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June 24, 2007
New Eurosif Reports Identify ESG Challenges in the European Food and Insurance Sectors
    by Anne Moore Odell

Eurosif's raises awareness of social and environmental issues across European companies in a series of sector-by-sector reports, the two newest covering the insurance and food production sectors.


Consumer health and nutrition is just one of the key challenges pinpointed by the European Social Investment Forum's (Eurosif) new report on the European food production sector. With 1 billion adults worldwide overweight, the report points to the risks and opportunities food producers face in providing healthier foods. Reports on the food production and insurance sectors released last week by Eurosif join their earlier reports on the hotel and tourism, chemical and automobile sectors.

Eurosif is a broad coalition of European groups whose mission is "to address sustainability through financial markets." Members include non-profit pension funds, financial service providers, academic institutions, research associations, and NGOs. Their reports are written for a wide-ranging audience from the general public to asset managers and pension fund trustees. The reports help outline the risks companies face that might be outside of traditional financial analysis, but that could still influence investments and long-term returns.

"Readers have commented on the compact and clear format allowing them to rapidly grasp the key challenges for a given sector," said Sarah Clawson, Head of Communications at Eurosif. "Companies have used our sector reports to improve their internal communications around ESG issues, as well."

The Food Producers Sector Report focuses on the "downstream" activities of the food sector, which includes industrial food processing and packaged foods. However, the report does not consider alcoholic beverages. The report was researched and written in-house.

The report notes that four companies control more than 50% of the global market capitalization of the top 30 global food companies. The top four global food companies are Groupe Danone, Kraft, Nestle, and Unilever with all but Kraft being European Union companies.

"Health and nutrition are key drivers of sales growth in the food sector and offer significant pricing power and margin opportunity," the report states. Yet the report also notes that people with higher-incomes purchase more expensive and healthier food choices, whereas people with lower-incomes eat less expensive processed foods, which often have more fat and sugar. This trend is one of the factors behind skyrocketing worldwide obesity.

"With 300 million adults clinically obese today and one in ten children considered to be overweight, I think it's fair to say that consumer health is the number one concern for food companies," Clawson told Socialfunds.com

Other key challenges faced by the food production sector include the safety of food products, land use, water shortage, labor standards, and human rights.

The Insurance Sector Report was written with research provided by Bank Sarasin. The report states, "As the direct environmental and social impact of the insurance sector is comparatively small, a comprehensive sustainability management approach (including indirect impacts) is still lacking in most companies. However, awareness of current environmental and social risks such as climate change has grown."

The report divides insurance sector into life insurance and non-life insurance. There are more than 5,000 insurance companies working in Europe, the report says, with 6.4 trillion (Euros) under management.

The aging population found in most industrial countries is shaping the insurance sector, as there is more demand for life and health insurances. European insurance sector is facing stricter regulations and companies are establishing improved risk assessment and management procedures. Insurance losses from natural catastrophes and political activities have also been on the rise.

The report considers one of the insurance sector's key challenges to be marketplace conduct, including lack of transparency and the large networks of independent agents that most insurance companies work with.

"Bad market place conduct (lack of transparency, misleading information, improper handling of complaints) can represent a risk in terms of legal controversies, compensation payments or reputation, whereas high ethical business standards and service quality will bring loyalty of clients" explained Marion de Marcillac, Head of Research at Eurosif.

De Marcillac added, "Exclusion of high-risk client groups or low income groups from insurance coverage can lead to public criticism and client complaints, whereas the inclusion of specific risks can provide niche market opportunities for insurers."

The integration of sustainability issues into the core insurance business is difficult because as the report states, "In contrast with other industries, insurance companies are primarily affected by the consequences of global environmental and social challenges, rather than directly causing them."

Climate change, geopolitical risks, and other long term issues could all create risks and high claims for insurers. The report suggests that the insurance sector create research programs and preventive measures to counter some of these environmental and social risks.

Concerning mainly life insurance companies, the report says that as important institutional shareholders, insurers need to consider the environmental, social, and governance (ESG) records of the companies they invest. ESG issues can affect companies' returns. The report points to the company Storebrand who screens its entire pension, insurance, and mutual fund products on social and environmental issues.

Reports on the European paper and forestry, and the real estate sectors will be released from Eurosif the first week of July.

 

 
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