the region.156
Mondelez International has invested more than
$400 million in its “Cocoa Life” initiative to
address many of the social and environmental
externalities of cocoa farming, including
improving farming techniques, promoting
community well-being, eliminating child labor,
and protecting the environment.157
Value Impact
While many of these companies do not have
direct control over farming practices, utilizing
their purchasing power to engage with farmers
enables them to influence and improve
agriculture conditions that improve their supply
of key ingredients. These efforts can help
companies address issues such as climate change
and water scarcity in their supply chain, which
can affect the availability of key raw ingredients
that impacts a company’s cost of sales and ability
to generate revenue in the medium to long term.
Additionally, investors may benefit from
disclosure around a company’s exposure to
environmental and supply chain risks from
climate change and water scarcity, which can
drive a firm’s long-term competitiveness and
influence its total risk profile. Addressing
responsible sourcing issues through programs
and certifications may provide processed foods
producers, particularly those that use palm oil
and cocoa, with opportunities to capture greater
I N D U S T R Y B R I E F | P R O C E S S E D F O O D S | 27
demand, improve their brand reputation, and
strengthen their risk profile.
Disclosure around the percentage of ingredients
sourced from water-stressed regions can help to
identify the level of risk associated with supply
chains, such as a company’s ability to procure
ingredients effectively and volatility in ingredient
prices. Additionally, further disclosure around
other social and environmental considerations in
the supply chain can help analysts determine
reputational risk associated with a company’s
supply chain.
Evolving regulations focused on addressing
environmental externalities are likely to become
more stringent, making probability and
magnitude of the aforementioned impacts higher
in the future.
I N D U S T R Y B R I E F | P R O C E S S E D F O O D S | 28
APPENDIX I
FIVE REPRESENTATIVE PROCESSED FOODS COMPANIESV
V This list includes five companies representative of the Processed Foods industry and its activities. This includes only companies for which the Processed Foods industry is the primary industry, companies that are U.S.-listed but are not primarily traded over the counter, and for which at least 20 percent of revenue is generated by activities in this industry, according to the latest information available on Bloomberg Professional Services. Retrieved on April 15, 2015.
COMPANY NAME (TICKER SYMBOL)
Mondelez International (MDZ)
ConAgra Foods (CAG)
General Mills (GIS)
Campbell Soup Co (CPB)
Hershey Co (HSY)
I N D U S T R Y B R I E F | P R O C E S S E D F O O D S | 29
APPENDIX IIA
EVIDENCE FOR SUSTAINABILITY DISCLOSURE TOPICS
Sustainability Disclosure Topics
EVIDENCE OF INTEREST
EVIDENCE OF
FINANCIAL IMPACT
FORWARD-LOOKING IMPACT
HM (1-100)
IWGs EI
Revenues &
Costs
Assets & Liabilities
Cost of Capital
EFI
Probability & Magnitude
Exter-
nalities
FLI
% Priority
Energy & Fleet Fuel Management
53* 83 5 Medium • • Medium • Yes
Water Management
70* 86 4 High • • Medium • Yes
Food Safety 67* 100 1 High • • • High • Yes
Health & Nutrition 73* 86 2 High • • • High • • Yes
Product Labeling & Marketing
57* 93 3t Medium • • High • Yes
Packaging Lifecycle Management
20 83 6 Medium • Medium • Yes
Environmental & Social Impacts of Ingredient Supply Chains
53* 93 3t High • • • High • • Yes
HM: Heat Map, a score out of 100 indicating the relative importance of the topic among SASB’s initial list of 43 generic sustainability issues. Asterisks indicate “top issues.” The score is based on the frequency of relevant keywords in documents (i.e., 10-Ks, 20-Fs, shareholder resolutions, legal news, news articles, and corporate sustainability reports) that are available on the Bloomberg terminal for the industry’s publicly listed companies. Issues for which keyword frequency is in the top quartile are “top issues.”
IWGs: SASB Industry Working Groups.
%: The percentage of IWG participants that found the disclosure topic likely to constitute material information for companies in the industry. (-) denotes that the issue was added after the IWG was convened.
Priority: Average ranking of the issue in terms of importance. 1 denotes the most important issue. (-) denotes that the issue was added after the IWG was convened.
EI: Evidence of Interest, a subjective assessment based on quantitative and qualitative findings.
EFI: Evidence of Financial Impact, a subjective assessment based on quantitative and qualitative findings.
FLI: Forward-looking Impact, a subjective assessment of the presence of a material forward-looking impact.
I N D U S T R Y B R I E F | P R O C E S S E D F O O D S | 30
APPENDIX IIB
EVIDENCE OF FINANCIAL IMPACT FOR SUSTAINABILITY DISCLOSURE TOPICS
MEDIUM IMPACT H IGH IMPACT
Evidence of
Financial Impact
REVENUE & EXPENSES ASSETS & LIABILITIES RISK PROFILE
Revenue Operating Expenses Non-operating Expenses Assets Liabilities
Cost of Capital
Industry Divestment
Risk Market Share
New Markets Pricing
Power Cost of
Revenue R&D CapEx Extra-
ordinary Expenses
Tangible Assets
Intangible Assets
Contingent Liabilities & Provisions
Pension & Other
Liabilities
Energy & Fleet Fuel Management
•
•
•
Water Management
•
• • •
•
Food Safety • • • • •
Health & Nutrition • • • • • • •
Product Labeling & Marketing
• • • • •
Packaging Lifecycle Management
• • •
Environmental & Social Impacts of Ingredient Supply Chains
• • • •
I N D U S T R Y B R I E F | P R O C E S S E D F O O D S | 31
APPENDIX III
SUSTAINABILITY ACCOUNTING METRICS | PROCESSED FOODS
TOPIC ACCOUNTING METRIC CATEGORY UNIT OF MEASURE CODE
Energy & Fleet Fuel Management
Operational energy consumed, percentage grid electricity, percentage renewable
Quantitative Gigajoules (GJ), Percentage (%)
CN0103-01
Fleet fuel consumed, percentage renewable Quantitative Gigajoules (GJ), Percentage (%)
CN0103-02
Water Management
(1) Total water withdrawn and (2) total water consumed, percentage of each in regions with High or Extremely High Baseline Water Stress
Quantitative Cubic meters (m3), Percentage (%)
CN0103-03
Number of incidents of non-compliance with water quality and/or quantity permits, standards, and regulations
Quantitative Number CN0103-04
Discussion of water management risks and description of strategies and practices to mitigate those risks
Discussion & Analysis
n/a CN0103-05
Food Safety
Global Food Safety Initiative (GFSI) audit conformance: (1) major non-conformance rate and associated corrective action rate and (2) minor non-conformance rate and associated corrective action rate
Quantitative Rate CN0103-06
Percentage of ingredients sourced from supplier facilities certified to a Global Food Safety Initiative (GFSI) scheme
Quantitative Percentage (%) by spend CN0103-07
Notice of food safety violations received, percentage corrected
Quantitative Number, Percentage (%)
CN0103-08
Number of recalls issued, total amount of food product recalled*
Quantitative Number, Metric tons (t)
CN0103-09
Health & Nutrition
Revenue from products labeled and/or marketed to promote health and nutrition attributes
Quantitative U.S. Dollars ($) CN0103-10
Revenue from products that meet Smart Snacks in School criteria or foreign equivalent
Quantitative U.S. Dollars ($) CN0103-11
Description of the process to identify and manage products and ingredients of concern and emerging dietary preferences
Discussion & Analysis
n/a CN0103-12
* Note to CN0103-09—Disclosure shall include a description of notable recalls, such as those that affected a significant amount of product or those related to serious illness or fatality.
I N D U S T R Y B R I E F | P R O C E S S E D F O O D S | 32
SUSTAINABILITY ACCOUNTING METRICS | PROCESSED FOODS (CONTINUED)
TOPIC ACCOUNTING METRIC
CATEGORY
UNIT OF MEASURE
CODE
Product Labeling & Marketing
Number of child advertising impressions made, percentage promoting products meeting the Children’s Food and Beverage Initiative (CFBAI) Uniform Nutrition Criteria
Quantitative Number, Percentage (%)
CN0103-13
Revenue from products labeled as (1) containing genetically modified organisms (GMOs) and (2) non-GMO
Quantitative U.S. Dollars ($) CN0103-14
Notices of violations received for non-conformance with regulatory labeling and/or marketing codes
Quantitative Number, Percentage (%)
CN0103-15
Amount of legal and regulatory fines and settlements associated with marketing and/or labeling practices**
Quantitative U.S. Dollars ($) CN0103-16
Packaging Lifecycle Management
(1) Total weight of packaging sourced, (2) percentage made from recycled or renewable materials, and (3) percentage that is recyclable or compostable
Quantitative Metric tons (t), Percentage (%)
CN0103-17
Description of strategies to reduce the environmental impact of packaging throughout its lifecycle
Discussion & Analysis
n/a CN0103-18
Environmental & Social Impacts of Ingredient Supply Chains
Percentage of food ingredients sourced from regions with High or Extremely High Baseline Water Stress
Quantitative Percentage (%) by spend
CN0103-19
Percentage of food ingredients sourced that are certified to third-party environmental and/or social standards, by certification scheme
Quantitative Percentage (%) by spend
CN0103-20
Suppliers’ social and environmental responsibility audit conformance: (1) major non-conformance rate and associated corrective action rate and (2) minor non-conformance rate and associated corrective action rate
Quantitative Rate CN0103-21
List of priority food ingredients and discussion of sourcing risks due to environmental and social considerations
Discussion & Analysis
n/a CN0103-22
** Note to CN0103-16—Disclosure shall include a description of fines and settlements and corrective actions implemented in response to events.
I N D U S T R Y B R I E F | P R O C E S S E D F O O D S | 33
34I N D U S T RY B R I E F | P R O C E S S E D F O O D S
APPENDIX IV: Analysis of SEC Disclosures | Processed Foods
The following graph demonstrates an aggregate assessment of how representative U.S.-listed Processed Foods companies are currently reporting on sustainability topics in their SEC annual filings.
Processed Foods
Energy & Fleet Fuel Management
Water Management
Food Safety
Health & Nutrition
Product Labeling & Marketing
Packaging Lifecycle Management
Environmental & Social Impacts of Ingredient Supply Chain
0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%
TYPE OF DISCLOSURE ON SUSTAINABILITY TOPICS
NO DISCLOSURE BOILERPLATE INDUSTRY-SPECIF IC METRICS
83%
86%
100%
86%
93%
83%
93%
IWG Feedback*
*Percentage of IWG participants that agreed topic was likely to constitute material information for companies in the industry.
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2 Author’s calculation based on above data, April 14, 2015.
3 Data from Bloomberg Professional service, accessed on June 12, 2014, using the MDLZ FA SEG <GO> command. The data represents global revenues for Mondelez International Inc., broken down by geographic regions.
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6 Mondelez International, FY2013 Form 10-K for the Period Ending December 31, 2013 (filed March 3, 2014), p.55; PepsiCo Inc., FY 2013 Form 10-K for the Period Ending December 28, 2013 (filed February 14, 2014), p.7.
7 ConAgra, FY2013 Form 10-K for the Period Ending May 25, 2014 (filed July 19, 2014), p. 10.
8 PepsiCo Inc., FY2014 Form 10-K for the Period Ending December 27, 2014 (Filed February 12, 2015), p. 7; ConAgra Foods Inc., FY 2014 Form 10-K for the Period Ending May 25, 2014 (Filed July 16, 2014), p. 4; IBISWorld, IBISWorld Industry Report 31191 Snack Food Production in the US, April 2014, p. 16.
9 IBISWorld, IBISWorld Industry Report 31141 Frozen Food Production in the US,” February 2014, p. 6; IBISWorld, IBISWorld Industry Report 31191 Snack Food Production in the US, April 2014, p. 6.
10 IBISWorld, IBISWorld Industry Report 31191 Snack Food Production in the US, April 2014, p. 27.
11 Ibid., p. 9.
12 IBISWorld, IBISWorld Industry Report 31191 Snack Food Production in the US, April 2014, p. 21.
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17 IBISWorld, IBISWorld Industry Report 31191 Snack Food Production in the US, April 2014, p. 8.
18 IBISWorld, IBISWorld Industry Report 31123 Cereal Production in the US, January 2014, p. 24; IBISWorld, IBISWorld Industry Report 31191 Snack Food Production in the US, April 2014, p. 24.
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24 IBISWorld, IBISWorld Industry Report 31141 Frozen Food Production in the US, February 2014, p. 9.
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I N D U S T R Y B R I E F | P R O C E S S E D F O O D S | 35
26 Author’s calculation based on above data, April 14, 2015.
27 Barbara Boland, "USDA Bans Junk Food in Schools - Will Salty Snacks Move to Black Market?," CNS News, April 14, 2014, http://www.cnsnews.com/mrctv-blog/barbara-boland/usda-bans-junk-food-schools-will-salty-snacks-move-black-market.
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31 White House Task Force on Childhood Obesity, Solving the Problem of Childhood Obesity Within a Generation, May 2010, p. 29.
32 Karlene Lukovitz, "Kellogg Agrees To Drop 'All Natural' Kashi Claims," Media Post, May 09, 2014, http://www.mediapost.com/publications/article/225527/kellogg-agrees-to-drop-all-natural-kashi-claims.html.
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36 Mondelez International, FY2013 Form 10-K for the Period Ending December 31, 2013 (filed March 3, 2014), p. 6.
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39 Mondelez International Inc., FY2013 Form 10-K for the Period Ending December 31, 2013 (filed March 3, 2014), p. 2.
40 ConAgra Foods Inc., 2013 Corporate Sustainability Report, p. 80.
41 Kellogg Co., FY2013 Form 10-K for the Period Ending December 28, 2013 (filed February 24, 2014), p. 2.
42 Author’s calculation based on data from “Annual Survey of Manufacturers: General Statistics: Statistics for Industry Groups and Industries: 2011,” U.S. Census Bureau, December 17, 2013, accessed May 20, 2015, http://www.census.gov/manufacturing/asm/.
43 PepsiCo Inc., FY2015 Form 10-K for the Period Ending December 27, 2014 (filed February 12, 2015), p. 18.
44 Author’s calculation from data from Bloomberg Professional service, accessed on April 14, 2015, using the BICS <GO> command. Industry revenue represents global revenues of companies listed on global exchanges and traded over-the-counter (OTC) from the Processed Foods industry, using Levels 3 and 4 of the Bloomberg Industry Classification System.
45 Author’s calculation based on data from Bloomberg Professional service, accessed on May 20, 2015, using the CAG FA US EQUITY <GO> command.
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47 General Mills Inc., 2013 Corporate Sustainability Report, pp. 38-39.
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49 PepsiCo Inc., 2013 Corporate Sustainability Report, p. 25.
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58 General Mills, 2015 Global Responsibility Report, p. 79.
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61 "Every Drop Matters," Heinz, accessed June 20, 2014, http://www.heinz.com/sustainability/environment/water-consumption.aspx; Post Holdings Inc., FY2013 Form 10-K for the Period Ending September 30, 2013 (filed November 11, 2013), p. 11; Hain Celestial Group Inc., FY2013 Form 10-K for the Period Ending June 30, 2013 (filed August 29, 2013), p. 13.
62 Diamond Foods Inc., FY2014 Form 10-K for the Period Ending July 31, 2014 (filed October 3, 2014), p. 13.
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71 Spencer Fane, "SPCC Violations by Food Company Result in $475,000 Penalty and Injunctive Relief," Environmental Law Solutions, November 03, 2013, accessed May 20, 2015, http://www.spencerfane.com/environmental_law_solutions/blog.aspx?entry=437.
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75 Pinnacle Foods Inc., FY2013 Form 10-K for the Period Ending December 29, 2013 (filed March 6, 2014), p. 19; Kellogg Company, FY2013 Form 10-K for the Period Ending December 28, 2013 (filed February 24, 2014), p. 9.
76 Mondelez International Inc., FY2013 Form 10-K for the Period Ending December 31, 2013 (filed March 3, 2014), p. 12.
77 Pricewaterhouse Coopers, Brand enhancement: The ‘hidden’ benefit of implementing food chain visibility, July 2012, p. 3.
78 Kellogg Company, FY2013 Form 10-K for the Period Ending December 28, 2013 (filed February 24, 2014), p. 65.
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80 ConAgra Foods, 2013 Corporate Sustainability Report, p. 33.
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82 Jesse Newman, “Criminal Cases Roil Food Industry,” Wall Street Journal, May 20, 2015, accessed May 27, 2015, http://www.wsj.com/articles/more-food-safety-lapses-prosecuted-as-crimes-1432165360.
83 Brandon Brown, “Listeria recalls lead Inventure Foods to a $14M loss in Q1,” Phoenix Business Journal, May 7, 2015, http://www.bizjournals.com/phoenix/news/2015/05/07/listeria-recalls-lead-inventure-foods-to-a-14m.html.
84 Data from Bloomberg Professional service, accessed on May 8, 2015, using the SNAK FA IS <GO> command. The data represents company revenue and income from Inventure Foods Inc, for 2014 and 2013 fiscal years.
85 General Mills, 2013 Corporate Sustainability Report, pp. 3-5.
86 "Background on the FDA Food Safety Modernization Act (FSMA)," FDA, last modified April 9, 2014, accessed June 27, 2014, http://www.fda.gov/Food/GuidanceRegulation/FSMA/ucm239907.htm.
87 Pricewaterhouse Coopers, Brand enhancement: The ‘hidden’ benefit of implementing food chain visibility, July 2012, p. 2.
88 Ibid., pp. 3, 6.
89 "Q4 2013 - The Recall Sprawl," ExpertRECALL, pp. 8-10, last modified 2014, accessed June 27, 2014.
90 "Food Allergy Facts and Statistics for the U.S.,” Food allergy Research & Education, accessed June 27, 2014, http://www.foodallergy.org/document.doc?id=194.
91 Adam Marcus, "MSG linked to weight gain," Reuters, last modified May 27, 2011, accessed May 9, 2015, http://www.reuters.com/article/2011/05/27/us-msg-linked-weight-gain-idUSTRE74Q5SJ20110527; "FDA takes step to further reduce trans fats in processed foods," FDA press release, November 07, 2013, http://www.fda.gov/newsevents/newsroom/pressannouncements/ucm373939.htm; "Trans Fats," American Heart Association, last modified August 5, 2014, http://www.heart.org/HEARTORG/GettingHealthy/FatsAndOils/Fats101/Trans-Fats_UCM_301120_Article.jsp.
92 Sharon Begley, “As America's waistline expands, costs soar,” Reuters, April 30, 2012, accessed May 12, 2012, http://www.reuters.com/article/2012/04/30/us-obesity-idUSBRE83T0C820120430.
93 Boland, "USDA Bans Junk Food in Schools - Will Salty Snacks Move to Black Market?"
94 Martin, "Mexico Tackles Obesity Epidemic With Tax on Junk Food."
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95 PepsiCo Inc., FY2015 Form 10-K for the Period Ending December 27, 2014 (filed February 12, 2015), p. 13; Synder’s-Lance Inc., FY2013 Form 10-K for the Period Ending December 28, 2013 (filed February 25, 2014), p. 7.
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