As investor demands for ‘healthier’ products escalate, how can packaged food companies respond?

Last month, the Financial Times reported that institutional investors had issued a public statement calling on Nestlé to reduce its reliance on unhealthy products. The initiative was coordinated by responsible investment charity ShareAction ahead of Nestlé’s annual general meeting. Warning that consumers’ overconsumption of packaged goods with limited nutritional value poses ‘systemic risks’ to financial returns, the statement suggested that shareholders would escalate the matter if their concerns were not addressed. The latest initiative is part of a long-running campaign, coordinated by ShareAction, urging major global food manufacturers to increase disclosure and ambition on the health profile of their sales portfolios.

Pressure to improve the health profile of packaged foods is not new. Reformulation of products to reduce levels of salt, sugar, or saturated fats has been on the industry agenda for decades. However, this recent situation is further evidence of a growing shift towards investors placing greater significance on publicly listed food companies’ ESG credentials.

Over the coming months and years, packaged food companies will likely face increasing demands from shareholders as well as regulators. Unfortunately, while the demands may have the same general intent, a lack of alignment could make it hard for companies to satisfy them.

For instance, perceptions about what makes a product healthy or unhealthy are inherently subjective. Investors and consumers may have different ideas about what the terms mean, and many nutritionists consider the terms unhelpful when applied to individual foods or meals. Legal definitions do exist, but they don’t necessarily match investor perceptions and lack harmony at a global level.

In view of these challenges, this article offers a high-level perspective on recent regulatory developments linked to healthy and unhealthy food and beverage products. We also consider what companies are already doing to achieve healthy targets, as well as how they might respond to new demands for healthier packaged foods. These factors will play a critical role as companies look to improve the health credentials of their portfolios in a way that satisfies stakeholders, regulators, and consumers.

Defining healthy

As mentioned above, legal definitions for ‘healthy’ vary around the world. As attitudes towards, and expectations of, healthy products have evolved, this has led the US Food and Drug Administration (FDA) to propose a new rule updating its definition of the term.

The proposed rule, issued in September 2022, would revise the requirements for when the term healthy can be used on product labels “to indicate that a food’s level of nutrients may help consumers maintain healthy dietary practices by helping them achieve a total diet that conforms to dietary recommendations”. Raw whole fruits and vegetables would automatically qualify, as would nuts, seeds, avocados, certain oils, and higher fat fish such as salmon. However, the basis of qualification for mixed products, meals and some other individual foods is highly complex. As explained on the FDA website:

“…to meet the proposed definition, a food product would need to contain a certain amount of food from at least one of the food groups or subgroups (e.g., fruit, vegetables, grains, dairy and protein foods) recommended by the 2020-2025 Dietary Guidelines for Americans. The specific limits for added sugars, saturated fat and sodium would be based on a percentage of the Daily Value for these nutrients. DVs are reference amounts of nutrients to consume or not to exceed each day. The proposed criteria for how much food from a particular food group is required (called food group equivalents) and the specific limits for the three nutrients vary for individual food products, mixed products (which contain more than one food group), main dishes and meals, and are based on a Reference Amount Customarily Consumed, which is the basis for determining a serving size.”

Many products currently labelled as healthy in the US, including white bread, highly sweetened yoghurt, and highly sweetened cereal, would not qualify under the proposed definition. Products would need to be assessed for adherence to the definition on a case-by-case basis.

Front-of-pack nutrition labelling

In a packaged foods context, healthy is a desirable feature. It can be a powerful marketing claim implying that a product holds superior nutritional qualities to competitive items not labelled as such. While FDA is focused on setting criteria for companies’ use of the term on products, other authorities take a more neutral approach.

This is the case for markets including the EU, UK, Canada, Singapore, Mexico, Brazil, Colombia, and Argentina which have established mandatory or voluntary front-of-pack nutrition labelling schemes. Many of these schemes involve icons or logos to indicate nutritional values ‘at a glance’, usually on a per portion basis or per 100g. Some incorporate a traffic light or star system to convey whether a product is deemed healthy.

However, there is some controversy surrounding these schemes, especially regarding single-ingredient foods which may be high in salt or fat. The EU is due to make a proposal surrounding mandatory front-of-pack nutrition labelling, and many member states back the well-known Nutri-Score system already used by many on a voluntary basis. However, others are strongly opposed. Italy favours its own ‘Nutrinform Battery’ system, claiming that Nutri-Score discriminates against products such as olive oil, parma ham, and cheese.

Marketing unhealthy food

Products that are high in fat, salt and sugar (HFSS), and ultra-processed foods, face rapidly changing global regulations. Much of the activity is aligned with governmental strategies to tackle obesity and other non-communicable diseases. While front-of-pack labelling and ‘healthy’ product claims empower consumers to make more informed decisions, other measures look to penalise or control the actions of manufacturers. Again, the global picture here is complex and fragmented. It ranges from taxation (frequently targeted at soft drinks containing high levels of sugar) to restrictions surrounding advertising and product placement.

A standard industry response to regulatory measures like those outlined above is to reformulate products. Reformulation strategies might focus on the removal or reduction of salt, sugar, or saturated fats. Equally, they might involve the addition of wholegrains, fruit, vegetables, or alternative proteins. This is an expensive process, and it needs to be handled carefully since there can be implications for product stability and consumer satisfaction.

Nestlé has already taken steps to reduce the sugar content in many of its cereals, ensuring they can be positioned as non-HFSS under current rules in Great Britain. This is part of its wider strategy to “create new products and reformulate existing ones to improve their nutritional profile.” Mars has also announced its intent to “improve the nutrition delivered by our products” to meet strict standards as set out in Mars Food Nutrition Criteria. And PepsiCo speaks of reducing added sugars, sodium, and saturated fats from products “so that people can continue to enjoy our most-loved brands as part of a healthy and balanced diet.”

As well as the financial and technical challenges linked to reformulation strategies, companies need to be mindful of regulatory disharmony in different markets. For instance, will a product that qualifies as ‘healthy’ in the US under the proposed FDA definition also achieve a favourable front-of-pack nutrition label in the EU or South American countries?

What’s more, nutrition and sustainability are now viewed by many as interconnected factors impacting the future health of the global population. Governments and authorities around the world are legislating on this basis, as seen in the EU Farm-to-Fork strategy goal to “make food systems fair, healthy and environmentally-friendly”. This adds another layer of complexity.

Increasingly, the onus is on large food and beverage companies to take the lead, acting with integrity on these matters. For companies whose portfolios include a high percentage of indulgent products, reformulation alone may not be enough. What’s more, even meeting the most stringent regulatory requirements might not satisfy demands from investors. A material shift towards a healthier product portfolio requires a high level of expert input from nutritionists who can bring deep and holistic insights. It may also involve the acquisition of smaller companies that are inherently more focused on healthy products. This in turn requires its own regulatory due diligence.

While packaged food companies are already taking steps to improve the nutritional composition of products, they face increasing pressure to do more. Such top-down pressure from the likes of ShareAction will escalate as shareholders are held responsible for ESG and demand more from their investments. Achieving an effective balance between commercial success and ESG is going to be a key challenge for publicly listed companies across all sectors in the coming years.

When it comes to healthy packaged foods, there are no easy solutions. Setting and achieving healthy targets is fraught with complexity and often subjectivity. Achieving positive outcomes will require sustained effort and a proactive, transparent, collaborative approach. With food and beverage regulatory changes, we always advise companies to invest in horizon scanning and work with the authorities, not against them. The same ethos applies to investor relations in this new age of shareholder activism.

If you have any questions about reformulation or complying with front-of-pack and other regulations, please get in touch at [email protected]