By Sara Rodriguez, Sage Advisory ESG Research Analyst
About Sysco Corporation
Sysco (an acronym for Systems and Services Company) is a global leader in selling, marketing, and distributing food products. The company operates 326 distribution facilities in 90 countries worldwide and provides food and food products to restaurants, healthcare and educational facilities, and hotels.
Financially Material Factors Emphasized
E – supply chain management, energy use management
S – human capital management, diversity & inclusion, product quality & safety
G – competitive behavior, independent board
Environmental
Supply chains that have an agricultural component are uniquely positioned when it comes to environmental risk, as they depend on limited natural resources. Sysco’s 2019 Corporate Sustainability Report (CSR) features detailed policies for the sourcing of two commodities that present risks for the company: seafood and palm oil. According to the World Wildlife Fund, 85% of natural fisheries have been pushed to or beyond their biological limits. The threat of depletion creates an incentive for Sysco to maintain a stake in preserving them as seafood is 6% of Sysco’s sales. As such, Sysco aims to source at least 75% of its top 15 wild caught seafood species from fisheries either certified by the Marine Stewardship Council or the Fishery Improvement Project.
Palm oil is another commodity Sysco uses that has been highly contested by environmentalists. An extremely versatile and efficient crop, palm oil is present in close to 50% of the packaged products found in supermarkets. Unfortunately, the cultivation of palm oil is a major driver of deforestation of some of the world’s most biodiverse forests — over 85% of global supply is sourced from Indonesia and Malaysia — and destroys the habitat of endangered species, such as the orangutan and Sumatran rhino. The clearing of these forests exposes methane-heavy peat soil, which releases greenhouse gasses (GHG) that contribute to climate change. To combat these issues, in 2018 Sysco set the goal of using only Roundtable of Sustainable Palm Oil (RSPO) certified palm and palm kernel oil in Sysco Brand products. Currently, 90% of Sysco’s palm oil is compliant with the company’s Palm Oil Policy. By 2025, Sysco aims to have developed robust sustainable policies for five of its material commodities. We look forward to Sysco’s expansion of commodity analysis, especially when it comes to those that are water intensive and contribute to GHG emissions, such as red meat, which comprised 20% of Sysco’s sales in 2019.
Most of Sysco’s products require refrigeration, creating regulatory risks for the company as substances that leak from equipment can impact the environment. Hydrochlorofluorocarbons (HCFCs), chemicals that are mainly used as refrigerants, damage the ozone. To minimize this risk, Sysco has increased its use of natural refrigerants (CO2 and NH3) and has removed most products with HCFC characteristics. When zero HCFC emissions are not feasible, Sysco follows guidelines to prohibit refrigerants with Global Warming Potential greater than 750. Sysco’s refrigeration also offers an opportunity for water conservation, as the company’s largest percentage of water usage comes from the condensers in its refrigerators. Sysco has installed technology to capture and recycle this condensation and has been able to reduce monthly water usage by 23% (four million gallons over eight months).
In addition to refrigeration, Sysco has a material interest in reducing the significant amounts of energy used for heating, ventilation, and lighting, the purchase of which affects operating costs. Sysco’s energy management program has allowed the company to improve its energy efficiency by 14.2% since 2014. In 2019, Sysco launched three Texas solar garden sites that collectively generate 10% of Sysco’s electricity – which is halfway to the company’s 2025 goal to source 20% of its electricity from renewable sources. Sysco estimates that it avoided $316.5 million in energy costs from 2006 to 2019.
Fleet energy management is another area of financial concern, as Sysco operates one the largest trucking fleets in the U.S. (approximately 14,000 delivery vehicles.) To reduce emissions and fuel costs, Sysco uses tractor units that run on compressed natural gas (CNG) and biodiesel fuel; however, Sysco has prioritized shifting to battery-electric vehicles. The company currently owns 100 hybrid/electric trucks and has reserved 50 of Tesla’s new fully electric semi tractors. Every year, Sysco replaces 10% of its vehicle fleet with newer, more fuel-efficient models.
Food distributors such as Sysco generate waste at various stages of operations, including water, labor, and energy. Strong food waste management can help reduce costs associated with inventory loss and improve food security. Through Sysco’s Unusual But Usable food program, the company partners with local farmers to connect “imperfect” produce that might otherwise go to waste to customers that can use it. This program helps reduce waste and save the inputs (water, energy, fertilizer) used to grow the produce. Decomposing food contributes to climate change through the release of GHG, so Sysco has prioritized composting technologies that divert food from landfills. When appropriate, Sysco donates excess food to nonprofits. Sysco has pledged to divert 90% of operations and food waste from landfills by 2025, and the company reached 73% waste diversion in 2019.
Overall, Sysco implements an impressive suite of environmental policies. It is important that the company limits its contribution to climate change, the acceleration of which will have negative environmental costs that may lead to the depletion of natural resources, which will threaten Sysco’s supply chain and jeopardize its business.
Social
In 2018, Sysco deemed human rights as one the most material issues for its stakeholders. Sysco’s current Supplier Code of Conduct contains the legal and ethical standards it expects of suppliers, including the rights of individuals as outlined by the International Labour Organization. All high-risk suppliers in Latin American and Asian countries must undergo third-party assessments to identify human rights risks, and Sysco continuously engages with and monitors its suppliers to drive improvement. Sysco’s seafood supply chain exposes the company to risk, as migrant fishers in Southeast Asia are often trafficked into fishing work. This is closely linked to illegal, unreported, and unregulated fishing. Sysco partners with multiple associations and non-governmental organizations (NGOs) to support actions needed to end human rights violations in the seafood supply chain, including a call for governments in Southeast Asia to enforce ethical labor practices and comply with laws governing the supply chain.
Another financially material component of Sysco’s supply chain is protecting the land, air, and water of the communities in which it operates. In 2018, a Sysco supplier was accused of not respecting the right to water in Peru when the agricultural sector was found to account for 90% of annual groundwater extraction while some local populations had access to water for only a few hours a week. Sysco has since committed to improving the monitoring of its suppliers’ water management.
The last supply chain issue we would mention is timely food delivery, which requires well-run logistics. Sysco averages a 98.5% service level (“the percent of orders delivered with the requested product within the designated delivery window and billed accurately”), and supply chain efficiency is necessary for Sysco to maintain a successful business. Poorly managed fair labor practices can affect the price and availability of food, and labor strikes resulting in work stoppages can have a material adverse effect on Sysco. Of Sysco’s 69,000 employees, approximately 99% are considered full-time, and 22% are represented by unions.
While Sysco’s customer base is increasingly diverse, the company’s workforce has not yet reached the same level of diversity. Women comprise 20% of Sysco’s workforce, with the executive management team made up of 18.2% women. Currently, Sysco’s U.S. associate employees’ ethnic and gender diversity is 57.2%, and the company aims to reach 62% by 2025. Sysco also looks to increase spending with minority- and women-owned suppliers by 25% by 2025. While admirable, Sysco has struggled in offering equal opportunities. In 2019, Sysco agreed to pay over $180,000 to settle allegations brought against the company by 238 female employees. The women filed the lawsuit after Sysco denied their applications for outbound selector positions based on their sex. Sysco has pledged to review and revise its job selection procedures and train company recruiters. In terms of employee benefits, Sysco provides six weeks of paid leave for mothers of a new child and for parents of an adopted child. We find this to be the minimum acceptable policy, as the leave length for new mothers is on the lower end of U.S. employers that offer this benefit, and Sysco does not specify offering leave for new fathers.
In terms of its customer base, Sysco has diversified its product line offerings to include options for organic and gluten-free foods and plant-based alternatives. Still, vegetables, fruits, and staple foods make up only 27% of Sysco’s net sales, while red meat-based products, energy and soft drinks, desserts, and highly processed foods make up 40% of Sysco’s net sales. Somewhat surprisingly, Sysco does not yet have policies in place to address the humane treatment of animals, although the company has pledged to establish its Animal Welfare Policy and require 100% supplier participation by 2025. We expect consumers to continue demanding healthier and more ethical options.
Maintaining product quality is crucial for food distributors, as food contamination can be detrimental to human health, and can lead to damaged brand value, lower revenues, and increased costs associated with recalls and litigation. In 2014, Sysco agreed to pay almost $20 million in penalties (one of the largest consumer settlements in California) after whistleblowers exposed the company for storing food in dirty and unrefrigerated outdoor storage units from 2009 to 2013. Sysco has since stated that it has comprehensively addressed its food safety and quality assurance practices. The company has also adopted the certification processes of the Global Food Safety Initiative, which emphasizes ongoing plant audits and inspections, including unannounced visits. This will continue to be an area of risk for Sysco and could present future controversies if not properly managed.
Covid-19 Actions
Covid-19 has had a substantial impact on Sysco due to immediate closures of restaurants and schools. Restaurants account for 62% of Sysco sales, the National Restaurant Association has predicted that up to 15% of restaurants may close permanently. Sysco laid off or furloughed a third of its workforce at the start of the pandemic. Despite this, Sysco’s community response showed strength. At a time when grocery stores were experiencing low inventory, Sysco donated 30 million meals across eight countries with 80% consisting of fresh produce and dairy products. The company also aided longstanding clients in filling out paperwork for the Paycheck Protection Program (PPP) loan so they could receive financial support, helped convert restaurants into marketplaces, and aided clients in setting up takeout and partnering with delivery services.
Governance
Overall, Sysco’s board is represented by seasoned directors with diverse professional backgrounds that benefit the company; however, Sysco could improve its board’s ethnic and gender diversity, as there are only two female directors and one minority director on the 12-member board. Most of Sysco’s board of directors are considered independent, and the company has established fully independent committees in charge of audit, executive renumeration and nomination, and sustainability.
The Corporate Social Responsibility committee is led by at least three board members and is responsible for implementing the company’s sustainability strategy. In 2018, Sysco released a sustainability bond focused on improving the company’s relationship with its related “people, product, and planet.” Proceeds from the bond will be used in the company projects relating to energy management and efficiency, waste and water management, sustainable agriculture and biodiversity conservation, and socioeconomic empowerment. Sustainalytics approved the bond framework as credible and impactful.
In terms of disclosure, Sysco is relatively transparent and its disclosures are guided by the Global Reporting Initiative (GRI); however, we believe the company can still improve the decision-useful ESG information it reports and prioritize reporting on material sustainability topics.
Because of its size, Sysco faces antitrust scrutiny, and in 2015, the Federal Trade Commission blocked an attempt for a merger between Sysco and its competitor US Foods on antitrust grounds. Sysco’s market share (16%) is close to double that of the largest competitor (US Foods, 9%). A merger between the two companies would have given Sysco control of 75% of the U.S. food service industry, which was found harmful to consumers.
Sage ESG Leaf Score
It is evident that Sysco’s bottom line has evolved since the company’s inception in 1969. Chefs, restaurant goers, schools, and hospitals have begun putting a premium on knowing where their food comes from and how it was produced — they are not only concerned with efficiency, but also with ethics. Sysco’s operations carry a host of opportunities for environmental and social risk, but overall, the company has strong management over the issues that can affect its brand value and reputation, allowing it to outperform its industry peers. We look forward to seeing Sysco’s progress made on its goals for 2025 and believe the company will continue to improve as a sustainability leader. We give Sysco a Sage Leaf Score of 4/5.
Sage ESG Leaf Score Methodology
No two companies are alike. This is exceptionally apparent from an ESG perspective, where the challenge lies not only in assessing the differences between companies, but also in the differences across industries. Although a company may be a leader among its peer group, the industry in which it operates may expose it to risks that cannot be mitigated through company management. By combining an ESG macro industry risk analysis with a company-level sustainability evaluation, the Sage Leaf Score bridges this gap, enabling investors to quickly assess companies across industries. Our Sage Leaf Score, which is based on a 1 to 5 scale (with 5 leaves representing ESG leaders), makes it easy for investors to compare a company in, for example, the energy industry to a company in the technology industry, and to understand that all 5-leaf companies are leaders based on their individual company management and the level of industry risk that they face.
For more information on Sage’s Leaf Score, click here.
Sources
- “Sysco 2019 Corporate Social Responsibility Report.” Sysco.
- Drane, Amanda. “Sysco CEO Kevin Hourican Talks Transformation in Turbulent Times.” Houston Chronicle. September 7, 2020.
- “8 Things to Know About Palm Oil.” World Wide Fund for Nature. January 17, 2020.
- Gara, Antoine. “Sysco Cancels $8.2 Billion US Foods Takeover in Big Antitrust Win for FTC.” Forbes. June 29, 2015.
- “Sysco Corporation Enters into Conciliation Agreements with U.S. Department of Labor to Resolve Discrimination Allegations.” U.S. Department of Labor.
- Kelso, Alicia. “53% of Restaurants Closed Amid Coronavirus Have Shuttered Permanently, Yelp Data Shows.” Restaurant Dive. July 6, 2020.
Disclosures
Sage Advisory Services, Ltd. Co. is a registered investment adviser that provides investment management services for a variety of institutions and high net worth individuals. The information included in this report constitute Sage’s opinions as of the date of this report and are subject to change without notice due to various factors, such as market conditions. This report is for informational purposes only and is not intended as investment advice or an offer or solicitation with respect to the purchase or sale of any security, strategy or investment product. Investors should make their own decisions on investment strategies based on their specific investment objectives and financial circumstances. All investments contain risk and may lose value. Past performance is not a guarantee of future results. Sustainable investing limits the types and number of investment opportunities available, this may result in the Fund investing in securities or industry sectors that underperform the market as a whole or underperform other strategies screened for sustainable investing standards. No part of this Material may be produced in any form, or referred to in any other publication, without our express written permission. For additional information on Sage and its investment management services, please view our web site at www.sageadvisory.com, or refer to our Form ADV, which is available upon request by calling 512.327.5530.