By Pamela Grinter, partner at Fox Rothschild LLP
Food manufacturing companies, like other manufacturing businesses, should consider performance in regard to ESG factors as a part of short term and long term business planning. ESG stands for “environmental, social, and governance” and reference to ESG for a food manufacturing business means using environmental, social and governance factors to evaluate the company or its business. Companies are increasingly focusing their business development plans on the manner in which they conduct business aside with considerations of profitability.
My previous articles have addressed how a food manufacturing company can identify its relevant stakeholders – investors, employees, customers, and others, and what material ESG issues might have the most impact on a food manufacturing business. This article will address how a food manufacturing business can engage in an ESG materiality analysis.
Before a company can report on its ESG performance, management must do an analysis of its material ESG issues. The first step in the process is to identify relevant stakeholders. They likely include investors, employees, customers, and suppliers. Then management, working with those stakeholders, should review the company’s business and operations to determine the company’s material ESG issues. This involves looking at each step in the company’s processes to determine sustainability and ESG impacts, from the company’s supply chain, to employee health and safety, through to product packaging and ultimate disposal.
ESG reporting can be called a variety of things, including “risk and opportunities reporting,” “corporate responsibility reporting,” or “sustainability reporting.” At its most basic, though, ESG reporting is providing public information about the company’s material ESG risks and opportunities and explaining how those risks and opportunities fit into the company’s business strategy.
A company’s ESG work plan will have the company identify material ESG issues for that company. The company will work with relevant stakeholders in doing this analysis. The breadth of the stakeholder group will drive how broad and deep this analysis might go. For example, if the company is a manufacturing company and the primary stakeholders involved in the analysis are its customers, identified strengths and weaknesses may be in the area of sustainable supply of raw materials and ingredients, clean manufacturing processes and operations, product safety and quality, and appropriate protection of intellectual property rights.
Each business must identify what elements are important to their specific operations and their stakeholders. Once the material ESG issues are identified, the company will measure its performance or compliance in those areas. This analysis should be quantitative (how much or the range of data), qualitative (the qualities and characteristics of the data), and specific. The company should adopt standardized metrics to measure progress and data and gather controls necessary for consistent reporting on a timely basis. Progress should be regularly reviewed by the board and goals should be incorporated into the company’s strategic plan.
ESG analysis and reporting involves identifying the material ESG opportunities and risks, measuring the company’s performance, over time, relative to these ESG opportunities and risks, and then reporting on those results.
Steps to material ESG Analysis
1. The board of directors and the management team should assess the risks and opportunities of the business
This can start with management developing and presenting information to the board for its review, input, and assessment, based on the company’s business. As discussed in a prior article, material issues for a food manufacturing business might including raw material sourcing, toxic emissions and waste, packaging material and waste, labor management, health and safety, product safety and quality, privacy and data security (protect the recipe), supply chain labor standards, board diversity, executive pay, and others. The board should engage with management in a thorough discussion of a wide variety of potential factors in light of the company’s business and operations.
2. Consider these issues relative to the business’s competitors
The initial issues identified should be considered in comparison to peer companies.
3. Solicit stakeholder input
Who has been identified as the company’s stakeholders? The company should solicit stakeholder input on its originally identified material issues list. Stakeholders should be asked to provide their input on the list already identified and also to identify any new issues they consider important.
4. Identify material issues
Management should then shift through the collected information and present a refined list to the board of directors.
5. Determine responses to material issues
Management and the board should consider how the company can respond to and improve on identified issues. Perhaps supply chain labor standards are a critical issue – where are milk, cream, chocolate, and vanilla sourced?
6. Set targets for improvement and plan how to reach those targets
If the material issue is supply chain labor standards, the company may choose to adopt policies that apply to their vendors and require periodic reporting from vendors, as well as reviewing independent reporting on the same issues.
7. Implement a strategic plan
The board and management may choose to adopt a strategic plan that identifies the company’s material ESG risks and opportunities, sets targets for improvement, the plan for making improvements, and the process for assessing improvement. Improvements might include educating stakeholders, training employees as necessary, operational compliance and, of course, implementing reporting systems.
Throughout the process, management should plan for disclosure on material issues, how to integrate any community response, and how to implement and measure improvement.
9. Analyzing the impact of disclosure
Depending on the company’s reporting on its material ESG issues, management may also need to determine how to analyze the impact in the market of that disclosure.
Pamela Grinter is a partner at Fox Rothschild LLP and co-chair of the firm’s Food & Beverage and Environmental, Social & Governance Practice Groups. Her practice primarily focuses on business and tax law. Pamela can be reached at [email protected].