Obesity as an investment risk

• Governments worldwide are taking a more interventionist approach towards corporate behaviour, especially in the food and drink industry, in response to rising obesity levels and associated healthcare costs.
• Companies that contribute significantly to obesity are potentially exposed to higher regulatory and reputational risks. These risks can translate into increased costs and could impact their business models and financial performance.
• At Schroders, we make use of our proprietary model, SustainEx, to identify and measure externalities that companies create, to anticipate future risks. These insights can then be used within investment models and serve as a launchpad for company engagements.

A theme of the current era of geopolitical upheaval has been a willingness of governments to rip up the rule book on how and when they should intervene in corporate behaviour. Policy makers globally seem to have a growing appetite for interventions that previous governments have tended to avoid. 

One sector increasingly in the crosshairs of government action is the food and drink industry. Driven by a rise in global obesity levels and the healthcare and economic costs associated with them, over 120 countries now levy taxes on sugar-sweetened food, covering 52% of the world’s population. Our analysis shows that governments are also increasingly comfortable intervening directly in corporate activity, an apparent shift from the far less active approach they tended to take in the earlier part of this century.

In the US, the Make America Healthy Again (MAHA) strategy, spearheaded by Robert Kennedy Jr, is active across a number of fronts: junk food advertising to children, food dyes, nutrition labelling, dietary guidelines, infant formula and reformulation of products.

MAHA has already borne fruit.  PepsiCo said in a trading update this summer that by the end of this year it will remove artificial colours – which have been linked to various adverse health impacts among children - from its Lays crisps and Tostitos snacks. Starbucks has also promised to provide healthier menu options.

The industry is unlikely to accept all the changes being proposed without a fight though. Analysis of US lobbying data by the Financial Times found that the food industry’s lobbying spend increased by 21% from 2020 to 2023. This means it now spends almost twice as much as the tobacco and alcohol industries combined. Given obesity costs 2.19% of global GDP annually, (more than $2tr), it is unsurprising the industry is taking action to safeguard itself.

It is possible PepsiCo and Starbucks will be rewarded with new customers. For now, however, their investments are a cost on their balance sheets and examples of a harmful impact they create (a negative externality) becoming “internalised”.

The risk to companies of being forced to bear the cost of their externalities is one that, at Schroders, we have been interested in for a long time. Indeed, the purpose of our proprietary model, SustainEx, which we originally created in 2019, is to measure externalities that companies create to give us a warning of potential future risks to companies’ business models.

Obesity is one of the externalities that we look at. We do this by working out the global cost of obesity and then attributing it to the many companies which contribute to obesity through the things they sell.

When we use SustainEx to identify companies with the largest obesity externalities PepsiCo comes out highest, followed by Coca Cola, Starbucks, McDonald’s and Mondelez.

In other words, our model is sensibly identifying companies facing risks to their business models due to government action.

These insights can be used within investment models and serve as a launchpad for company engagements. We have engaged several companies which score poorly on obesity in SustainEx on areas like meeting regulatory requirements, adapting to changing consumer preferences, setting nutrition-related targets, providing clear labels and practices around advertising to vulnerable groups such as children.

In times of apparently constant upheaval and changing perceptions from voters on which levers governments should be allowed to pull, we as investors need to keep a close eye on policy interventions which affect the companies we invest in and potentially move their share price.

Any reference to regions/ countries/ sectors/ stocks/ securities is for illustrative purposes only and not a recommendation to buy or sell any financial instruments.

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