Tesco's £100m environment fund for developing sustainable technologies has been praised.
But how green is it really, asks Simon Creasey
It's timing can't be faulted. On the same day that Tesco announced profits of £2.2bn, it also unveiled a new £100m environment fund to finance innovation in sustainable environmental technologies throughout the group's business and create the greenest supermarket in the world (see box on the right).
Some cynics suggest that this, like its ten-point 'Tesco in the community' plan, is merely a diversionary PR tactic - a greenwash initiative led by the group's marketing team with little genuine substance behind it. Tesco chief executive Sir Terry Leahy denies this, arguing: "£100m is not a PR stunt."
Financial analysts posit yet another theory: that Leahy and his cohorts are only too aware of investor pressure on ethical concerns and that the announcement was partly in response to the rapid growth and increasing influence of socially responsible investment (SRI) funds.
So are Tesco and the likes merely 'green chameleons', as environmental pressure group Friends of the Earth suggests, or is there now a genuine movement in place to repair the damage that their business model does to the environment and appease investors in the process?
It is certainly not the first green initiative that the retailer has embarked on ('The rise of the green grocers', The Grocer, January 14, p34).
But when it comes to ethical concerns, Waitrose, Sainsbury and Marks and Spencer have traditionally led the way. Sustainability ratings for the FTSE 100 companies produced by Morley Fund Management, the fund management arm of Norwich Union, confirm this. It produces a sustainability matrix rating a company's product from A to E and management practices from one to five.
The multiples struggle to achieve higher than a C-rating, largely because of factors such as food miles. However, M&S is rated C1, Sainsbury C2 (along with Carrefour), Tesco C3 and Morrisons behind at C5 (Waitrose and Asda do not have ratings as they are not public companies).
Harriet Parker, SRI analyst at Morley Fund Management, says that Tesco's decision to post its results alongside its announcements to invest in environmental technologies was no accident. "It is a sign that it is trying to reduce negative associations with its size and profits, and ensure that its brand is associated with more positive contributions to society and the environment."
Dawn McLaren, senior analyst at Ethical Investment Research Services (EIRIS), adds that supermarket chains are now doing more in terms of managing "reputational risks". "They are very aware of how to manage ethical issues and how important reputational risk is to investors. If a company has a poor reputation and is exposed as having poor practices, this can affect investor decisions."
Paying lipservice to green issues certainly won't wash. The multiples are expected to put their money where their mouths are. If they don't cough up, they risk opprobrium from shareholders and the public alike.
More than £5.5bn worth of retail funds in the UK are now invested ethically, according to figures collated by the EIRIS. This figure has grown from £792m ten years ago and continues to grow, according to Nick Robins, head of SRI funds at Henderson, who says that there are an increasing number of SRI investors who want to seek out the companies that lead in this area.
A survey by the UK Social Investment Forum found that 59% of pension funds currently incorporate SRI into their funds. In other words, money is diverted from companies that cannot demonstrate this good practice. Many investors are now engaging with companies that they invest in or are considering investing in, to persuade them to improve their policies and practices. This is where the growing influence of the SRI funds comes into play.
Rachel Crossley, director of investor responsibility at fund manager Insight Investment, says that companies that have mismanaged issues have taken a hit on their share price and profitability. "Companies understand that their long-term business success depends on the trust and co-operation of stakeholders. Unless they meet growing customer concerns and recognise and manage them properly, it could come back to bite them and damage the success of the company."
Crossley agrees that it's all about risk management - spotting the critical issues, such as food miles, obesity, climate change, and thinking about what their relationship is to the business and then addressing them.
Some chains are better at this than others. While M&S, Sainsbury and Waitrose see ethical trading as part of their USP in terms of customer retention, historically Tesco has been happy to let others take the lead - until now. The one company that appears to be failing in this area - at least according to SRI analysts -is Morrisons. "We have been calling for better disclosure of social, environmental and ethical (SEE) issues from Morrisons for a number of years," says Parker. "Although some SEE issues are mentioned in the company's annual reports, reporting falls a good deal short of what we would like to see from a FTSE 100 retailer."
Analysts say good reporting shows that a company has good systems in place - a fact that does not go unnoticed by investors. It's also important to address the concerns of the public. A MORI poll in June 2004 revealed that 65% feel that it is important for companies to take social, ethical and environmental issues seriously.
Analysts believe that food retailers that fail to meet consumer expectations on these issues do not perform as well as those that do, and it is vital that they communicate their efforts - through campaigns such as M&S's 'look behind the label'.
In the end, Tesco's decision - as with other environmental initiatives by other multiples - is driven by a thirst to improve profits. As Morley's Parker confirms: "I have no doubt that the motivation is not morally based - it is not a true shade of NGO-green. Tesco is simply using this strategy to maintain its sales and market share by strengthening its brand and reputation."
Analysts say that Tesco will look at this new fund as a £100m investment and will have a good return worked out. In addition, some feel that due to the spiralling energy costs, switching to greener sources could save the company a fortune in the long run. "With energy prices continuing to rise, Tesco's pledge to reduce its energy use by half by 2010 is an astute financial decision," says Robins. "If it does deliver returns, we could see further commitment."
As well as investing a lot of money in developing and embracing new environmental technologies, Tesco has also invested a lot of time in developing a more proactive programme with NGOs. As Tesco has grown into a global behemoth, it hasn't escaped the wrath of consumers and the NGOs - a fact acknowledged by Sir Terry in The Economist's The World in 2006 annual preview. "The bigger a brand becomes, the more sensitive it has to be to what its customers want," writes Leahy. "The knowledge that one slip can destroy a reputation that has been carefully nurtured over many years helps keep consumers in the driving seat."
Despite Tesco's announcements, some groups believe it could do more. "Tesco is still a long way from being a truly green company," says Friends of the Earth supermarket campaigner Sandra Bell. "Given its rapid growth, commitment to sourcing cheap food and threat to independent retailers, it is hard to see how it is going to
get there."
The £100m plan
But how green is it really, asks Simon Creasey
It's timing can't be faulted. On the same day that Tesco announced profits of £2.2bn, it also unveiled a new £100m environment fund to finance innovation in sustainable environmental technologies throughout the group's business and create the greenest supermarket in the world (see box on the right).
Some cynics suggest that this, like its ten-point 'Tesco in the community' plan, is merely a diversionary PR tactic - a greenwash initiative led by the group's marketing team with little genuine substance behind it. Tesco chief executive Sir Terry Leahy denies this, arguing: "£100m is not a PR stunt."
Financial analysts posit yet another theory: that Leahy and his cohorts are only too aware of investor pressure on ethical concerns and that the announcement was partly in response to the rapid growth and increasing influence of socially responsible investment (SRI) funds.
So are Tesco and the likes merely 'green chameleons', as environmental pressure group Friends of the Earth suggests, or is there now a genuine movement in place to repair the damage that their business model does to the environment and appease investors in the process?
It is certainly not the first green initiative that the retailer has embarked on ('The rise of the green grocers', The Grocer, January 14, p34).
But when it comes to ethical concerns, Waitrose, Sainsbury and Marks and Spencer have traditionally led the way. Sustainability ratings for the FTSE 100 companies produced by Morley Fund Management, the fund management arm of Norwich Union, confirm this. It produces a sustainability matrix rating a company's product from A to E and management practices from one to five.
The multiples struggle to achieve higher than a C-rating, largely because of factors such as food miles. However, M&S is rated C1, Sainsbury C2 (along with Carrefour), Tesco C3 and Morrisons behind at C5 (Waitrose and Asda do not have ratings as they are not public companies).
Harriet Parker, SRI analyst at Morley Fund Management, says that Tesco's decision to post its results alongside its announcements to invest in environmental technologies was no accident. "It is a sign that it is trying to reduce negative associations with its size and profits, and ensure that its brand is associated with more positive contributions to society and the environment."
Dawn McLaren, senior analyst at Ethical Investment Research Services (EIRIS), adds that supermarket chains are now doing more in terms of managing "reputational risks". "They are very aware of how to manage ethical issues and how important reputational risk is to investors. If a company has a poor reputation and is exposed as having poor practices, this can affect investor decisions."
Paying lipservice to green issues certainly won't wash. The multiples are expected to put their money where their mouths are. If they don't cough up, they risk opprobrium from shareholders and the public alike.
More than £5.5bn worth of retail funds in the UK are now invested ethically, according to figures collated by the EIRIS. This figure has grown from £792m ten years ago and continues to grow, according to Nick Robins, head of SRI funds at Henderson, who says that there are an increasing number of SRI investors who want to seek out the companies that lead in this area.
A survey by the UK Social Investment Forum found that 59% of pension funds currently incorporate SRI into their funds. In other words, money is diverted from companies that cannot demonstrate this good practice. Many investors are now engaging with companies that they invest in or are considering investing in, to persuade them to improve their policies and practices. This is where the growing influence of the SRI funds comes into play.
Rachel Crossley, director of investor responsibility at fund manager Insight Investment, says that companies that have mismanaged issues have taken a hit on their share price and profitability. "Companies understand that their long-term business success depends on the trust and co-operation of stakeholders. Unless they meet growing customer concerns and recognise and manage them properly, it could come back to bite them and damage the success of the company."
Crossley agrees that it's all about risk management - spotting the critical issues, such as food miles, obesity, climate change, and thinking about what their relationship is to the business and then addressing them.
Some chains are better at this than others. While M&S, Sainsbury and Waitrose see ethical trading as part of their USP in terms of customer retention, historically Tesco has been happy to let others take the lead - until now. The one company that appears to be failing in this area - at least according to SRI analysts -is Morrisons. "We have been calling for better disclosure of social, environmental and ethical (SEE) issues from Morrisons for a number of years," says Parker. "Although some SEE issues are mentioned in the company's annual reports, reporting falls a good deal short of what we would like to see from a FTSE 100 retailer."
Analysts say good reporting shows that a company has good systems in place - a fact that does not go unnoticed by investors. It's also important to address the concerns of the public. A MORI poll in June 2004 revealed that 65% feel that it is important for companies to take social, ethical and environmental issues seriously.
Analysts believe that food retailers that fail to meet consumer expectations on these issues do not perform as well as those that do, and it is vital that they communicate their efforts - through campaigns such as M&S's 'look behind the label'.
In the end, Tesco's decision - as with other environmental initiatives by other multiples - is driven by a thirst to improve profits. As Morley's Parker confirms: "I have no doubt that the motivation is not morally based - it is not a true shade of NGO-green. Tesco is simply using this strategy to maintain its sales and market share by strengthening its brand and reputation."
Analysts say that Tesco will look at this new fund as a £100m investment and will have a good return worked out. In addition, some feel that due to the spiralling energy costs, switching to greener sources could save the company a fortune in the long run. "With energy prices continuing to rise, Tesco's pledge to reduce its energy use by half by 2010 is an astute financial decision," says Robins. "If it does deliver returns, we could see further commitment."
As well as investing a lot of money in developing and embracing new environmental technologies, Tesco has also invested a lot of time in developing a more proactive programme with NGOs. As Tesco has grown into a global behemoth, it hasn't escaped the wrath of consumers and the NGOs - a fact acknowledged by Sir Terry in The Economist's The World in 2006 annual preview. "The bigger a brand becomes, the more sensitive it has to be to what its customers want," writes Leahy. "The knowledge that one slip can destroy a reputation that has been carefully nurtured over many years helps keep consumers in the driving seat."
Despite Tesco's announcements, some groups believe it could do more. "Tesco is still a long way from being a truly green company," says Friends of the Earth supermarket campaigner Sandra Bell. "Given its rapid growth, commitment to sourcing cheap food and threat to independent retailers, it is hard to see how it is going to
get there."
The £100m plan
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