The definition of ethical investing is changing. New investors are coming through the ranks with a different set of priorities from previous generations.

Historically, ethical funds have used a relatively simple screening process to determine which companies were eligible for investment, simply ruling out businesses involved in tobacco, arms and alcohol, for example.

But today’s investors are increasingly interested in other issues such as climate change, corporate governance and health and well-being.

Experts say among the industries which could soon find themselves categorised among the so-called sin stocks are sugar-related companies.

Camilla Ritchie, investment manager at 7IM, says: ‘I think sugar will be one of the next sin stocks, even if we are not focused on it yet.

‘It could easily be picked up by ethical funds as the S or G part of ESG investing (which is considering environmental, social and governance factors when investing). Just as plastic has become something for ethical investors to think about, I believe sugar will too.’

REAPPRAISING SUGAR

Sugar businesses, it is thought, have an uncanny resemblance to tobacco companies in the past: they are selling highly addictive products which we are only now realising are bad for us.

Regulation in the sector is increasing as governments try to reduce the burden of healthcare costs for sugar-related diseases – it is already among the top causes of obesity and cancer.

Some 42 sugar taxes have already been brought in across the word while new guidelines mean nutritional labelling must be clearer than ever before. Some companies are already seeing sales slip as consumers opt for healthier alternatives.

Elly Irving, ESG analyst at Schroders, says litigation costs could also hit these companies in the future as they did with tobacco. According to the World LII legal database, nearly 350 lawsuits have been brought against the staples sector in the past three years.

Reputational damage is another risk for companies selling sugary goods – the Schroders Brand Index found fewer than 10% of consumers have a positive perception of product quality across five of the top eight fizzy drinks brands.

All of this creates significant headwinds to investing and the companies that don’t adapt could struggle.

PRESSURE ON BUSINESSES

‘There are a lot of parallels between the food staples and tobacco industries and there’s a need for companies to adapt,’ says Irving. ‘The World Health Organisation has identified nine food categories that contribute the most sugar to kids’ diets such as breakfast cereals and yoghurt and there could an issue for those companies.’

But many businesses are prioritising the situation, spending millions on research and development and reformulating products as well as acquiring smaller brands which have already developed healthier, low-sugar ranges.

Nestle has developed a new type of sugar granule which could reduce sugar in confectionery by up to 40%. AG Barr (BAG) has developed a version of its Irn Bru drink with half the sugar of
the original.

Unilever (ULVR) – the firm behind Magnum, Ben & Jerry’s and Wall’s ice creams – launched seven low-calorie, high-protein ice creams after it was revealed to have lost market share to a new healthy ice-cream brand.

WHAT DOES THIS MEAN FOR INVESTORS?

Investors are now looking more closely at food and drink companies. Fund manager Schroders, for example, is looking for companies who are transparent and explicit in their approach to sugar.

Irving says the change in consumer trends creates investment opportunities. For example, WhiteWave is the fastest growing US food and beverage company, and it focuses on healthy plant-based foods such as So Delicious dairy-free ice-cream and Alpro soy and dairy-free yoghurts.

Meanwhile, sales at companies such as McDonalds are falling. Schroders says some of the brands at the highest risk of the consumer focus on health and wellness are Coca Cola, chocolate maker Hershey, and Campbells Soup.

Matt Crossman, engagement manager at Rathbone Greenbank Investments, comments: ‘We definitely see companies with the poorest performance around the issue of sugar, health and obesity as targets for exclusion.’

But he adds: ‘Sugar and tobacco aren’t directly comparable. Arguably there isn’t a healthy level of tobacco consumption but there might be for sugar.

‘We couldn’t see investing in a company promoting traditional tobacco products as ever being acceptable in our portfolios, but a company committed to the UN goal of good health and wellbeing, making innovative, nutritious, healthy and delicious products would always be of interest.’

A NEW APPROACH

It is early days for investors looking to put these theories into practice. Crossman says companies which aggressively market unhealthy products to children, particularly those which use stealthy advertising through online gaming for example, could be ripe for exclusion.

And as businesses become more open about how they are tackling this problem, it may be easier to pinpoint those which don’t fit with the ethical fund model. Sales data may, in the future, help analysts identify the proportion of profits a company makes from foods in breach of nutritional guidelines, for example.

Irving says: ‘The demand for processed food and fizzy drinks is not going to disappear overnight; however, we do believe that consumer behaviour is changing and tastes are evolving.

‘Big Food has been slow to adapt, focusing more on cost than innovation. Pressure from consumers, public health bodies and governments are changing the way investors need to think about the sector.’ (HB)

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