In terms of societal attitudes towards sustainability, Europe – especially the Nordic region – has historically been faster to embrace change than most other parts of the world. This is reflected in the long track record of both Nordic companies and Nordic investors in focusing on the various dimensions of sustainability and associated risks.
In other parts of the world, including the US – the world’s largest market by capitalisation – many businesses were routinely turning down invitations to meet and discuss ESG issues and risks up until about five years ago. Fast forward to today, not only do most companies want to talk ESG, but management teams are also listening to – and acting upon – our sustainability proposals.
Interestingly, this trend has hardly been disturbed by the well-publicised political posturing and backlash of the past two years.
Despite the rhetorical divide between anti-ESG ‘red states’ and pro-ESG ‘blue states’ being unlikely to meaningfully subside as we move closer to the 2024 US presidential election, the trend towards an increased focus on sustainability risks is as unlikely to be derailed in the US as it is elsewhere.
In fact, with US corporate management teams increasingly recognising the need to improve ESG risk profiles and reporting practices, we are continuing to witness positive steps forward through our ongoing engagement activity. Although subject to some political risk in the medium term, both the SEC’s new focus on climate risk and the $370bn of climate-related investments unveiled under last year’s Inflation Reduction Act are strong drivers supporting the underlying trend. Two companies currently held within our portfolios illustrate this well.
US Foods: Scope 3 GHG emissions engagement
US Foods, the second-largest food service distributor in the US, is a good illustration of the complexities in reducing real-world carbon emissions. At first glance, US Foods itself is not a heavy emitter, but with approximately 250,000 clients across the country and more than 6,000 different suppliers, 90% of its carbon footprint comes from indirect – or Scope 3 – emissions.
So, while US Foods is, and should be, working towards the decarbonisation of its own operations, through fleet fuel management and energy efficiency, we believe it also has a major role to play in building a net-zero food supply chain.
However, given the indirect nature of the emissions, US Foods faces a significant challenge to measure and reduce emissions across its diverse supply chain. This has been a major focus of our engagement efforts with the company.
Last year, US Foods committed to having 35% of its suppliers, measured by emissions, covered with science-based targets by 2027. While we were encouraged by the approval of this goal by the Science Based Target initiative, we believe execution will be the decisive factor in actual emissions reduction.
We have reiterated to management the importance of gathering reliable and accurate data from suppliers – both direct and indirect – to complete the inventory of its Scope 3 emissions. We have also encouraged US Foods to commit to even more ambitious emission goals. Indeed, we expect the company to take even more responsibility for the emissions attached to its purchasing decisions in a timeframe of three years and ensure the underlying raw materials can be produced with reduced impacts on nature and climate.
Ashland: Engagement on resource management and disclosure
Another US company we are currently engaging with is Ashland, a chemicals company with a focus on consumer market additives and specialty ingredients. While chemicals can negatively impact human health and the environment during stages of a life cycle, the company’s portfolio of more sustainable chemistry plays an important role in providing more natural, recyclable, and sustainable products to its customer base.
While Ashland is well positioned in terms of more sustainable core chemistry and innovations, we believe its position as a leading supplier of sustainable ingredients is not being recognised by the wider market. Ashland may even be penalised for lacking clear climate disclosures and ambitious public sustainability targets.
Therefore, we continue to encourage senior management to provide greater transparency on the ESG characteristics of its solutions and to make this a central aspect of Ashland’s business strategy.
As we move forward, we will continue to engage on and monitor the company’s strategic direction toward environmental stewardship, mostly through the completion of the ongoing process of setting science-based targets.
Beyond the business-specific guides to help customers quickly identify sustainable products, we are encouraging Ashland to provide increasingly clear explanations of sustainability characteristics – such as measuring how the company’s offerings comply with the 12 Principles of Green Chemistry.