As the world wrestles with rising temperatures and ongoing climate change, part of the solution may lie with our diets. Substituting plant-based alternatives for beef, chicken, and other meats could accelerate the world’s decarbonization journey.
We can debate the taste and texture of a Beyond Burger versus a juicy steak, but plant-based proteins generate nearly 90% fewer greenhouse emissions, use 90%-plus less land, and consume anywhere from 87% to 99% less water than their meat-based counterparts. These reductions are meaningful. Meat production generates up to 26% of all greenhouse gas emissions, uses 26% of all ice-free land (with industry growth causing further deforestation), and uses 23% of the world's freshwater footprint.
Yet plant-based food companies may come with greater risks for investors, at least if you consider the case of Tyson Foods TSN and Beyond Meat BYND. Tyson is one of the world's largest meat processors, selling $10 billion of beef, pork, and chicken products in 2021, not including $2 billion-plus of processed foods under such brands as Jimmy Dean, Hillshire Farm, and Ball Park. Beyond Meat is the popular purveyor of meat substitutes such as burgers and vegan chicken; last year, it sold $465 million of vegan meat substitute. But Beyond Meat nets a Severe ESG Risk Rating score from Sustainalytics, a Morningstar company that provides sustainability research. This is one notch greater than Tyson's High designation. What gives?
In addition to environmental concerns, the meat-processing industry has been beset by price-fixing litigation, tariff wars, and consumer health concerns. The coronavirus pandemic intensified this pressure, with headlines of significant worker illness, and production disruptions that led to product shortages and steep inflation.
Against this challenging backdrop, Tyson hasn’t covered itself in glory. On top of the industrywide issues, the company has faced allegations of discrimination, sexual harassment, and improper employee compensation, while the US Department of Labor’s Occupational Safety and Health Administration has fined the company repeatedly for failing to maintain and enforce safety requirements. Given these headlines, it’s no wonder that Sustainalytics rates Tyson as having High ESG (environmental, social and governance) Risk, and is cited by our equity research team as facing several specific ESG risks related to business ethics and human capital, which weigh on our valuation, moat rating, and uncertainty rating.
On the other hand, Sustainalytics assigns Beyond Meat an even worse rating of Severe ESG Risk. At first blush, this may seem counter-intuitive given Beyond Meat’s positive environmental image. But it serves as a good reminder of what ESG Risk Ratings are designed to do. Sustainalytics’ ESG Risk Rating measures only risk, using publicly available information, and not potential positive attributes from societal impact.
This risk assessment measures both a company’s exposure to material ESG issues, and how it manages them. The primary difference between the ratings for Beyond Meat and Tyson stems from how the two companies manage their ESG risks. Sustainalytics reckons that Tyson actually faces greater ESG risk exposure than Beyond Meat. But Sustainalytics also rewards Tyson’s management for its strong whistleblower program and efforts to revisit its compliance systems, alongside average or even strong management across several other material ESG issues, including product governance, resource use, and land use. And in terms of human capital, Tyson has made an effort to address concerns. It has invested in higher wages; flexible schedules; on-site healthcare; affinity groups; initiatives to recruit, retain, and promote minorities; and is piloting childcare. These initiatives have already led to improved employee retention, and we expect them to also help Tyson attract employees in the current market, which has severe labor shortages.
Conversely, Sustainalytics is less impressed by Beyond Meat’s management of its key ESG risks. In particular, a lack of disclosure related to product quality and safety--deemed to be its most critical ESG issue--calls into question Beyond Meat’s commitment to managing this risk. Per Sustainalytics, the company lacks a suitable product and service safety program, including policy commitments, public reporting, and disclosures around regular employee training. Beyond Meat also lacks disclosure around a number of policies and programs for its suppliers, including deforestation, human rights, and sustainable agriculture programs such as the use of pesticides and synthetic fertilizers, which risk damaging soil health and endangering biodiversity.
So should investors skip Beyond Meat, throwing it on the compost pile along with other ESG-risky stocks?
Not so fast. ESG concerns need to be considered alongside all risks and opportunities a company faces. In addition, a prospective investor should contemplate the likelihood that these risks may occur, and how much that might affect a stock’s valuation. To this end, while our equity research analyst Rebecca Scheuneman acknowledges the lack of disclosure at Beyond Meat as a risk, she separately estimates that Tyson’s high degree of ESG risks need to be counted heavily against its valuation. Meanwhile, we expect Beyond Meat to enjoy solid growth--with revenue climbing 24% annually, on average, over the next decade--as consumers adjust their own behavior to align with greater sustainability. In this way, Beyond Meat should be a growth story built on positive ESG opportunities.
Moreover, the prevailing market price at any time must also be a critical input into determining whether a stock is worthy of long-term investment. In this case, our equity analyst's 3-star rating for Tyson, which recently traded at $88.35, suggests that the market is pricing Tyson’s high ESG risk appropriately. On the other hand, despite Beyond Meat’s disclosure issues, a lower degree of valuation-related ESG concerns and offsetting growth opportunities for Beyond Meat are being overlooked by investors. At $50.58, Beyond Meat has garnered a 5-star rating.
Beyond Meat’s Share Price Has Sharply Trailed the Performance of Tyson Foods Over the Past Year
- Source: Morningstar. Data shows relative performance of BYND and TSN from March 31, 2021, through March 31, 2022.
ESG Risk Ratings are dynamic, and should be expected to change as new information comes to light. For instance, Beyond Meat recently created an ESG committee, and conducted carbon emissions and water quality assessments. We could see additional data disclosed that may give us more comfort on the firm’s management of its relevant risks.
In all, while ESG considerations are important for a wide range of companies, context is critical. We view ESG risk analysis as essential to the investment process, but it should be integrated alongside the assessment of any other risks and opportunities. As such, the combined use of Sustainalytics' ESG Risk Rating with Morningstar's economic moat rating, uncertainty rating, and fair value estimate can be a solid screening tool when identifying potential long-term investments. Lists such as our Wide-Moat & Undervalued Stocks provide additional starting points for further analysis.