3 Aug 2023
Ice cream is an increasingly popular treat around the world, but investors should be aware of sustainability issues ranging from climate change to labour conditions. While investors should take into account how ice cream is sourced, produced and sold, they should also consider that it doesn’t (and might not) last forever.
In this issue of #WhyESGMatters, we look at the key contributors towards ice cream’s environmental impact (raw materials, manufacturing and retail and packaging), and social issues associated with popular flavours (vanilla and chocolate) and marketing. We also consider how the ice cream sector is impacted by climate change.
Scooping it up
The ice cream industry is growing globally. According to Fortune Business Insights, ice cream market revenue could grow from cUSD74bn (2022) to USD105bn by 2029. Key drivers of this growth include rising demand for innovative flavours and increased consumption, especially in developing markets.[@ice-cream-1] We believe that this increased consumption could lead to greater stakeholder focus on sustainability aspects.
Before it melts
Ice cream has a significant climate impact, arguably higher than many other treats. For example, the emissions from producing 1kg of premium vanilla ice cream is 3.94 kg CO2 (see Figure 1), which is 1.8x the climate impact of producing the same quantity of cupcakes and 2.2x that of chocolate-coated biscuits.[@ice-cream-2] We believe this could lead to more scrutiny of retailers’ commitments to reducing the climate impact of ice cream, while also considering the social aspects of ice cream production.
Figure 1: Climate impact of ice cream
Dairy farming and the cultivation of other raw materials used for making ice cream are associated with a number of environmental impacts.
Impacts of milk:
Impacts of other raw materials (e.g. cocoa, vanilla):
Vanilla: While some mass-market producers now use artificial vanilla flavourings, real vanilla remains an ingredient in some ice creams, particularly high-end products. It’s the second-most expensive spice in the world (after saffron) due to its sophisticated and labour-consuming production process. The orchid that produces vanilla beans is pollinated by wild Melipona bees. Since there’re not many of these bees in other top vanilla-producing countries, each flower must be pollinated by hand.[@ice-cream-8]
Cocoa: According to the World Cocoa Foundation, c70% of cocoa is produced in West Africa, mostly Ghana and Côte d’Ivoire. Small- scale farmers are the beginning of complex, fragmented supply chains that often include harsh conditions. Limited access to water, sanitation, health and education services mean that many producers are below the poverty line.
Mislabelling and deceptive marketing: Due to growing competition, rising cost of ingredients and pressure to deliver differentiated products, numerous instances of mislabelling and misselling of ice cream have been reported across different geographies.
Manufacturing: The impacts are mostly attributable to energy consumption, particularly during the hardening process and deep freezing. Considering annual consumption of ice cream in the UK, the total primary energy demand contributes to 3.8% of energy consumption in the whole food sector. In our view, there’s an opportunity to reduce the energy intensity of the manufacturing stage by optimising energy use and increasing the use of low-carbon energy sources.
Packaging: Stakeholder attention to reducing the impacts of packaging, e.g. fossil fuel depletion, energy demand and waste management, is likely to increase. Polypropylene tubs, which are the most widely used packaging material for manufactured ice cream, are a notable hotspot for these impacts. Some brands are planning to introduce or have already introduced ice cream packaging made from a monolayer wrapper, paper-based materials, or fully biodegradable materials. We believe these moves will help reduce the percentage of plastic packaging ending up in landfills.
We believe that investors should also consider how the ice cream sector is impacted by climate change and how companies respond to these challenges. For example, rising temperatures can affect cow milk productivity; in hot climate conditions, cows tend to eat less, and this reduces the amount of milk they produce. Water shortages due to climate change are another significant challenge as dairy products are the third-largest food product category in terms of water footprint.[@ice-cream-12]
As global warming impacts production of ice cream ingredients, leading ice cream companies are taking measures to mitigate these risks. For example, according to the International Union for the Conservation of Nature, vanilla crops are facing the highest risk of extinction due to rising temperatures exacerbated by climate change.
Similarly, global cocoa production is threatened by climate change, as according to the International Centre for Tropical Agriculture, rising temperatures in the tropical equatorial countries may significantly impact the suitability of the main-producing countries for cocoa production over the coming years. To mitigate these risks, leading cocoa processing companies are diversifying their supply sources and developing sustainable agricultural practices.
Investors should continue to scrutinise companies’ commitments in the ice cream industry, in our view; with future improvements focusing on the raw materials stage, especially raw milk production, as well as vanilla and cocoa cultivation. Other areas of potential investor attention include energy reduction during the refrigeration stage, plugging refrigerant leaks, correct labelling of ingredients, honest marketing practices and social impacts on workers in supply chains. With investor input, we can help make ice cream more sustainably delicious over time.
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