Even something as seemingly innocuous as the Woolies around the corner can have a negative impact on the things you care about. Our Head of Ethics Research Dr Stuart Palmer explains how we assess supermarkets against our Ethical Charter.
What Australian Ethical does and doesn’t invest in can surprise people. Even clients who have been with us a long time have queries about our process. Questions about what we invest in are the most common, although we’re also queried about sectors we don’t invest in. Supermarkets are a frequent battleground, with some investors concerned about the problems they cause while others emphasise their benefits.
While we’re not currently invested in any supermarket company, we’re not opposed to them in principle. In fact, our starting point is that a business which helps people efficiently purchase food and other staples can positively contribute to human wellbeing. For example, in the past we have invested in US supermarket Whole Foods Market.
At present, neither of Australia’s major supermarket chains pass our Ethical Charter. Until recently, Coles was excluded because its parent company (Wesfarmers) owned coal mines. Coles’ association with coal mining ended when Wesfarmers demerged its supermarket business in November 2018. Coles also announced in March 2019 it had signed a deal to give up control of 87 hotels in Queensland that operate about 3,000 pokies. However, we continue to exclude Coles because its revenue from retail tobacco sales is above our threshold, which is 1% for a supermarket (although we have zero tolerance for tobacco production).
We also exclude Woolworths because its revenue from alcohol and gambling is above our relevant threshold of 10%. In July 2019 Woolworths announced a demerger of Endeavour Drinks and ALH Group that will see the company offload its 12,000 gaming machine licences by 2020. Whether this makes Woolworths shares investable will depend on a number of details, including the size of the minority stake Woolworths will retain in Endeavour Group and the relationship between the two companies (including the terms of cross-promotion arrangements and joint rewards programs). The key will be understanding the extent to which Woolworths will or won’t continue to support and benefit from liquor and gaming.
Here are some of the other factors we take into account when we assess a supermarket business against our Ethical Charter.
Hard, soft and slippery selling
Some items sold by supermarkets may hurt their consumers, particularly if they are consumed excessively. How do we assess this potential for injury?
On the one hand, we think that individuals should be able to choose those things that they consider will best advance their interests. On the other hand, we believe that advertising and cultural influences often make it hard for consumers to make fully free and informed choices. That’s one of the reasons we scrutinise the sale of alcohol by supermarkets. We worry that alcohol marketing and societal attitudes to alcohol can encourage overconsumption – consumption that’s clearly not in the interests of individual drinkers or their communities. We also worry about blatant false advertising: remember Coles’ “baked today” bread that had been partially baked months earlier in Ireland?
The process of producing products that supermarkets sell can also harm those who aren’t their customers, including animals and the environment. Intensive and factory farming practices are often environmentally unsustainable and cause animal suffering. Palm oil (an ingredient in many processed supermarket foods) can have wide-ranging impacts on wildlife and communities through land clearing and child and trafficked labour.
We have seen some attention paid to animal welfare – with moves to phase out caged eggs, or to comply with RSPCA standards for home-brand eggs and chicken meat – but there is much more to be done. This includes increased transparency about the conditions in which animals are raised and the meaning of labels such as “free range”.
Both Coles and Woolworths are taking measures to reduce plastic waste in their stores. This includes offering soft plastic recycling collection, banning single-use plastic bags and moving to reduce the amount of plastic packaging on fresh produce. However, both supermarkets have more to do on this front.
Relationships with suppliers can also be troubling. Coles and Woolworths exercise unprecedented power through their size, market share (around 60%) and their house brands for a growing range of products. This power can be abused to impose uneconomic prices and unfair trading terms on the farmers and manufacturers whose goods stock supermarket shelves. This in turn can force suppliers to adopt unsustainable practices of their own, whereas we think supermarkets should actually exercise their influence to improve social and environmental impacts of their supply chain.
Looking after their people?
Some parts of the supermarket sector have a poor record of staff treatment, with cases of payment below award rates and high levels of casual and contract labour. At the same time though, supermarkets can give a diverse range of people the opportunity to find flexible work, learn valuable vocational skills and progress a career both within and outside the sector.
Given these diverse positive and negative potential impacts, some of the questions we look at when assessing supermarket companies are:
- What product lines does the company earn most revenue from?
- What restrictions does it place on the products it sells?
- What shelf space does the supermarket provide for organic, sustainably farmed and fairtrade produce?
- How does the supermarket manage its supply chain – both to ensure fair treatment of suppliers and to reduce negative social, animal and environmental impacts of production?
- What steps are taken to minimise the environmental footprint of supermarket stores themselves?
- What’s the marketing track record of the supermarket? Is there a history of misleading product claims?
- How does the supermarket rate as an employer of choice?
We assess and balance these and other dimensions of supermarket businesses. It’s rare to encounter a perfect company, and our biggest challenge is often balancing positive and negative aspects of a business. Ethical investing isn’t always easy, but it’s well worth the effort.