Key Takeaways
- We consider environmental risks for the consumer products sector to be average from a credit perspective compared to other industries, and evenly balanced in the branded consumer non-durables industry. Concerns include environmentally unfriendly plastic packaging and waste treatment.
- Social risks are above average as consumer focus on health and wellness is causing important shifts and loss of market share for goods such as carbonated nonalcoholic beverages, beer, and cereals. The global tobacco industry has the highest social risk, being subject to health-related risks, resulting in significant regulation.
- In agribusiness, exposure to environmental risks is above average, particularly due to extreme weather-related volatility and disease outbreaks.
- Governance has factored more heavily in recent rating actions in the agribusiness sector, mainly in Brazil, albeit in a more company-specific way.
Analytic Approach
Environmental, social, and governance (ESG) risks and opportunities can affect an entity's capacity to meet its financial commitments in many ways. S&P Global Ratings incorporates these considerations into its ratings methodology and analytics, which enables analysts to factor in short-, medium-, and long-term impacts--both qualitative and quantitative--to multiple steps of their credit analysis. Strong ESG credentials do not necessarily indicate strong creditworthiness (see "The Role Of Environmental, Social, And Governance Credit Factors In Our Ratings Analysis," published Sept. 12, 2019).
Our ESG report cards qualitatively explore the relative exposures (average, below, above average) of sectors to environmental and social credit factors over the short, medium, and long term. For environmental exposures, chart 1 shows a more granular listing of key sectors and (in some cases) subsectors reflecting the qualitative views of our analytical rating teams. This sector comparison is not an input to our credit ratings and not a component of our credit rating methodologies; it is based on our current qualitative, forward-looking opinion of credit risks across sectors.
In addition to our sector views, this report card lists ESG insights for individual companies, including how and why ESG factors may have had a more positive or negative influence on an entity's credit quality compared to sector peers or the broader sector. These comparative views of environmental and social risks are qualitative and established by analysts during industry portfolio discussions, with the goal of providing more insight and transparency.
Environmental risks we considered include greenhouse gas (GHG) emissions, including carbon dioxide, pollution, and waste, water and land usage, and natural conditions (physical climate, including extreme and changing weather conditions, though these tend to be more geographic/entity-specific than a sector feature). Social risks include human capital management, safety management, community impacts, and consumer-related impacts from customer service and changing behavior to the extent influenced by environmental, health, human rights, and privacy (but excluding changes resulting from broader demographic, technological, or other disruptive industry trends). Our views on governance are directly embedded in our rating methodology as part of the management and governance assessment score.
The list of entities covered in this report is not exhaustive. We may provide additional ESG insights in individual company analyses throughout the year as they change or develop, with companies expected to increasingly focus on ESG in their communication and strategy updates.
Branded Consumer Durables, Non-Durables, And Tobacco
This industry includes the following subsectors: apparel and related products (footwear and accessories); beverages (nonalcoholic and alcoholic), including spirits and soft drink bottlers; food (including packaged and branded) and kindred products; personal care and cosmetics; and household products.
Environmental exposure
We consider environmental credit risks for the consumer products industry as average compared with other industries. The global anti-plastic movement is an outcome of inherent environmental risks, which have so far not translated into far-reaching or quantifiable government policy actions. Still, we believe it is subject to the evolution of policy-making across the world. Over the medium to long term, it is possible that sudden regulatory action on waste management will make the industry bear the cost of switching to more environmentally friendly packaging or pay for the treatment of product waste before such costs can be passed on to end consumers. However, many companies are already taking steps ahead of such a transition, including developing smaller, more automated manufacturing bases, as well as improving productivity in warehousing, logistics, and shared services, and reducing, reusing, and reinventing packaging. Another environmental risk is tiny plastic particles from synthetic clothing, which make their way into water when washed.
We believe the consumer durables sector has a modestly higher environmental risk than the non-durable sector because consumer durables can significantly contribute to hazardous and non-hazardous solid waste generation and energy use. Refrigerators, for example, can release harmful chemicals when thrown out, so there is growing importance around solid waste management and materials recovery. In addition, energy-using durables such as kitchen appliances and electronic equipment can contribute significantly to environmental degradation as they are one of the fastest-growing sources of residential energy use.
Social exposure
We consider exposure to social risks as above average, as consumers are increasingly focused on health and wellness, which has resulted in a loss of market share for categories such as carbonated nonalcoholic beverages, beer, and cereal. This is partly due to the additives, preservatives, sugar content, and chemicals linked to health issues. Rising obesity rates--now considered a worldwide public health crisis--have been linked to greater consumption of the additives and preservatives found in many processed foods and beverages.
Governments have developed or are developing ways to stem the obesity rate because of its impact on health care resources and costs. To encourage healthier choices, governments are providing educational programs and food guidelines, implementing mandatory labeling, and, in some regions, imposing taxes (i.e. on sugary drinks). Governments are also stepping up efforts to reduce alcohol consumption because of its impact on health and safety.
Packaged foods have been particularly hard hit because consumers have switched buying patterns to store peripheries, where fresh products are, and away from the center-of-store area where shelf-stable products are. Consumer products companies are thus investing more in innovation, reformulating products, increasing transparency on labels, and engaging in merger and acquisition (M&A) activity to find ways to accelerate sales growth and keep pace with consumers.
Other risks in the industry include social media marketing, which we consider an area of potential social risk due to emerging data privacy laws and because of growing consumer sensitivities around factual accuracy and respectful attitudes to different social groups. Safety management is also a relevant factor for the industry given the risks to reputation and profitability from product recalls. This risk is partly offset by regulatory requirements, corporate focus on preserving brand equity, and by the relatively small volume impact from any product batch entering the market.
We believe the tobacco sector has the highest social risk in the sector given the widespread awareness of the adverse health effects of smoking and its impact on health care costs and resources. The sector has stringent regulatory requirements including restrictions on the promotion, marketing, packaging, labelling, and usage of tobacco products. The secular decline of traditional cigarette usage is accelerating because of a combination of health concerns, increasing regulations in developed markets, and greater availability of reduced-risk products. The decline could accelerate further because the U.S. Food and Drug Administration (FDA) is aiming to reduce the nicotine content of cigarettes and ban menthol cigarettes. Several countries like France are steadily raising cigarette prices. Companies within the sector continue to perform well because they have been able to offset volume declines with price increases, and in some cases are diversifying away from traditional cigarettes through new growth-oriented investments such as e-cigarettes and cannabis. Companies' operating performances and credit metrics could deteriorate if the decline in cigarettes accelerates further and they cannot offset the impact with price increases or alternative tobacco-related products.
Governance
We see governance issues as idiosyncratic. In most cases, governance does not significantly affect ratings. Tobacco, alcoholic beverage, and cannabis companies require greater management oversight given their need to interact with regulators and public officials. Also, there are a number of companies that have significant family ownership or voting control. We do not believe these companies' governance unduly benefits the families/trusts over other stakeholders.
Agribusiness
Environmental exposure
We consider environmental credit risk as above average compared to other industries. The agribusiness sector faces several environmental risks that are critical to its long-term growth prospects, such as land and water use and pollution control. These risks are typically well mitigated in the short term; for example, dedicated water sources for the world's key farming regions are largely expected to remain intact over the next several years, including in the U.S. and Brazil, which have dependable irrigation networks. In addition, improving harvest yields from better agronomic practices (such as more disease-resistant seeds and targeted use of fertilizers) continue to ensure relatively steady global crop production to supply the world's main consumer markets, although more frequent extreme weather conditions will likely have larger impacts on individual companies' production and/or supply chains in a particular region. Temporary weather-induced crop shortages, food supply contamination, and/or disease outbreaks tend to increase profit volatility and can hurt ratings. Recent key weather events affecting the sector include the ongoing drought and fires in Australia and last year's floods in key Midwestern agricultural regions of the U.S. due to unprecedented rainfall, which caused significant damage to certain crops like U.S. sugar beets. Currently the livestock sector is dealing with swine fever hitting China's pork supply, but we believe production out of the Europe, South America, and even the U.S. (tariffs not withstanding) can replace some of China's anticipated shortfall. The impact of swine fever will be highly disruptive to the livestock sector and will cause material food inflation in impacted economies like China, but is likely to be beneficial to ratings in aggregate because it will increase export volume for several livestock producers, particularly those in key exporting regions like Brazil.
Environmental risk is comparatively less relevant for processors than producers because the process and distribution business is only indirectly exposed to weather conditions and it's possible to source from multiple sites and regions.
Social exposure
We consider the social risk to be average compared to other industries. Although environmental risks are most relevant to agribusiness, we have increasingly seen social risks factored into our rating actions. Key social factors include reputational risks related to food safety concerns and the sector's shift to more traceable, sustainably sourced food and ingredients pressured by changing consumer preferences. Some examples include several failed plant inspections affecting Brazil's livestock sector, expanding antibiotic and hormone-free livestock production, and acquisition-based expansion into more natural and healthy ingredients by key industrial food manufacturers. This is prompting companies to reevaluate their existing portfolios and seek different growth avenues, possibly within a different financial policy framework.
Governance
Although more company-specific rather than a broad sectorwide issue, governance still factors heavily into many of our ratings. Several global agribusiness companies have or are facing pressure to change their strategies and/or governance structures, including JBS S.A. after the fallout from bribery allegations, BRF S.A.'s need to ensure chicken exports conform to Muslim standards in their key Mideast export market, or Bunge Ltd.'s recent agreement with its new activist board members to undertake a strategic review.
ESG Risks In Consumer Products
Table 1
| Company/Rating/Comments | Analyst | |
|---|---|---|
| Alfa S.A.B. de C.V.(BBB/Stable/--) | ||
| We see Alfa's group credit profile as more exposed to environmental and social risks than its non-durable peers because of its product mix. The petrochemical industry is subject to increasing regulation because most of the feedstock used in its processes comes from petroleum, a nonrenewable resource. The company's Alpek segment recently acquired Perpetual Recycling Solutions (PRS), which, along with the recycling facility in North Carolina, makes it the largest polyethylene terephthalate (PET) recycler in the U.S. These facilities operate in full compliance with U.S. environmental regulations, and in Mexico, Alpek has a clean industry certification, which in our view mitigates the risks of facing material environmental liabilities. Also, the auto-parts business is subject to increasingly stringent regulations for emissions control, as well as for energy and water consumption. In 2018, the company's Nemak segment invested more than $10.5 million in emission reductions, waste disposal, and remediation. This has led to a total reduction of 72,225 tons of CO2 equivalent, or the avoidance of emissions equivalent to approximately 15,000 cars in a year. In its food division, Sigma, safety in production and processing methods, as well as the strategic shift toward a value-added nutritional portfolio, are key social factors. Since 2010, Sigma has improved the nutritional profile of over 480 products (reducing sodium, sugar, and fat content), and adapting to new consumer trends. In 2018, Sigma invested more than $18 million in R&D (about 10% of total capital expenditures [capex]), including health and nutritional initiatives. | Luis Manuel Martinez | |
| Altria Group Inc. (BBB/Stable/A-2) | ||
| Altria is more exposed to social factors than the bulk of consumer products companies due to its heavy reliance on nicotine-derived products, particularly traditional cigarettes in the U.S. market. Widespread public awareness of smoking's adverse health effects has been a key contributor to the secular decline in cigarette consumption in the U.S., and to a lesser extent tobacco manufacturers' profitability. Manufacturers have been further hindered by punitive regulatory and legal actions in response to these health effects. Altria has proved resilient, offsetting volume declines with price increases and generating significant profits and cash flows. There is a risk that declines could accelerate further due to the FDA's proposed reduction of nicotine content in combustible cigarettes and ban on menthol cigarettes. Altria has responded to these risks by strategically diversifying away from its core tobacco business through new growth-oriented investments, including e-cigarette provider JUUL Labs Inc. However, JUUL has been under scrutiny because e-cigarettes have been tied to a rapid rise in youth usage and recent lung-related injuries and deaths (though we believe the lung-related illnesses were mostly tied to illicit THC products). In response to concerns over youth usage, the U.S. FDA has announced a ban on all flavored products used in cartridge-based vaping devices until otherwise authorized (note that the FDA could reauthorize specific products if the products meet certain requirements, subject to a premarket application process). Some states and municipalities have also banned vaping products to various degrees. We believe this will put a severe damper on JUUL’s domestic growth prospects since a significant portion of its sales were from flavors. There is still uncertainty as to growth prospects in international markets, particularly given some countries have implemented bans on the vaping product category. We view an extreme event for combustible cigarettes (e.g., menthol ban or nicotine reduction regulations) as somewhat less likely, but our expectation for steady or potentially accelerating volume declines of combustible cigarettes in the U.S. is unchanged. We incorporate these social and regulatory risks into our rating on Altria. | Brennan Clark | |
| Anheuser-Busch InBev S.A. (ABI)(A-/Stable/A-2) | ||
| We view environmental and social risks as comparable with those of its industry. Potential risks come from issues related to alcohol abuse, so we consider the company’s clear commitment to responsible drinking to be especially important. In some emerging economies, the group is proposing entry-level products that use local raw materials instead of traditional and more expensive ingredients (like malt). This benefits sales by adding customers who couldn't afford the traditional products, and is often also supported by local governments because these products help reduce illegal alcohol consumption. We do not see any governance risks. ABI has an articulated ownership structure derived from past mergers, which often have been concluded partially through share exchanges. There are clear governance rules that define the board's composition and protect minority shareholders' interests. | Barbara Castellano | |
| Avon Products Inc.(B+/Stable) | ||
| Avon's exposure to environmental and social factors is broadly in line with those of peers in the consumer products space. To address social risks, the company is focusing on natural products that use safe ingredients, and enhancing its e-commerce capabilities to meet consumers' evolving shopping preferences. The company continues to make progress towards reducing its environmental impact by increasing recycling rates at its manufacturing facilities, taking steps to conserve water and reduce waste. | Mariola Borysiak | |
| British American Tobacco PLC (BAT)(BBB+/Stable/A-2) | ||
| We consider BAT's environmental and social related exposure to be in line with that of the tobacco industry. The high social risks are an important credit consideration for the tobacco industry, given the scientific evidence of the negative effect of tobacco products on consumers' health. Over time, tobacco companies have been exposed to big litigations and class actions that, in many cases, ended in billion-dollar compensations that have had limited impact on ratings due to very long-term payment agreements. In BAT’s case, its Canadian subsidiary is liable for a maximum of C$9.2 billion (about £5.7 billion) under the Quebec class action law suit and has obtained protection under the Companies' Creditor Arrangement Act (CCAA). The challenging regulatory trends are not likely to change and, in response, tobacco companies are investing in alternative tobacco products (so-called new categories) that could reduce health risks associated with smoking. Within the new categories business (representing about 4.5% of total company sales), BAT is active in vapor, heated tobacco, and modern oral products. As a consequence of this diversified approach, the group is able to mitigate technology risks and can potentially reduce health risks compared to traditional smoking (although this has yet to be proven). On the negative side, some of these products (especially vaping in U.S.) appeal to underage nonsmokers, likely due to the use of flavors, which can have social-risk consequence. | Rocco Semerano | |
| Campbell Soup Co.(BBB-/Stable/A-3) | ||
| We view environmental and social credit factors for Campbell as broadly in line with industry peers', given its portfolio of on-trend snacks. This should offset social trends that favor healthier products at the expense of some out-of-favor categories. The company has tried to use ingredients and acquire products that consumers perceive as healthier. Its recent acquisitions of Pacific Foods and Snyder's-Lance expanded its portfolio into organics and better-for-you snacks, and are also favorable because of their higher revenue growth potential than some legacy Campbell's products. Notable aspects of Campbell's governance include the fact that 42% of the company is owned by the Dorrance family and three of the 14 board of directors are family members. However, no specific governance risks affect our ratings on Campbell because the company has maintained a consistent strategy and risk tolerance. There have also not been signs of misalignment among the company and family's strategic and financial goals. | Diane Shand | |
| Chobani Global Holdings Inc.(B-/Stable/--) | ||
| We view Chobani’s environmental and social risks to be broadly in line with those of industry peers. However, the credit quality is impacted by governance factors, as demonstrated by recent increases in capital budgeting decisions influenced by its entrepreneurial culture, underpinned by its founding owner. This is reflected in Chobani's fair management and governance assessment. Other long-term factors include social changes as consumer preferences change to dairy alternatives and low-sugar products. Chobani launched less-sugar Greek yogurt in 2018 and non-dairy Chobani products to diversify its product portfolio with more on-trend offerings that have performed well in the first three quarters of 2019, albeit off of a small base. | Raina Patel | |
| Coca-Cola Amatil Ltd. (CCA)(BBB+/Stable/A-2) | ||
| CCA, like most beverage bottlers, faces long-term social risks, notably changes in consumer tastes toward low or no-sugar products and categories because of health concerns. In response to these social changes, CCA continues to invest heavily in diversifying its portfolio away from carbonated soft drink (CSD) consumption to categories like water, dairy, juices, energy drinks, alcohol, and other emerging product categories. The global anti-plastic movement is an inherent environmental risk. CCA is using recycled products to manufacture its packaging to reduce its carbon footprint and energy usage. Australian States have introduced container deposit schemes to assist with waste reduction; however, these have undermined volumes and sales to a degree, creating an additional challenge for CCA. CCA's ongoing strategy of lowering sugar content via product diversification while reducing serving sizes and increasing prices aims to offset this impact. | Joel Yap | |
| Coca-Cola Co. (The) (Coke)(A+/Stable/--) | ||
| Coke’s credit quality is negatively influenced by social factors as a result of consumer shifts away from sugary soft drinks. In response to these social changes, Coke continues to invest heavily (including via acquisition) in diversifying its portfolio away from carbonated soft drinks to categories like premium water, sports and energy drinks, and coffee. This strategy has yielded better-than-industry-average organic sales growth and improved its portfolio mix toward faster growing, more socially acceptable offerings. Coke so far has not been materially affected by government efforts to curb sugar consumption via taxation. As was seen with Mexico's 2014 sugar tax, sales typically fall by a large amount before rebounding closer to historic levels once the tax is lapped. Coke's product diversification, reduced serving sizes, and increased prices more than offset this impact. The global anti-plastic movement is an inherent environmental risk. Coke is using recycled products to manufacture its packaging to reduce its carbon footprint and energy usage. The modest capex requirements and cost savings of increasing recycled inputs should not compromise Coke's strong free cash flow generation. | Gerald Phelan | |
| Coca-Cola Consolidated Inc. (CCCI)(BBB/Stable/--) | ||
| Similar to other Coca-Cola bottlers, CCCI faces long-term social risks due to changing consumer tastes and stricter health regulations on sugar content in drinks. However, CCCI offsets that by expanding its product mix into the faster growing enhanced water, energy, and sports drink categories with brands like BodyArmor. Long-term environmental factors include environmental risks related to plastic packaging waste, water scarcity, and health concerns. Governments are increasingly enforcing more stringent recycling rules, which could mean higher operating costs for CCCI although not likely in the near term in the U.S. We view CCCI's management and governance as satisfactory, reflecting management's ability to grow the business profitably, with a balanced board composition. | Raina Patel | |
| Coca-Cola European Partners PLC (CCEP)(BBB+/Stable/A-2) | ||
| CCEP, similar to other bottlers, has moderate exposure to environmental risks related to plastic packaging waste, water scarcity, and health concerns. Governments are increasingly enforcing more stringent recycling rules, which could mean higher operating costs for CCEP if it has to pay to collect and recycle plastic waste. That said, CCEP has been positioning itself more favorably. All of its glass and PET bottles and cans are recyclable and it is aiming for at least 50% (versus 28% in 2018) of the PET it uses coming from recycled materials by 2025. As a beverage bottler, CCEP could also face rising operating costs to source water, and face rising tensions with local communities as natural resources become more scarce. Today, CCEP is trying to be more efficient. It uses 1.61 liters of water for every 1 liter of beverage (-11% since 2010). Changing consumer tastes and stricter health regulations on sugar content in drinks are risks for its sparkling beverages business. However, CCEP did anticipate this and now 45% of its product volumes are low- or no-calorie. We view CCEP's management and governance as satisfactory, reflecting the management' s ability to grow the business profitably, with a balanced board composition. | Maxime Puget | |
| Coca-Cola Femsa S.A.B. de C.V. (KOF)(A-/Negative/--) | ||
| KOF, like most beverage bottlers, faces long-term risks from social factors, notably towards changes in consumer tastes toward low- or no-sugar products and categories. Although in some of its key markets KOF has been facing changes in consumption trends and regulatory actions, we have not yet perceived a long-term impact on its carbonated soft drink volumes. For instance, in some of its markets, such as Mexico in 2014, KOF faced structural reforms, increased taxation, and excise tax-driven prices on most soft drinks, which only temporarily affected industry volumes. We believe KOF is on track to meet new consumption trends and regulatory rules as it diversifies its product offering towards low- or no-sugar beverages (34.6% of the brands in its total portfolio in 2018), while reformulating its products, reducing packaging size, and increasing prices without affecting the long-term direction of its earnings. Given the nature of KOF's products and supply chain, environmental factors such as water scarcity, waste management, and carbon emissions can have an impact if regulations increase. KOF is reducing its exposure, for instance by increasing its water use efficiency by 19% between 2010 and 2018. Last year, the company generated savings of about $14.6 million through its efficient resource management and packaging optimization, and increased its energy use efficiency by 10% (compared with 2017). We don't expect environmental factors to have serious credit implications for KOF over the medium term because its initiatives don't require significant increase in capital investments. We view KOF's management and governance as strong, reflecting the consistency between the targets and the executed strategies, the clear rules on governance, and board independence. | Alexandre Michel | |
| Colgate-Palmolive Co.(AA-/Stable/A-1+) | ||
| We view environmental and social credit factors for Colgate-Palmolive as broadly in line with those of industry peers, especially given its solid portfolio of mostly nondiscretionary products, which has driven historically steady demand. The global anti-plastic movement is a risk common to many of the company's peers, and the company plans to move to 100% recyclable packaging in most categories by 2020 and in all categories by 2025. The company also utilizes palm oil in many of its products and paper-based materials for much of its packaging. The company also plans to procure 100% of its pulp and paper-based materials from recycled or certified sources by 2020. We do not believe these efforts will meaningfully affect Colgate's profitability. We recognize Colgate is a defendant in civil actions concerning talcum powder products sold prior to 1996, with at least 237 individual cases outstanding and at least one case where the plaintiff was awarded about $12 million. At this time we assume the outstanding cases will not have a material impact on Colgate's credit metrics. | Brennan Clark | |
| Compagnie Financiere Richemont S.A.(A+/Stable/--) | ||
| Among the branded consumer goods companies, those in the luxury industry are the most exposed to damages from negative publicity. The widespread use of social media increases the risk that negative comments could ultimately take a toll on profits. In this respect, we do not see Richemont as more exposed than peers. The company has not sustained any significant damage from social media and has managed its social and communication strategies thoughtfully. Richemont uses precious metals and stones in some of its products, and over 95% of the gold and diamonds it uses come from sources which are Responsible Jewelry Council (RJC)-certified, while a large part of the gold is recycled. As with several luxury goods peers, Richemont's controlling shareholder is influential in the group's strategy, with the absolute majority of the voting rights. While visibility on the structure above Compagnie Financiere Richemont is limited, Richemont's governance rules are aligned to the industry's best practices. We assess the company’s management and governance as satisfactory. The majority of board members are independent and follow clear rules, its financial policy has been consistently conservative, and its investment decisions have not proved harmful for the company. So, we do not see the presence of a controlling shareholder as a factor that negatively impacts the rating. | Barbara Castellano | |
| Conagra Brands Inc.(BBB-/Stable/A-3) | ||
| We view environmental and social credit factors for Conagra Brands as broadly in line with those of industry peers, given its portfolio of on-trend packaged food brands and track record of innovation. This should offset social trends that favor healthier products at the expense of some of Conagra's out-of-favor categories. Conagra owns a collection of brands, especially in grocery and shelf-stable products, that are generally declining, which we believe is partly due to the perceived health risk. Conagra also faces unique environmental risks, specifically with respect to lead paint litigation in California, though this risk appears to be capped. The litigation stems from a Conagra subsidiary's ownership decades ago of a business that sold paint containing lead. The company has reached an agreement to resolve this litigation subject to court approval whereby it will pay about $100 million over seven years. We assume no additional material unfavorable litigation pertaining to lead paint will materialize, though plaintiffs in other states, including Illinois, have made attempts, generally unsuccessfully. | Gerald Phelan | |
| Constellation Brands Inc.(BBB/Stable/A-2) | ||
| We view Constellation’s environmental and social risks as comparable with those of its industry peers. Although the alcoholic beverage sector is relatively more exposed to social risks than other non-durable sectors (such as packaged goods) because of the issues related to alcohol abuse, Constellation markets its products with an emphasis on moderate consumption. As alcohol consumption moderates with younger generations opting for lower-volume, premium-priced products or alternatives, such as coffee houses or cannabis, the company is starting to position its portfolio to benefit from these changing consumer tastes away from beer to other forms of alcohol and to cannabis. The company recently leveraged its balance sheet above its 3x to 4x target range to buy a near 40% stake in cannabis producer and marketer Canopy Growth Corp. To restore leverage, management is looking to divest underperforming parts of its portfolio. Given the company's reliance on growth to meet its financial targets, management's ability to execute its business strategy as planned will be an important factor for the company to maintain its satisfactory management and governance assessment. | Raina Patel | |
| Coty Inc.(B+/Stable/--) | ||
| We view Coty's environmental and social risks to be broadly in line with those of industry peers. However, we note that its credit quality is influenced by governance factors primarily due to the missteps integrating the Procter & Gamble beauty assets it acquired in 2016, which weigh on our competitive position and management and governance assessments. The company incurred supply chain disruptions and the acquired beauty business has significantly underperformed. The poorly executed merger has resulted in loss of sales, weak profitability, and service issues with its customers. Its adjusted EBITDA margin was 16.5% in fiscal 2019 (ending June 30), well below that of its peer Estee Lauder, which is almost 25%. The company has replaced its chairman of the board, chief executive officer, chief financial officer, and senior management at its consumer beauty business, and recently announced a four-year turnaround plan. Improving operating efficiency could be slow and uneven given its struggles integrating the acquired assets. We assess its management and governance as fair. | Diane Shand | |
| Danone S.A.(BBB+/Stable/A-2) | ||
| Exposure to social and environmental risks for Danone is aligned with that of the food industry in general. Danone is active in managing environmental and social risks, with a comprehensive, well-articulated sustainability plan. Given the nature of its products, Danone is exposed to big global topics, including human health, sustainability of resources, and waste management. It has a large exposure to dairy products and agricultural raw materials, and any relevant negative news could have a serious reputational consequences that hamper economic performances. To offset this exposure, Danone traces the country or mill of origin of its raw materials and has dedicated investment funds to support local biodiversity and animal welfare. Another potential risk surrounds the company's use, recycling, and waste management of plastic and PET, which Danone relies on for the packaging of its waters. To address this, Danone (with Nestlé) formed the NaturALL Bottle Alliance, to develop bottles using biomass feedstocks, such as previously used cardboard and sawdust, and has committed to using 100% reusable, recyclable, or compostable packaging by 2025. Danone uses large quantities of water in its products. Given the greater water scarcity in many regions, the group could have higher operating costs to source water. We see Danone's management and governance as strong, reflecting the consistency between targets and execution and the board's independence. | Barbara Castellano | |
| Diageo PLC(A-/Stable/A-2) | ||
| We believe Diageo faces social risks similar to peers in the alcoholic beverage industry; for example, if the government takes a more stringent approach--restricting sales and marketing practices, higher taxes, etc.--to limiting alcohol consumption, as we are seeing in the tobacco sector. In our view, the overall potential harm of alcohol misuse can be broader than that of tobacco; that is, the harm caused to end-users is higher for tobacco than for alcohol, but the potential harm to others (i.e. not the users) is usually higher for alcohol (related to crime, injuries, family/community costs, etc.). Diageo is addressing this through industry collaboration and by providing consumers with information and educational tools to make informed choices about drinking. To tackle underage consumption, Diageo has educational programs in place and an internal marketing code of conduct that includes a directive to "place marketing in communications media and events only where 70% or more of the audience can reasonably be expected to be older than the legal purchase age." Still--as with all alcohol companies--navigating social media is a challenge, especially regarding underage consumption, but so far this risk has not affected our rating on Diageo. We view Diageo's management and governance as strong, reflecting management's record of strong strategy execution, as well as board independence. | Rocco Semerano | |
| Electrolux AB(A-/Stable/A-2) | ||
| Electrolux’s credit quality is less hampered by environmental factors than industry peers', mainly owing to the strict EU regulatory framework for both energy and environmental impacts, which the company has embraced fully. Electrolux has a track record in innovation concerning efficient and sustainable use of recycled materials for its plastic and steel needs. These efforts support the environmental credentials of Electrolux’s brands in the eyes of consumers. They can also help mitigate potential volatility of virgin plastic prices in case of environmental taxes or other regulatory actions to this effect. We believe these elements of Electrolux’s sustainability strategy to be contributing to credit quality. The company has a growing number of aftermarket initiatives in place to extend products' lifespan, fighting the concept of planned obsolescence and reducing waste. The longer life also translates into higher sales of spare parts, which tend to be more profitable, especially in an economic downturn. In addition, to limit water consumption, Electrolux is innovating its washing machines to reduce the volume of water and detergent needed during the washing cycle. This helps to lower pollution from detergents and preserve textile fibers, and ultimately could be a differentiating factor at the point of sale, possibly leading to organic growth. | Remi Bringuier | |
| Embotelladora Andina S.A.(BBB/Stable/--) | ||
| We believe long-term social risk factors are more pronounced for soft-drink bottlers than for the overall consumer products industry, because of changes in consumer habits and preferences, on top of additional taxation in some regions, like in Chile in 2014. Andina is adapting its portfolio mix through higher investments and increased M&A activity, such as the 2018 acquisition, in partnership with The Coca-Cola Company and Embonor, of Comercializadora Novaverde S.A., a Chilean producer and marketer of juices, ice cream, frozen fruits, and prepared desserts. Andina's environmental exposure is no different from that of industry leaders. The company has water treatment plants in three of its four operating locations, and complies with local regulations on wastewater evacuation. | Francisco Comelli | |
| Essity AB(BBB+/Stable/--) | ||
| We see environmental and social factors for Essity as broadly in line with those of the industry average. The company's portfolio includes nondiscretionary items like consumer tissues, incontinence products, and baby care and feminine care products, whose growth is supported by rising living standards in emerging economies. We see potential risks on environmental issues, in particular the sustainability of resources (given Essity's reliance on natural fibers like virgin pulp) and the disposal of diaper and incontinence products (given the currently limited range eco-friendly raw materials). Essity is adopting technologies to use fewer materials and produce less waste. We assess Essity's management and governance as satisfactory, reflecting consistency in its executed strategies, clear rules on governance, and the board's independence. | Barbara Castellano | |
| General Mills Inc.(BBB/Stable/A-2) | ||
| We consider General Mills' exposure to environmental and social credit factors to be broadly in line with that of the consumer products industry. To meet changes in consumer tastes and preferences related to health concerns, the company has improved the ingredients in its products and increased its organic foods portfolio. For example, it offers cereal with reduced sugar and no artificial sweeteners and colors. Also, with the acquisition of Annie's, the company's organic foods portfolio exceeds $1 billion in revenues, making it one of largest organic foods manufacturers in the industry. The company continues to make portfolio changes toward healthier products, which we believe helps its competitive position. From an environmental perspective, General Mills is updating its packaging, a large component of its direct costs, and has initiatives to lower greenhouse emissions and achieve zero waste at its own production facilities. | Amanda O’Neill | |
| Grupo Bimbo S.A.B. de C.V.(BBB/Negative/--) | ||
| We view Bimbo's social and environmental exposure as generally aligned with that of food industry peers. To anticipate long-term market trends toward healthier eating, Bimbo operates seven innovation centers across its key regions to improve its products' nutritional profiles. Over the medium term, we do not expect environmental factors to affect Bimbo's credit quality, even if their relevance has increased. As its customers have become more environmentally aware, Bimbo's management has undertaken several strategic initiatives to reduce the impact of its operations on the environment. The company is investing globally to reach 100% renewable electric energy in all of its operations, to reduce its manufacturing food waste by 50%, and to make the totality of its packages recyclable, biodegradable, and/or compostable by 2025. | Alexandre Michel | |
| Grupo Embotellador Atic S.A.(B/Stable/--) | ||
| We view Atic’s environmental and social risks to be broadly in line with those of industry peers. However, we note that the credit quality is influenced by governance factors, because of recent strategic shifts and management turnover. Atic is a privately owned company whose board of directors is composed of three memebers of the founding family, manifesting a lack of independence. In recent years, the company has shown limited strategic direction that has weakened its operating and financial performance and undermined its credit profile. Indeed, Atic has failed to execute its business plan to replicate its profitable Peruvian operations in various international markets where it had started operations. Moreover, its strategy to turn around the troubled businesses in Mexico and Asia has not yielded the originally expected results in terms of volume sales and market share. Since 2018, Atic's new CFO has taken several strategic actions to stabilize and revert the company's operating and financial position, reducing leverage from about 4.5x in March 2018 to 3.5x in the 12 months ended September 2019. In the area of social risk factors, Atic, similar to other bottlers, is exposed to the increasing consumer focus on health and wellness. In some of its key markets, Atic has been facing changes in consumption trends and regulatory actions; however, we have not yet perceived a long-term impact on its CSD volumes. In some of Atic's key markets (like Mexico in 2014 and Peru in 2018), governments have enacted sugar taxes that temporarily impacted consumption. In response to these factors, Atic has been reformulating certain categories of its portfolio to reduce its sugar content and producing smaller size formats across the CSD categories. In addition, Atic's beverage portfolio is less exposed to CSD products (53% of its volume sold in the year-to-date [YTD] June 2019) than some global peers that have more than 70% exposure to this category. Finally, like peers in the sector, Atic has moderate exposure to environmental risks, and given the nature of its products and supply chain, these risks (specifically related to water scarcity, waste management, and carbon emissions) would rise if regulations tighten. We assess its management and governance as weak. | Alexandre Michel | |
| Heineken N.V.(BBB+/Stable/A-2) | ||
| Environmental and social factors are broadly in line with the industry average. We see social factors as more relevant given the exposure to risks from alcohol abuse, and Heineken maintains a clear commitment to support, through various projects in different countries, responsible beer consumption and road safety and to fight underage drinking. Heineken is also promoting the Heineken zero-alcohol beer as an alternative to traditional beer. The low-alcohol and no-alcohol portfolio includes 130 brands. Heineken invests 10% of its media budget into responsible consumption campaigns in almost all markets where the Heineken brand is sold. We see water scarcity as a potential environmental risk given the large quantity needed by the group. Heineken halved the usage of water in the last ten years and has set precise targets for 2030. We view Heineken's management and governance as satisfactory, reflecting consistency between its targets and executed strategies, clear rules on governance, and the board's independence. | Barbara Castellano | |
| Henkel AG & Co. KGaA(A/Stable/A-1) | ||
| Henkel has exposure to environmental, social, and governance risks related to adhesives and consumer goods, and we see the exposures as in line with the average of the two sectors. In its adhesives business there are the general environmental and social risks associated with production processes, including energy use, CO2 emissions, and other pollution. Social risks could arise from a potential personnel safety accident; however, the group has strong safety standards for the industry, and has targeted a 75% reduction of its CO2 emissions per ton of production by 2030. In consumer goods, Henkel is exposed to environmental risks (such as plastic packaging waste) and social risks (like product safety issues). Demand could drop sharply if consumers no longer trust product quality, especially for beauty products. For packaging waste, governments could impose more stringent recycling rules, which would mean higher operating costs. To tackle this, Henkel has committed to make 100% of its packaging recyclable, reusable, or compostable by 2025. We view Henkel's management and governance as strong, reflecting management's solid record in growing the business' profitably, as well as the board's effectiveness in overseeing management's actions. | Maxime Puget | |
| Herbalife Nutrition Ltd.(BB-/Stable/--) | ||
| Herbalife's credit quality is more negatively influenced by social factors compared with peers', primarily due to the reputational and regulatory risks stemming from its direct-sales business model. These risks weigh on our competitive position and management and governance assessments. We assess its management and governance as fair. Reputational risks have arisen from allegations that it is a pyramid scheme, or that it targets certain lower-income demographic groups. Herbalife has faced an unresolved, uncertified 2017 Florida class action suit; potential violations of the Foreign Corrupt Practices Act (FCPA); an investigation by the U.S. DOJ and SEC with respect to China; and an FTC investigation that resulted in a $200 million settlement and agreement to implement changes to the business in the U.S., which an independent compliance auditor is monitoring until 2023. We believe risks from controversies like these still exist, but have overall declined since the 2012–2017 period. Separately, Herbalife's Belgian subsidiary prevailed in pyramid-related litigation in 2013. With respect to its international business practices, Herbalife's CEO voluntarily resigned in January 2019 due to comments he made before becoming CEO that were inconsistent with the company's expense policies and business practices. These comments could heighten scrutiny by government authorities, especially if a pattern of abuse is uncovered in foreign countries. | Gerald Phelan | |
| Imperial Brands PLC(BBB/Stable/A-2) | ||
| We consider Imperial's environmental and social risk exposure to be in line with that of the tobacco industry. The high social risks are an important credit consideration for the tobacco industry, given the scientific evidence of the negative effect of tobacco products on consumers' health. Over time, tobacco companies have been exposed to big litigations and class actions that, in many cases, ended in billion-dollar compensations that have had limited impact on ratings due to very long-term payment agreements. These challenging trends are not likely to abate and more stringent rules are probably coming. In response, global tobacco companies are investing in so called next-generation products (NGPs) that could reduce health risks associated with smoking (although this has yet to be proven). Compared with other global industry players (such as PMI and BAT) we note that revenue contribution from new product categories for Imperial is relatively lower. In 2019, Imperial reported net revenues from NGPs of £285 million (about 3.5% of the company's tobacco and NGP net revenues). On the negative side, some of these products (especially vaping in the U.S.) appeal to underage nonsmokers, likely due to the use of flavors, which can have social-risk consequence. | Rocco Semerano | |
| Jacobs Douwe Egberts International B.V. (JDE)(BB/Positive/--) | ||
| We view environmental and credit factors for JDE as broadly in line with those of industry peers. We note that global demand for coffee has positive growth trends thanks to its increasing penetration in emerging economies and different methods of preparation (e.g., powder, capsules, soluble). This represents expansion opportunities for JDE, but the positive trends are offset by risks related to the sustainability of resources. With over 95% of JDE's revenues coming from coffee-related products, our assessment of the company must consider potential risks coming from environmental and social issues related to harvesting. JDE has a responsible sourcing program in place, including the purchase of certified coffee from origins where it jointly addresses priority social and environmental challenges with relevant governments, NGOs, and civil society; the company has set itself a target to reach 40% of its overall procurement by 2025 (22% in 2018). In 2018, JDE joined forces with Unilever, Mondelez, Rabobank, and the Dutch government to set up a €100 million fund (with JDE's own commitment of up to €10 million over the next five years), which is aimed at providing cheap financing solutions to independent coffee farmers, and we think the industry will need to do a lot more for farmers to address long-term sustainability issues. | Nikolay Popov | |
| Japan Tobacco Inc. (JT)(AA-/Negative/A-1+) | ||
| Similar to other tobacco manufactures, social factors are significant credit considerations for JT given the widespread awareness of smoking's adverse health effects and the impact on health care costs and resources globally, as well as concerns over illicit trade. These social risks are greater than that of the broader non-durable sector, in our view. Greater health-consciousness among consumers and more regulatory requirements could lessen demand for tobacco products, which may hurt JT's operating results. Illegal trade harms both consumers and the brand image of genuine products because uncontrolled products circumvent regulations and quality. JT tries to address social concerns by increasing reduced-risk products (RRP). In 2018, RRP contributed to 3% of JT's revenues, and we expect them to reach 7% in 2020. However, we don't necessarily believe that a larger mix of RRP would lower social risks because no regulator publicly corroborates RRP's modified risk profile; there isn't enough empirical data to support it. JT's anti-illicit trade team has been trying to combat illicit trade. Notified seizures of counterfeit products in the EU have increased 82% over the past four years, while notified seizures of JT's genuine products in the EU decreased 57%. In 2018, the team advised 1,329 law enforcement officers on counterfeit recognition, with over 2.7 billion illegal cigarettes seized. Exposures to environmental factors are less relevant for JT. JT takes measures toward effective waste management and disposal of electronic products contained in T-vapor and e-cigarettes. | Ryohei Yoshida | |
| Kellogg Co.(BBB/Stable/A-2) | ||
| We view Kellogg's exposure to environmental and social factors to be broadly in line with that of its consumer products industry peers. To meet changes in consumer tastes and preferences around health concerns, especially around highly processed and high-sugar foods, the company has rebalanced its legacy breakfast cereal, toaster pastries, and frozen waffle portfolio; tried to reduce the number of ingredients in its products; and acquired products that are considered healthier. The company's acquisition of RXBAR and its further expansion into kids' bars provides higher revenue growth potential than some legacy Kellogg products. On the environmental side, Kellogg has focused on reducing its packaging output and water usage, responsible sourcing of major ingredients, and working with farmers on sustainable agricultural programs. We assess Kellogg's management and governance as satisfactory because nearly 20% of the company is owned by the W.K. Kellogg Foundation Trust and two of the 12 board members are foundation trustees. However, no specific governance risks affect our ratings on Kellogg because there have not been signs of misalignment between the company's and foundation's goals. | Amanda O’Neill | |
| Kering S.A.(A-/Stable/A-2) | ||
| Among the branded consumer goods companies, those in the luxury industry are the most exposed to damages from negative publicity. The widespread use of social media increases the risk that negative comments could ultimately take a toll on profits. In this respect, we don't see Kering as more exposed than peers. The company has not sustained any significant damage from social media and has managed its social and communication strategies thoughtfully. It agreed with Italian tax authorities to pay €1.25 billion to settle a tax dispute for the period 2011-2017, the highest-ever settlement of its kind in Italy, and faced no direct blowback on its operating performance --although from a sustainability perspective, it might have given some concerns to investors. Another social consideration relates to the labor conditions of third-party manufacturers, which, in our view, is getting more relevant considering the recent sales volume growth. In the jewelry and watch business the sourcing of precious metals is also relevant; more end-customers are demanding responsible sourcing and origin-tracking. Kering is targeting 95% of its supply chain (including soft and hard luxury) to be transparent and socially responsible by 2025. Another point common to several luxury groups is the influence of a controlling shareholder. This is the case for Kering, as it is for LVMH and Richemont. Artemis, the holding company controlled by Francois Pinault, has 57.8% of the voting rights in Kering. While visibility on the structure above Kering is limited, Kering's governance rules are aligned to the industry's best practices, with the majority of its board members being independent (55% in 2018 from 46% in 2013) and following clear rules. We do not see the presence of a controlling shareholder as negative to the rating as we have seen no evidence of decisions that have been harmful for minority shareholders or other stakeholders. We assess its management and governance as satisfactory. | Rocco Semerano | |
| Keurig Dr Pepper Inc. (KDP)(BBB/Stable/A-2) | ||
| We view environmental and social credit factors for KDP as broadly in line with those of industry peers, especially given its coffee business and portfolio of noncarbonated drinks, which add diversity to its CSD portfolio. Ongoing changing consumer tastes away from traditional CSDs and societal efforts to reduce the sugar content of beverages has reduced demand for certain soft drinks. In response, KDP invests in diversifying its portfolio toward categories like premium water, sports, and energy. This strategy has yielded good organic sales growth while improving the portfolio mix toward faster-growing, more socially acceptable offerings. KDP so far has not been materially affected by efforts to raise taxes on sugary foods. These efforts tend to temporarily reduce sales and consumption, but sales typically rebound after a year or so. For example, Mexico enacted a sugar tax in 2014 and consumption did fall in the subsequent year, but stabilized thereafter. The global anti-plastic movement is also an inherent environmental risk factor, and KDP is focusing on using fully recycled and recyclable products in its packaging. The company's coffee pods are 100% recyclable in Canada and within the next 18 months its pods in the U.S. will be as well. The modest capex requirements and cost saving of increasing recycled inputs should not compromise KDP's strong free cash flow generation. | Diane Shand | |
| Kimberly-Clark Corp. (KMB)(A/Stable/A-1) | ||
| We view environmental and social credit factors for KMB as broadly in line with those of industry peers, especially given its solid portfolio of mostly nondiscretionary products, which has driven historically steady demand. The global anti-plastic movement is an inherent environmental risk, common to many of the company's peers. KMB has implemented initiatives to make recycling easier and increase consumer awareness of recycling options. Environmental risk is modestly elevated due to the company's concentration in tissue-based products, which makes sustainable forest management an important activity. KMB has several goals in this regard, including reducing greenhouse gas emissions, sourcing only from certified suppliers, and reducing its natural forest footprint by 50% by 2025. | Brennan Clark | |
| Kraft Heinz Co. (The)(BBB-/Negative/--) | ||
| We view governance as a material factor in our rating on Kraft Heinz. We assess its management and governance as fair because of its strategic missteps, weak internal controls, and an accounting investigation. The company's “3G” strategy--including zero-based budgeting and deep acquisition-related cost cutting--has in our view contributed to Kraft Heinz's profit deterioration by prioritizing cost reductions over effective innovation, which is important in packaged food given changing consumer preferences. In addition, while the magnitude of accounting errors over the past two years has not been substantial, it demonstrates a pattern of weak controls, which Kraft Heinz is taking action to strengthen. There also remains risk pertaining to the SEC's investigation into the company's accounting policies, procedures, and internal controls related to its procurement function, notwithstanding completion of Kraft Heinz's internal investigation, which included external counsel and forensic accountants under the oversight of the audit committee. | Gerald Phelan | |
| LVMH Moët Hennessy - Louis Vuitton, Société Européenne(A+/Stable/A-1) | ||
| Among the branded consumer goods companies, those in the luxury industry are the most exposed to damages from negative publicity. The widespread use of social media increases the risk that negative comments could ultimately take a toll on profits. In this respect, we don't see LVMH as more exposed than peers. The company has not sustained any significant damage from social media and has managed its social and communication strategies thoughtfully. Another social consideration relates to the labor conditions of third-party manufacturers, which, in our view, is getting more relevant considering the recent sales volume growth. In the jewelry and watch business the sourcing of precious metals is also relevant; more end-customers are demanding responsible sourcing and origin-tracking. The "Diamond Source Initiative" taken by Tiffany, for example (LVMH announced the Tiffany acquisition in Nov. 2019), seems to go in that direction by improving transparency in the provenance of every newly sourced, individually registered diamond. Another point common to several luxury groups is the influence of a controlling shareholder. We assess LVMH’s management and governance as strong. The Arnault family controls 63% of LVMH voting rights. While visibility on the structure above LVMH is limited, we note that LVMH's governance rules are aligned to the best practices of the industry, with a majority of independent board members and clear rules for the board; and that the strategic decisions taken by the board have never proved to be harmful for minorities or other stakeholders. | Rocco Semerano | |
| Molson Coors Beverage Co.(BBB-/Stable/A-3) | ||
| Social factors weigh more heavily on our ratings on Molson Coors than on other alcoholic beverage companies. The company continues to see beer volume declines in its core U.S. market, due to consumers' changing habits. The volume of U.S. alcohol consumption as a whole is moderating as younger people opt for other recreational consumption options (i.e., coffee and cannabis). Although the company is benefiting from the shift in consumer tastes with products such as Henry's Zero Sugar Hard Sparkling Water in the hard seltzer category (which has grown triple digits over the last two years) and the company's Truss joint venture with HEXO, this growth is off a very low base. Potential social risks relate to alcohol abuse, so we consider the company's support, through various projects in different countries, of responsible beer consumption, getting-home-safely programs, and fighting underage drinking to be important. We view its management and governance as satisfactory, reflecting consistency in its executed strategies, clear rules on governance, and the board's independence. | Raina Patel | |
| Mondelez International Inc.(BBB/Stable/A-2) | ||
| We view environmental and social credit factors for Mondelez as broadly in line with those of industry peers, Similar to other packaged food companies, Mondelez faces environmental risks arising from the sustainable sourcing of key ingredients, including wheat, cocoa, and palm oil. This includes reducing energy, water, waste, and CO2 emissions from the company's operations, and the conservation of land and forest resources. The company is also exposed to social risks from shifting consumer preferences toward healthier eating. In addition, the company is exposed to public perceptions of its approach to human/workplace rights. Increasingly, firms such as Mondelez need to demonstrate their positive effect on the local communities that source and process their products. Mondelez has several initiatives in place to address its environmental and social risks, including cocoa life (a third-party verified program designed to cover all its cocoa sourcing by 2025), the 2019 palm oil action plan, and Harmony (which strives to reduce pesticide use and preserve insect life, among other goals). | Amanda O’Neill | |
| Nestlé S.A. (AA-/Stable/A-1+) | ||
| We see Nestlé's exposure to environmental and social risk factors as in line with that of the rest of the industry. The group has clear targets and communication on several important metrics, which we see as consistent with the excellent business risk profile. We note that Nestlé has been readjusting its portfolio to align it to changing consumer preferences, after having defined key areas of growth. The readjustment has privileged coffee, water, pet food, and infant nutrition, and reduced exposure to confectionary and ice creams that are more difficult to align with healthier eating targets. The net effect of acquisitions and divestitures has not significantly impacted the credit ratios and we believe there will still be activity in the next quarters. As with peers, it is exposed to several potential risk factors including sustainability of resources, plastic packaging waste, water scarcity, and food safety. Nestlé is the largest coffee producer in the world and any significant disruption in the supply chain could have a direct economic impact on the company. Nestlé has defined targets to support improvements in productivity and living standards for coffee farmers. It responsibly sources 55% of the coffee for Nescafé and 94% of the coffee for Nespresso, and by 2020 the Nescafé percentage must achieve 70%. In packaging waste, governments could enforce more stringent recycling rules, which would mean higher operating costs if Nestlé has to pay to collect and recycle waste. To tackle this, Nestlé committed to make 100% of its plastic packaging recyclable or reusable by 2025 but considering the very different approaches in various regions we cannot rule out the possibility of a charge on consumer goods producers. Nestlé uses large quantities of water to bottle beverages and water. Given greater water scarcity in many regions, the group could have higher operating costs to source water. We view Nestlé's management and governance as strong, reflecting management's ability to grow profitably and the board's balanced composition. Gender diversity is also a focus for the group; women hold about 43% of management roles. The company aims for women to hold 30% of the top 200 senior management roles by 2022, versus 20% currently. | Maxime Puget | |
| Newell Brands Inc.(BB+/Stable/B) | ||
| We view governance as a material factor in our rating on Newell. We assess its management and governance as fair because of its shifts in strategy and management turnover. Over the past few years, Newell has pursued acquisitions to accelerate growth and significantly levered up its balance sheet to merge with Jarden Corp. It then accelerated a divestiture plan to raise enough cash to improve leverage toward 4x at end of 2019, which it was unable to execute on. As these developments played out, we negatively revised our assessment of the company's management and governance to fair from satisfactory in 2018, reflecting its frequent shifts in strategic direction; and we recently lowered the issuer credit rating on Newell to 'BB+' because of the high leverage. | Mariola Borysiak | |
| PepsiCo Inc.(A+/Stable/A-1) | ||
| We view environmental and social risk factors for PepsiCo as broadly in line with those of industry peers, given its large portfolio of on-trend snacking brands that more than offset declines in its CSD portfolio, which constitutes about 25% of sales and which faces shifting consumer preferences toward healthier options and targeted taxation to dissuade unhealthy consumption. A key environmental factor in the rating is PepsiCo's efforts to increase the recycled content of its packaging from aluminum and plastics to recyclable or biodegradable packaging. | Gerald Phelan | |
| Pernod Ricard S.A.(BBB+/Stable/A-2) | ||
| We believe Pernod Ricard faces social risks in line with peers in the alcoholic beverage industry; for example, if the government takes a more stringent approach--restricting sales and marketing practices, higher taxes, etc.--to limiting alcohol consumption, as we are seeing in the tobacco sector. In our view, the overall potential harm of alcohol misuse can be broader than that of tobacco; that is, the harm caused to end-users is higher for tobacco than for alcohol, but the potential harm to others (i.e. not the users) is usually higher for alcohol (related to crime, injuries, family/community costs, etc.). Pernod Ricard is addressing this through consumer educational programs and through a code of commercial communications to ensure it does not encourage or condone irresponsible consumption; for example, commercial communications should not promote alcohol beverages where more than 30% of the audience is known or reasonably expected to be minors. Still--as with all alcohol companies--navigating social media is a challenge, especially regarding underage consumption, but so far this risk has not affected our rating on Pernod Ricard. We view Pernod Ricard's management and governance as strong, reflecting in part the independence of the majority of the board of directors. | Rocco Semerano | |
| Philip Morris International (PMI)(A/Stable/A-1) | ||
| We consider social risk in the tobacco industry as high. Still, we see PMI's social risks as lower compared to the peers exposed to sale of cigarettes because it has a leading position in NGPs. Social factors are an important credit consideration for the tobacco industry, given the evidence of negative effects of tobacco products on consumers' health. Tobacco companies have been exposed to big litigations and class actions that, in many cases, ended in billion-dollar compensations that have had limited impact on ratings only thanks to the very long term of the payments. These challenging trends are not likely to abate and more stringent rules are probably coming. In response, global tobacco companies are investing in alternative and NGP tobacco products that could reduce health risks associated with smoking. We see PMI as better placed than peers thanks to its larger exposure to NGPs. Today about 20% of the group's net revenues come from this category, significantly more than peers, and this is almost entirely represented by the heat-no-burn products. We note that as with other products containing tobacco, the sale of IQOS (the largest heat-no-burn brand in PMI's portfolio) is subject to different rules in different markets. In May 2019, PMI has attracted scrutiny about very young social media influencers appearing in marketing campaigns promoting IQOS. In this regard, another key social consideration is underage tobacco consumption, which companies in the sector must publicly discourage. | Barbara Castellano | |
| Procter & Gamble Co. (P&G)(AA-/Stable/A-1+) | ||
| We view environmental and social risk factors for P&G as broadly in line with those of industry peers, given its diverse portfolio of functional, daily use products and its record of strong innovation. P&G is exposed to resource sustainability risks, and the global anti-plastic movement is an inherent risk for all consumer products companies. Plastic packaging for products such as diapers and sanitary pads exposes P&G to regulatory pressure and the potentially higher cost of collecting and recycling its products as well as moving to more sustainable solutions. The company has faced backlash over diaper and sanitary waste in India as the volume of waste from its products has grown. In 2016, the government in India published rules requiring companies to provide disposal wrappers for these products, pay for waste-management systems, and explore recyclable alternatives, but currently these requirements have not meaningfully impacted P&G's profitability. P&G has put in place several venues to educate consumers about the disposal of these products, and developed a line of more natural products to meet the needs of changing consumer preferences. | Diane Shand | |
| PVH Corp.(BBB-/Stable/A-3) | ||
| We view environmental and social risk factors for PVH as broadly in line with industry peers'. We also consider investments related to sustainable operations a necessary cost for PVH to remain competitive as consumers are increasingly aware of their consumption-related environmental impact. Environmental risks arise from the sourcing of key raw materials such as cotton and waste treatment in the manufacturing of textile products. This includes reducing energy, water, waste, and carbon dioxide emissions, and the conservation of land and forest resources. Social risks in the apparel industry include human rights concerns related to the ethical treatment of its labor force, especially supply chain workers in developing countries. In addition, the apparel industry is under pressure from environmental and social groups as excessive purchase of discretionary products is increasingly considered wasteful, especially in developed nations. PVH has several ongoing initiatives to address its environmental and social risks, including its Fashion Forward strategy, which focuses on reducing the company's environmental footprint, specifically on circularity. Circularity is broadly defined as the elimination of waste products and efficient use of raw materials in the production of apparel products. PVH is investing in technology and initiatives such as waterless dyeing and recycling ocean-bound plastics and used clothing. At this time, we believe the costs related to these investments are still small compared to the company's overall research and marketing budget, thus the incremental investments would not materially affect the company's margins. | Suyun Qu | |
| Reckitt Benckiser PLC (RB)(A-/Stable/A-2) | ||
| We don't see environmental and risks as specific factors in the rating on RB because we believe these are in line with those of other hygiene and personal care companies, but the group has faced social risks due to a serious accident. From 1996-2011, RB sold humidifier sanitizers in South Korea that were ultimately linked to lung injuries and were, according to local courts, responsible for about 100 deaths. In 2016, the group took responsibility and publicly apologized. Although the costs associated with this incident did not affect credit quality financially, it has had a very serious reputational effect that hurt the group's sales and activities in South Korea. After this accident, RB adopted a framework to prevent similar accidents. We view RB's management and governance as satisfactory. In 2019, RB appointed a new CEO and CFO, the latter of whom will start in April 2020. We read these changes as part of the normal cycle of management renewal as the two managers have been with the company for several years. The board composition is balanced and there are clear governance rules. | Barbara Castellano | |
| Revlon Inc.(CCC+/Negative/--) | ||
| We view Revlon's exposure to environmental and social factors to be in line with that of the consumer products industry. The company is increasingly focusing on natural products that use ingredients that are safe for its consumers; pursuing sustainable packaging throughout its brand portfolio; and strengthening ethical and responsible sourcing practices that are aligned with human and workers' rights. | Mariola Borysiak | |
| ServiceMaster Global Holdings Inc.(BB-/Stable/--) | ||
| ServiceMaster's pest control and termite businesses expose the company to a higher degree of social risk than the bulk of the consumer services industry. The company sprays pesticides around household premises to control for pests, and the chemicals could be harmful to the environment or public health, as evidenced by two civil litigations in 2016 with large monetary fines. The company had enough liquidity to handle the situations with no material impact on its operations or credit metrics, and because the cases were local they did not hurt the company's overall brand equity. However, to prevent such events from occurring again, the company has implemented a companywide health and safety initiative to support its operations. Additionally, the company's use of pesticides is governed by various international, federal, and local environmental and public health agencies, so it could be affected if regional or global regulations change. | Suyun Qu | |
| Scotts Miracle-Gro Co. (The)(BB/Stable/--) | ||
| Scotts' core lawn and garden business, including various pesticides and fertilizers, exposes the company to a higher degree of social risks than the bulk of the consumer products industry, given that its products contain chemicals that may have, or be perceived to have, unfavorable public health effects. Scotts is Monsanto Co.'s exclusive U.S. agent for marketing and distributing its consumer Roundup weed killer products (about 15% of Scotts' EBITDA). Litigation against Monsanto alleges that glyphosate (the active ingredient in Roundup) causes cancer. We assume Scotts will remain free of direct litigation pertaining to Roundup, but in order to offset some of the expected sales decline, Scotts has introduced Ortho GroundClear, a weed killer certified for use in organic gardens. Additionally, Scotts is expanding into hydroponic gardening, including manufacturing and selling nutrients, growing media, advanced indoor garden, lighting, and ventilation systems, and we are beginning to see the positive financial impact of these investments. While Scotts does not sell cannabis, its products can be used to grow cannabis, and a measured investment in this potentially large category may benefit Scotts over time. However, growing cannabis is still prohibited under U.S. law, and in certain jurisdictions where cannabis has been approved for medicinal and/or recreational use, demand is likely to be inconsistent over the medium term. | Gerald Phelan | |
| Sigma Alimentos S.A. de C.V.(BBB/Stable/--) | ||
| Social and environmental risks factors are overall modest from a credit perspective in the branded consumer non-durables industry. Social factors such as food processing safety methods and a strategic shift toward a value-added nutritional portfolio are key in our rating analysis for Sigma. The company continues to invest heavily in R&D (about 10% of total capex in 2018) to anticipate long-term market trends. Since 2010, it has improved over 480 products' nutritional profiles (reducing sodium, sugar, and fat content), adapting to new consumer preferences. Environmental factors are also important elements of our rating on Sigma because food products are prone to disease outbreaks. Nonetheless, Sigma has had limited product recalls and disease issues in its food supply in the past, and therefore limited effects to its reputation and credit quality so far. This is because Sigma has strict standards that guarantee product quality and safety throughout the value chain. Its international certifications include the USDA and the Global Food Safety Initiative. Sigma continues to reduce its fossil fuels and carbon-based electricity consumption by shifting to cleaner energy such as cogeneration and wind power. As a result, 85 sites have been using electricity from renewable or cleaner energy sources. | Alexandre Michel | |
| Suntory Holdings Ltd.(BBB/Stable/--) | ||
| We view environmental and social factors for Suntory as broadly in line with those of industry peers and currently not major rating drivers. Demand for sweetened beverages, such as CSDs, has continued to decline due to growing concerns over their impact on health. However, we expect a limited impact on Suntory's overall business because its sweetened beverages account for a smaller share of overall total beverage sales than they do at major global peers. Environmental risks are less relevant, in our view. There are direct and indirect long-term risks such as water availability, agricultural production, and the global anti-plastic movement. The group has increased its usage of recycled PET bottles, and with more than 20 natural water sanctuaries is creating a sustainable supply of its beverage products, such as mineral water. | Ryohei Yoshida | |
| Swedish Match AB(BBB/Stable/A-2) | ||
| Social factors are an important credit consideration for the tobacco industry. Like other tobacco manufacturers, Swedish Match is largely exposed to regulatory constraints implemented by health authorities. However, the group's credit quality is less negatively influenced than global peers ' owing to its product mix focused toward smokeless products, which have not been proven to be as harmful as combustible products. The only traditional products Swedish Match sells are cigars, but we estimate this accounts for below 30% of the group's sales. We view Swedish Match as better positioned than peers to social factor due to its alternative tobacco products, including snus and snuff products, chewing tobacco, and nicotine pouches. | Remi Bringuier | |
| Turning Point Brands Inc. (TPB)(B+/Negative/--) | ||
| TPB's credit quality is more negatively influenced by social factors than that of the bulk of the sector due to its reliance on nicotine-related products. The company sells alternative tobacco products, including vaporizers and e-cigarettes, and has benefited from the rapid growth of vaping over the last several years. However, vaping products have come under scrutiny recently due to a rapid rise in youth usage and deaths and lung injuries (we believe the lung-related illnesses were mostly tied to illicit THC products), leading to a significant drop in vaping industry sales. In response to concerns over youth usage, the U.S. FDA announced a ban on all flavored products used in cartridge-based vaping systems until otherwise authorized (note that the FDA could reauthorize specific products in the future if the products meet certain requirements, subject to a premarket application process). Flavored products in open tank-based vaping devices have not been banned, which is a positive for TPB, since open-system devices and products represent a much larger percentage of the company’s vaping portfolio than cartridge-based products. Nevertheless, this does not preclude the FDA from taking regulatory actions against open-system devices and products in the future if the youth vaping issue continues. We also cannot be certain the FDA will approve any or all of TPB's products to remain on the market after it has submitted its premarket tobacco application (due May 2020). Further unexpected legislation or severe regulatory actions could weaken TPB's business. Other products in TPB's portfolio, such as chewing tobacco and cigarette papers, are also more negatively influenced by social factors than the bulk of the sector and are generally declining categories, though not as severely as traditional cigarettes. | Brennan Clark | |
| Unilever PLC(A+/Stable/A-1) | ||
| We see environmental and social factors for Unilever's credit quality as broadly in line with those of industry peers. The group has clear targets and communication on several important metrics, which we see as consistent with its excellent business risk profile. Sustainability topics are well embedded in the Unilever strategy. The group's portfolio is under continuous readjustment to adapt to changing consumer preferences focused on healthier options, and the bolt-on acquisitions and divestitures it makes to further this strategy are not creating pressure on financial metrics. Among the three divisions--beauty and personal care, home care, and food and refreshment--we think the last one might need more fine-tuning; a large part of the food portfolio is exposed to ice cream and dressings that are more difficult to align with ongoing healthier eating trends. On plastic use reduction, Unilever has specific targets for 2025 and a good record, having met its previous targets. However, it is important to note that the possible solutions under discussion for plastic use and recycling differ by region, and at this stage, we cannot rule out a higher cost burden. We view Unilever's management and governance as strong, which reflects good diversity of nationality, gender, and skillset, and the good level of board independence. | Barbara Castellano | |
| Upfield (Sigma HoldCo BV)(B+/Stable/--) | ||
| Upfield's environmental and social risks are broadly in line with those of the packaged food industry. Its portfolio is composed of plant-based margarines (about 75%-80% of revenues), butters, spreads, creams, and cheeses. In recent years, margarine specifically has experienced declining consumption in developed markets due to doubts on its naturalness and health-supportiveness. However, a growing number of consumers are moving toward plant-based diets, which is playing in favor of nondairy products, which represents a growth opportunity for Upfield. As a plant-based food company, its social risks are also linked to ethical behaviors and environmental sustainability, particularly the sustainability of its oil sourcing and plastic-free packaging. Upfield directly sources 100% physically certified sustainable palm oil for all of its products and it has committed to be fully plastic-free in the future, although it hasn't set a target date. | Salvio Cascarino | |
| Vector Group Ltd.(B/Stable/--) | ||
| Compared to the bulk of the consumer non-durable sector, Vector Group is more exposed to social factors because of its heavy reliance on cigarette sales, and we factor this into our diversity assessment as well as our financial forecast. The industrywide decline in demand for cigarettes (which constitute over 90% of Vector Group's EBITDA) has accelerated, with U.S industry volumes now falling by a mid- to high-single-digit rate. In our view, cigarette volumes are likely to continue to decline as older people smoke less and fewer young people start smoking. Nevertheless, Vector's tobacco profitability has held up well due to balanced volume and pricing execution. In addition, we consider Vector's management and governance as fair because of its historically high executive compensation (especially given its mid-cap market capitalization) and, in our view, limited board independence from management. Notwithstanding the company's improved governance outreach and meaningfully lower executive compensation, “say on pay” (the ability of shareholders to vote on executive compensation) remains low, with about 51.5% of shareholders voting for the compensation of the named executive officers in 2018. The board of directors may have limited independence, as several board members are current or former executives of the company or its subsidiaries. | Gerald Phelan | |
| Vista Outdoor Inc.(B/Stable/--) | ||
| Vista is more negatively influenced by social factors than the bulk of its peers because of its sizable exposure to ammunition sales, which has resulted in earnings volatility. Gun regulation, the political climate, and publicity have a large influence on ammunition sales. The company's precipitous drop in profitability following the 2016 election demonstrates how the political party in office has a direct impact on ammunition demand. Additionally, the company has experienced customer losses following mass shootings and the associated negative press. Walmart has announced that it would no longer sell certain ammunition products in its stores, which will hurt Vista's revenues. While the company's ammunition and outdoor sports brands do not overlap, negative press associated with the ammunition business could harm the image of the overall company, including its sports brands. External stakeholder pressure could lead to significant portfolio shifts. | Gregory Fang | |
| Whirlpool Corp.(BBB/Stable/A-2) | ||
| Whirlpool's credit quality is more negatively influenced by environmental factors compared with peers' primarily due to ozone-depleting chemicals used in refrigerators and the effects of energy usage on the environment in general from kitchen appliances and electronic equipment. We do not expect these risks will have a material negative impact on the company anytime soon; however, they could lead to higher compliance costs and lower cash flow due to increasingly strict government energy and environmental standards. Whirlpool is also involved in the cleanup of a number of Superfund sites. Despite minimal impact of increasing regulations on earnings and capex to date, the effects could increase in the future. | Gerald Phelan | |
ESG Risks In Agribusiness
Table 2
| Company/Rating/Comments | Analyst | |
|---|---|---|
| American Crystal Sugar Co.(BBB+/Stable/A-2) | ||
| American Crystal Sugar's credit quality is more negatively influenced compared to peers' by environmental factors due to its reliance on coal as the primary energy source for its sugar manufacturing process. The company has strong regional political support for the use of carbon-powered plants. Although, the company may substitute its coal needs with natural gas eventually, if mandated by regulation, the timing and extent of such a transition remains uncertain and could pose heightened risks if the company is unable to cost-effectively make the switch. | Arpi Gupta | |
| Archer Daniels Midland Co. (ADM)(A/Stable/A-1) | ||
| We believe ADM is relatively more exposed to environmental risk than its peers because of its U.S. ethanol business. Its earnings had, for several years, benefited from the USDA's renewable fuels standards, which promoted biofuel production. However, margins are under pressure because U.S. ethanol production now exceeds domestic demand, partly because production mandates are too high. Moreover, lower oil prices and recent regulatory waivers granted to producers that don't comply with production mandates have squeezed margins. We believe these factors will continue to pressure U.S. ethanol margins, and view ADM's large biofuels footprint as a drag on the strength of its otherwise well-diversified business. Weather is an ongoing environmental factor that affects ADM's profitability. Weather disruptions, particularly droughts, appear to be more frequent due to global warming and can lead to wide swings in profits (at times favorably). We hold grain processors like ADM to higher standards of financial strength than corporates in general, to account for this volatility. A less relevant but important social factor for ADM is its ongoing commitment to build out its Nutrition segment as consumers and societies become more health-conscious. We continue to view ADM's food and ingredients exposure as modest compared to its overall portfolio. Still, these investments have largely offset underperformance in its ethanol business. We have a satisfactory view of ADM's governance, including its balanced approach to managing shareholder returns and growth investments while appropriately managing risk. | Christopher Johnson | |
| ASG Parent LLC(B/Stable/--) | ||
| ASG's credit quality is more positively influenced than peers' by environmental factors, given that the U.S. Bering Sea pollock fishery is characterized by relatively stable fish stocks because of conservative management of total allowable catch (TAC) by the government. Annual TAC levels are set well below estimated fish populations to prevent overfishing. ASG benefits from its strong position in the U.S. Bering Sea pollock fishery and from regulatory support under the American Fisheries Act (AFA), which created a more rational, stable, and profitable operating environment by limiting the number of vessels operating in the fishery and lowering the TAC of pollock to ensure the long-term sustainability of the fish stock. | Raina Patel | |
| BRF S.A.(BB-/Positive/--) | ||
| Governance issues have hit BRF's operating performance heavily in recent years following allegations of bribery and food safety breaches at its meat processing plants, which are under investigation. This led to some of its plants being shut down temporarily and more export restrictions. The company also faced other management and governance deficiencies, including a lack of strategic focus given substantial shareholder disputes and significant senior management turnover. We revised our management and government assessment to fair following those events. This management turmoil impacted BRF's ability to face severe sector volatility that has negatively impacted the rating, including higher feed input costs after a weak corn harvest in 2016 and 2018 and the national truck driver strike in Brazil in May 2018. Also, BRF bore several investigation-related costs such as export bans from key regions, higher legal costs, and a damaged reputation. In 2017 and 2018, BRF suffered about R$1.2 billion (roughly 28% of our 2019 forecast EBITDA) in incremental expenses and losses related to food safety investigations, export restrictions, and the truck driver strike. We now see a stronger alignment between shareholders and management and a more conservative financial strategy to quickly deleverage. However, future investigations over operational safety or additional export restrictions could cause divergence from deleveraging plans and possibly pressure the credit quality. | Victor H Nomiyama | |
| Bright Food (Group) Co. Ltd.(BBB/Stable/--) | ||
| We consider social factors for Bright Food as comparable with those of the broader commodity food sector. Safety control is a relevant factor given its position as one of China's largest dairy product and commodity food manufacturers. Contaminated products can disrupt a company's food production and lead to material earnings decline and litigation risk, such as the melamine milk powder crisis in 2008. Since then, Bright Food has implemented stringent controls on product safety by establishing daily plant sanitization, cow immunization and quarantine, and daily fresh milk quality inspections. As such, the company has not suffered any product recalls that materially affected its earnings or hurt its reputation over the past five years. Tighter environmental regulation in China prompted the company to close 17 dairy farms by 2016. Its remaining 32 dairy farms strictly adhere to high nternational standards. Given dairy farming's small revenue contribution (about 2% of total revenue), we believe the closures won't materially affect the company's cash flows or credit measures. We view Bright Food’s governance as fair because it is 100% owned by the Shanghai government and closely supervised by Shanghai's state-owned Assets Supervision and Administration Commission of the State Council. Despite that, the company's managers have strong industry expertise. | Polly Ng | |
| Bunge Ltd.(BBB/Negative/--) | ||
| Governance is an important near-term rating factor for Bunge. We view Bunge’s management and governance as fair. The company is undergoing a strategic review following a cooperation agreement signed in October 2018 with activist investor Continental Grain Corp. So far, the company has appointed four new board members and formed a strategic review committee. These developments leave us uncertain over the company's direction and suggest additional change is likely in the near term. Bunge’s social and environmental risks are comparable to those of other agribusiness peers. Weather is an ongoing environmental factor for Bunge and its peers, regularly affecting near-term profits, and weather disruptions--particularly droughts--appear to be more frequent due to global warming. We hold Bunge to higher standards of financial strength than we hold the corporates sector as a whole, to account for this volatility. Long-term environmental factors include land preservation and reducing water use, for which Bunge has established prudent long-term goals. These include reducing water consumption in industrial activities by 10% by 2026 and increasing supply chain traceability to farms that do not contribute to deforestation. Although less relevant, a social factor for Bunge is its drive to expand into more value-added ingredient offerings in response to consumers and societies becoming more health-conscious. Although last year's acquisition of Loders Croklaan expanded Bunge's offerings into value-added palm oils for bakery, confectionary, and infant nutrition, Bunge's food and ingredient business remains concentrated in more commodity-like edible oils (which get consumed less as societies become wealthier) and wheat milling, which is less health-conscious. | Christopher Johnson | |
| Cargill Inc.(A/Stable/A-1) | ||
| We view Cargill’s exposure to environmental risk as comparable to that of the broader agribusiness sector in aggregate. Increasingly important environmental factors for Cargill include reducing water use and land scarcity to ensure sustainability. To this end, Cargill has long-term goals to no longer source crops from farms that contribute to deforestation. Still, weather is an ongoing environmental factor for Cargill and its peers, regularly affecting near-term profits, and weather disruptions--particularly droughts--appear to be more frequent due to global warming. We hold Cargill to higher standards of financial strength than we hold the corporates sector as a whole, to account for this volatility. We believe this level of volatility will continue to affect Cargill's earnings, but its overall geographic and product diversification mitigates this risk. Although less relevant, an important social factor for Cargill is the need to further develop healthier food ingredients as consumers and societies become more health-conscious. Cargill's food and ingredients segment is well positioned to benefit given its strong relationships with food companies, but is facing more competition. Rivals like ADM have made several acquisitions in this space, while Cargill has taken a more measured approach by emphasizing growth across multiple areas of its much broader portfolio. Although competition has increased, we continue to view Cargill's business strength favorably compared with its peers' given its broader diversification. Cargill is a family-owned company controlled by the Cargill and MacMillan families. Given the company's low appetite for debt leverage and modest dividend policy, we view Cargill's governance as satisfactory. | Christopher Johnson | |
| Corporacion Azucarera del Peru S. A. (Coazucar)(B-/Negative/--) | ||
| Coazucar’s environmental risk exposure is comparable to other sugar cane producers', all of which face significant exposure to changing weather conditions. As a result, companies in this sector have invested in better systems to irrigate their fields and to control potential impacts from weather fluctuations. Coazucar was exposed to a severe El Niño climate pattern in 2017, which eroded its operating performance and hampered its revenue and profitability in the last few years. For instance, revenues fell 18.6% during 2017 partly due to this climate pattern, but also from low international sugar prices, which impacted its EBITDA margin downward to 15% from 25% of previous year. Coazucar is a socially responsible company, with strong relationships with the community and a commitment to preserving the environment. Moreover, the company has invested in equipment and on developing processes to improve its production, but also to reduce water consumption and waste, and to manage its discharge of solid waste and wastewater. | Rodolfo Fernandez | |
| Fonterra Co-operative Group Ltd.(A-/Stable/A-2) | ||
| We believe Fonterra manages environmental risks and increasingly stringent regulations inherent within the agriculture and commodity food industry. Fonterra and its farmer suppliers have a significant environmental footprint and face increasing scrutiny on greenhouse gas emissions (generated by energy use and livestock), health and biodiversity of land and waterways, farming efficiencies and sustainability, as well as managing waste discharge. Failure to maintain strict food safety can have significant consequences, as underscored by the WPC80 botulism scare in 2013 that resulted in mass precautionary product recalls by Fonterra and its affected customers, resulting in claims. In the case of one customer, Danone, Fonterra had to pay significant damages. But Fonterra treats animal health and biosecurity seriously, as highlighted by its response to the mycoplasma bovis bacteria detected in the Canterbury region in 2017. We believe Fonterra is working with shareholder farmers to address environmental factors. However, many of the measures require significant capital outlay that may place additional financial pressure on the cooperative as well as its shareholder farmers. In our view, upstream environmental factors weigh on volume growth, which affects the throughput and operating efficiency of its processing plants. In our opinion, Fonterra recognizes the business' social responsibility to the wider dairy farming community. In addition, the purpose of the Dairy Industry Restructuring Act (DIRA) is to promote the efficient operations of dairy markets in New Zealand by regulating the activities of Fonterra to ensure New Zealand markets for dairy goods and services are contestable. Fonterra's cooperative structure introduces an additional layer of complexity to its governance. Its management faces close scrutiny over its performance. | Samuel Playfair | |
| Gruma S.A.B. de C.V.(BBB/Stable/--) | ||
| Gruma’s environmental risk exposure is comparable to that of other agribusiness companies. The company actively seeks and obtains various certifications that credit it as an environmentally responsible company, proving its commitment to sustainability with the communities where it operates and to the environment. Gruma continues to invest in efficient equipment and in developing processes to improve its production. In addition, it's committed to reduce water use and to waste management. Gruma has implemented specific policies in its U.S. operations to manage the waste generated in the production and distribution of its products. In particular, Gruma received recognition for its facilities in the state of Indiana for sewage water and gas emissions reduction. The company also modified the corn cleaning systems, reducing the waste of water in its plants in the Mexican states of Chiapas and Yucatan; Gruma implemented these improvements in order to cooperate with the domestic drainage and sewage problems of the surrounding communities. Although somewhat less impactful to the rating, Gruma is involved in several social activities, supporting Mexican communities in need, promoting the involvement of human capital through education and investment in professional development in order to achieve better employment while meeting its production needs. Gruma has relied on social networks as a marketing platform, but also as a way to strengthen the relationship with the end-consumer by staying in touch with the community for specific social events. In addition, Gruma supports competitiveness in the value chain by investing in local suppliers in Mexico, by fostering continued collaboration with domestic farmers in special projects (hybrid corn as an example), and by managing of post-harvest marketing initiatives with farmers, including investing together in storage capabilities and other projects. We believe Gruma is well-positioned to continue developing a skilled workforce more effectively than most of its competitors. We view Gruma's management and governance as satisfactory, reflecting management's experience and favorable planning processes, enabling the company to deliver a strong financial and operational performance. | Rodolfo Fernandez | |
| Jalles Machado S.A.(BB-/Stable) | ||
| Jalles' credit profile is more positively influenced by social factors than its peer group's, given that the company is one of few organic sugar producers in the world, a niche product for which price premium over standard sugar is high, mitigating a possible decline in non-organic sugar consumption in the future. It also has a high flexibility to shift its production mix towards ethanol, should profitability of the biofuel demand it. The impact of environmental factors on our rating on Jalles is in line with that of the industry. Sugar and ethanol producers in Brazil are prone to adverse climate conditions that can directly affect its agricultural productivity, particularly droughts and extremely rainy periods, which can prevent companies from crushing available sugarcane in their fields. Jalles suffered from a severe drought during fiscal 2017 that hampered its agricultural yields and cane availability, although it has fully recovered in the current harvest season. Jalles mitigates weather risks by enhancing its irrigation capacity. | Bruno Matelli | |
| JBS S.A.(BB/Stable/--) | ||
| We view governance as a material factor in our rating on JBS, given the corruption probe of the company since May 2017. The investigation exposed JBS' failure in applying risk tolerance and controls to prevent wrongdoing and protect outside stakeholders from decisions that benefitted the Batista brothers and their companies. We assess JBS' management and governance as weak. Weak governance also led to significant refinancing risks, which JBS significantly diminished last year. Over the last two years, JBS has implemented several compliance policies and initiatives to improve governance and transparency. We view the company's exposure to environmental and social risk factors as broadly in line with that of the industry. | Flavia Bedran | |
| Marfrig Global Foods S.A.(BB-/Stable/--) | ||
| We view Marfrig's exposure to environmental and social risk factors as broadly in line with that of the industry. The main social risks facing the company are animal disease outbreaks and food contamination (e.g. foot-and-mouth disease for cattle). In our view, the company deals with those risks effectively by spreading its slaughtering operations across different regions and by maintaining a close control over its suppliers' operations. Marfrig's operations are located in the U.S. and four South American countries. Most recently, fires in the Amazon region raised concerns about environmental care in Brazil, an important factor for accessing export markets. Marfrig audits all direct suppliers located in the Amazon region, including using geospatial monitoring, and doesn't acquire cattle from properties with identified deforestation processes. Governance factors have also been more pronounced for meat processors in Brazil due to federal policy investigations since March 2017 on safety evasion practices and regulatory breaches. Marfrig was not severely affected by those investigations, while they weighed more negatively in our view of BRF`s governance. | Victor H Nomiyama | |
| Minerva S.A.(BB-/Positive/--) | ||
| Minerva's exposure to environmental risks is comparable to that of the overall industry. Minerva´s assets are spread across five different countries in South America and 24 plants, which reduce the risk of any disease outbreak while partially offsetting its still-heavy concentration in Brazil, where about 40% of its production capacity is located. Also, Minerva audits all its suppliers of livestock to avoid any potential environmental practice deviation and export restriction. Social and governance risk both factor heavily in the Brazilian protein sector following a federal police investigation started in March 2017 of bribery accusations and charges of illegal food safety practices. Minerva has remained fairly isolated from any fallout because its senior management was not directly involved in those investigations and the company was able to reroute a portion of its production to units outside Brazil, reducing the impact from the temporary embargoes. | Victor H Nomiyama | |
| Pesquera Exalmar S.A.A.(B/Stable/--) | ||
| Exalmar’s environmental risk exposure is comparable to that of other protein sector and fishing peers. Weather events like El Niño could change water temperatures and disperse biomass, which occurred and hampered Exalmar's revenue and profits significantly in 2016. Government quotas for each fishing season have also been volatile, which has affected Exalmar's results as well. Exalmar actively cooperates with the Ministry of Production (PRODUCE) and with IMARPE (Peruvian Sea Institute) for the preservation of marine resources, abiding by anchovy size restrictions for fishing, fishing vetoes, and quotas. We believe continuous fishing restrictions and reduction in quotas well below 4 million tons per year could take a toll on Exalmar's operating performance, profitability, and credit metrics. The fishing industry is gradually becoming less labor intensive, and the drive toward automation has created discontent among workers. However, Exalmar works to create and maintain strong relationships with the community, purchasing more than half of its processed fish from third parties, including artisan fishermen, which has improved its EBITDA while reducing some of its social risk. | Rodolfo Fernandez | |
| Pyxus International Inc.(CCC/Negative/--) | ||
| Pyxus is more exposed to social factors compared to the rest of the sector because of its heavy reliance on leaf tobacco, which it uses primarily in the manufacture of traditional cigarettes. The company's operations include processing and packaging of leaf tobacco used to make cigarettes, which are associated with health risks and expose the company to the effects of the liability and regulatory risks faced by its customers. Moreover, in an effort to diversify its business away from leaf tobacco, the company has made investments into cannabis, e-liquids, and industrial hemp. Importantly, all of these products themselves carry heightened social risk as scientific research on potential health effects, regulatory framework, and consumer awareness continues to evolve. In particular, recent news linking fatal health incidents to the usage of e-cigarettes has significantly increased regulatory scrutiny and public attention on vaping products. | Arpi Gupta | |
| Tyson Foods Inc.(BBB/Positive/A-2) | ||
| Tyson’s exposure to environmental risk factors is comparable to that of its livestock peers. Livestock production is prone to disease outbreaks, which can disrupt food production (including large product recalls) and possibly cause material earnings declines, litigation, and other penalties for not meeting regulatory standards. Tyson has historically minimized the effects of disease on in its food supply. In fact, it has not suffered any product recalls that materially affected its earnings or hurt its reputation because of its stringent on-farm raising standards, daily plant sanitization, and ongoing site inspections. Tyson has updated its business practices to meet changing consumer tastes and preferences. Animal raising practices, in particular nutrition and health monitoring practices, are critical as consumers gravitate toward antibiotic-free products. Today, the company raises more than 95% of its flock without antibiotics and complies with all regulatory limits on the use of hormones and steroids in its hog and cattle production. We consider Tyson's governance to be in line with that of its large global peers. Tyson continues to be controlled by members of the Tyson family, who have 71% control of the voting power of the company's outstanding voting stock. Despite this high level of control, we do not believe Tyson's governance unduly benefits the Tyson family over other stakeholders. Underpinning this opinion is the company's successful record under mostly non-family professional management, and of adhering to its financial policy targets while executing its M&A-driven growth strategy. | Christopher Johnson | |
| Universal Corp.(BBB/Stable/--) | ||
| Universal is more exposed than its peer group to social factors because of its heavy reliance on leaf tobacco, which is primarily used in the manufacture of traditional cigarettes. Although the company has been facing volume pressures driven by declines in tobacco consumption as well as ever-increasing regulatory oversight, Universal has been able to maintain stable profitability by providing additional value-added services to its customers, the cigarette makers, including blending and physical testing of tobacco, service cutting and manufacturing reconstituted leaf tobacco. We believe the company will continue to be challenged by the effects of the litigation and regulatory risks faced by its customers. However, Universal's longstanding relationships with its largest customers (including Altria, BAT, China Tobacco International Inc., Imperial Brands, Japan Tobacco, and PMI) position it well to navigate through these industry challenges, in our view. | Arpi Gupta | |
This report does not constitute a rating action.
| Primary Credit Analysts: | Diane M Shand, New York (1) 212-438-7860; diane.shand@spglobal.com |
| Chris Johnson, CFA, New York (1) 212-438-1433; chris.johnson@spglobal.com | |
| Secondary Contacts: | Barbara Castellano, Milan (39) 02-72111-253; barbara.castellano@spglobal.com |
| Raam Ratnam, CFA, CPA, London (44) 20-7176-7462; raam.ratnam@spglobal.com | |
| Flavia M Bedran, Sao Paulo + 55 11 3039 9758; flavia.bedran@spglobal.com | |
| Sophie Lin, Hong Kong (852) 2533-3544; sophie.lin@spglobal.com | |
| Maxime Puget, Paris (33) 1-4075-2577; maxime.puget@spglobal.com | |
| Mariola Borysiak, New York (1) 212-438-7839; mariola.borysiak@spglobal.com | |
| Remi Bringuier, Paris + 33 14 420 6796; remi.bringuier@spglobal.com | |
| Brennan Clark, Chicago + 1 (312) 233 7086; brennan.clark@spglobal.com | |
| Rodolfo Fernandez, Mexico City; rodolfo.fernandez@spglobal.com | |
| Francisco Gomez Comelli, Buenos Aires (54) 114-891-2112; Francisco.Comelli@spglobal.com | |
| Arpi Gupta, CFA, New York (1) 212-438-1676; arpi.gupta@spglobal.com | |
| Luis Manuel Martinez, Mexico City (52) 55-5081-4462; luis.martinez@spglobal.com | |
| Bruno Matelli, Sao Paulo (55) 11-3039-9762; bruno.matelli@spglobal.com | |
| Alexandre P Michel, Mexico City + 52 55 5081 4520; alexandre.michel@spglobal.com | |
| Polly Ng, Hong Kong + 852 2532 8068; polly.ng@spglobal.com | |
| Victor H Nomiyama, CFA, Sao Paulo (55) 11-3039-9764; victor.nomiyama@spglobal.com | |
| Amanda C O'Neill, New York + (212) 438-5450; amanda.oneill@spglobal.com | |
| Raina Patel, New York + 1(212) 438-0894; raina.patel@spglobal.com | |
| Gerald T Phelan, CFA, Chicago (1) 312-233-7031; gerald.phelan@spglobal.com | |
| Sam Playfair, Melbourne + 61 3 9631 2112; sam.playfair@spglobal.com | |
| Nikolay Popov, Dublin +353 1 568 0607; nikolay.popov@spglobal.com | |
| Suyun Qu, Chicago + 1 (312) 233 7018; suyun.qu@spglobal.com | |
| Rocco A Semerano, London +44 20 7176 3650; rocco.semerano@spglobal.com | |
| Joel Yap, Melbourne (61) 3-9631-2196; joel.yap@spglobal.com | |
| Ryohei Yoshida, Tokyo (81) 3-4550-8660; ryohei.yoshida@spglobal.com |
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