Sustainability After a Merger or Acquisition

It was not long after Kraft Heinz’s failed bid to take over Unilever earlier this year that the food giant announced a $200m programme of corporate social responsibility (CSR) initiatives and a raft of new targets to improve its environmental management and in creating a more resilient and sustainable supply chain. The company’s senior manager of sustainability programmes, Julio Quintana-Castillo said that Kraft Heinz was making the investment to “grow a better world through our global CSR initiatives”.

Whether the failed takeover bid and consequent revised and improved green goals are in any way connected is anybody’s guess. But the story did raise alarm bells for NGOs keen to understand what might (if anything) be the negative (or otherwise) impact on Unilever’s progress on sustainability.

Similarly, the consumer goods giant’s decision to sell off its baking, cooking and spreads (BCS) division to private equity investors has had environmental campaigners concerned not least because of its buying power and influence in the palm oil sector, an industry at the heart of the rainforest destruction debate.

To service its business, Unilever spends €18.7bn globally on raw materials and packaging. For its BCS business, which includes spread brands such as Flora and I Can’t Believe It’s Not Butter (and posted pre-tax profits of $742m, accounting for 6% of 2016 revenues), it relies on a steady supply of palm oil. In fact, the company currently buys 3% of global palm oil production, but impacts 8% of global production via its use of palm kernel oil.

Crucially, as an early adopter of Roundtable on Sustainable Palm Oil (RSPO) standards, Unilever now purchases 10% of global certified sustainable palm oil output, making it the biggest buyer of RSPO-backed palm oil. As a big business it is having a hugely positive impact on shifting a tricky sector towards more sustainable and long-term practices. As the company itself notes, “with this scale comes a responsibility and opportunity to transform our own supply chain and to positively influence the wider palm oil sector of which we are a part”.

Chain Reaction Research (CRR), an NGO backed by the Norwegian Agency for Development Cooperation, is one of the organisations concerned by such M&A activity having a negative impact on sustainability progress. Its analysis of the BCS sale suggests that sustainable agriculture product sourcing would fall by 20%, arguing that such a change might negatively impact MSCI, Bloomberg, and others scoring of Unilever’s sustainability and environmental, social, governance (ESG) achievements.

Companies that have strived to improve their supply chain resilience and build stronger relationships with farmers, for example, have been applauded – and are starting to reap the benefits. Unilever’s Sustainable Living brands – from Ben & Jerry’s and Lifebouy, to Dove and Hellmann’s – are growing more than 50% faster than the rest of the business, delivering more than 60% of Unilever’s growth in 2016.

So, questioning whether its influence no longer being asserted will have a detrimental effect on rural communities and the environment at large, appears to be a legitimate concern. Regardless of how robust and embedded a sourcing policy might be, new owners commonly strip out what might be deemed ‘unnecessary’ cost from a business to beef up margins, recouping their investment as quickly as possible.

As such, a raft of NGOs have issued statements and campaigns asking stakeholders to assess the credentials of potential buyers, particularly in large-scale M&As. The CRR analysis looked at a number of potential buyers of Unilever’s BCS business, highlighting potential risks – Bain’s lack of a sustainability report and CVC Capital Partners’ six investment criteria not mentioning sustainability at all, among them.

Of course, the selling company has a responsibility to hand over their business to an appropriate party that is happy to continue what has been started. In this case, Unilever knows only too well the potential reputational risk of selling to a ‘rogue’ buyer. “Unilever is acutely aware that, regardless of price, this would be bad business and would cause substantial damage to our reputation,” it said in a statement.

Of course, many previous corporate buy-outs and M&As have been to the benefit of people and planet. But the fact that the sustainability credentials of potential buyers and investors is being called into question is evidence of just much progress the corporate world has made in being responsible, transparent and sustainable for the long term.