Unilever Changing Strategy After Kraft Pulls Bid and Invests USD 200 Million in Sustainability

Unilever Selling its Spreads / Margarine Business

As written by Chain Reaction Research, Unilever announced April 6, 2017 that it will sell its spreads / margarine business, possibly by Q2 2017. The move came after Unilever conducted a review of its business segments following Kraft Heinz February 2017 unsolicited USD 143 billion takeover offer.


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Two days after it became public, as analyzed by Profundo, by February 19, 2017, Kraft Heinz had pulled its bid for Unilever. Kraft Heinz, controlled by Warren Buffett and the Brazilian private equity firm 3G Capital, pulled its bid for various reasons including Buffett’s longtime aversion to hostile bids. While he supported the “friendly” takeover of H.J. Heinz in 2013 and later combining it with Kraft Foods Group Inc. in 2015 to create Kraft Heinz, he does not like to go where Berkshire Hathaway is not welcome.

Kraft Heinz Rejected So Announces USD 200 Million CSR Investment

Kraft Heinz in response announced March 21 2017 a USD 200 million investment to expand its CSR commitment.

Kraft Heinz says it will improve its supply chain’s sustainability, decrease its GHG emissions 15 percent and donate one billion meals by 2021. It also aims to set raw material-sourcing policies and practices to improve supply chain sustainability.

For example, under its new policy, it will only purchase palm oil products certified by the Roundtable on Sustainable Palm Oil (RSPO). But Kraft’s plan to rely on the RSPO and its Green Palm certificates scheme has been targeted by NGOs.

Domini Impact Investments and Calvert Investments Launch Proxy Against Kraft

In fact, Domini Impact Investments and Calvert Investment Management announced a proxy proposal directed toward Kraft Heinz shareholders in March, 2017. The pending proxy proposal urges shareholders to require the company to assess and report publicly on its deforestation and human rights impacts.

Under the new USD 200 million financing measure, Kraft Heinz is expanding pushing its global suppliers to achieve palm oil traceability, prohibit the use of child and forced labor and conserve forests and habitats. But Kraft Heinz has not published a time-bound plan showing how it will verify compliance with these requirements. Its new policy also includes humane poultry and beef sourcing commitments. The company is also making efforts to decrease its energy and water use and reduce waste at each of its 86 company-owned manufacturing plants.

Unilever’s Global Brand Tied to Sustainability, Uncertain Future

In 2016, the Dow Jones Sustainability Index named Unilever Industry Group Leader of the Household and Personal Products Industry Group. Only 24 companies globally were awarded Industry Group Leader status.

Yet Unilever – the marketer of iconic sustainability-linked brands such as Ben & Jerry’s and Dove – did not address Unilever’s global sustainability leadership role under its new direction during their April 6 announcement. The company is also still exposed to active cases of deforestation and labor rights abuse in its palm oil supply chain.

Unilever’s sustainability global leadership and its impact on agricultural chains has material risks. By divesting the spread business to private equity, the transparency in sustainability of this business may be reduced.

Currently, Unilever buys 3 percent of global palm oil production, but impacts about 8 percent of global production via its use of palm kernel oil. It formerly purchased 10 percent of global certified palm oil output but in 2017 announced it would materially reduce its purchases of segregated RSPO certified palm oil. Unilever has already advised its suppliers, the RSPO and NGOs of this change. Unilever has been a driving factor behind the RSPO. Private equity will probably be less aggressive.

Key questions remain:

  • Will Unilever reduce its certified palm oil purchases losing its iconic status as a global sustainability leader?
  • Will Unilever maintain its Product & Protect and jurisdictional sourcing commitments?
  • Will institutional investors who have bet the farm supporting Unilever’s sustainability commitments stay invested in Unilever without clear guidance on Unilever’s sustainability future?
  • Will Kraft Heinz purchase Unilever’s margarine business and in doing so the ESG risks and opportunities associated with it?

Moreover, as Unilever’s spread business is also the division within Unilever that buys most of its certified palm oil, the sustainability profile of the remaining Unilever businesses will suffer. For example, in the press release and webcast of April 6, 2017 the word ‘sustainability’ was not used in the context of ‘good for the earth’ but only in ‘good for top-line growth’. Is this a preview of Unilever’s less-sustainable future?

Conclusion: What Will Unilever and Kraft Heinz Choose?

By offering an unsustainable response to the Kraft Heinz bid, is Unilever making a strategic business choice to be less sustainable and possibly decrease its reliance upon its iconic sustainability-linked brands? Instead, could Unilever ask itself how much losing its sustainability edge since Kraft Heinz implies it may be worth USD 200 million. Finally, will Kraft Heinz take its proxy resolution to a vote or instead align its USD 200 million investment with transparency regarding material deforestation risks and human rights abuses?

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Gabriel Thoumi, CFA, FRM works as Director Capital Markets at Climate Advisers where he manages global financial analytics focusing on mitigating systemic climate risk while advising on “greening” capital markets. He has 18 years of experience managing and deploying frameworks to improve global capital markets sustainability through risk mitigation and return enhancement. Previously, for Calvert Investment Management, he valued global equity, index, and fixed income portfolios and their component positions in the utilities, energy, materials, chemicals, and financial sectors. He worked on quantitative index construction and asset allocation strategies. He engaged Fortune 500 CEOs on approaches to mitigating climate risk using financial risk management tools. He led initiatives to improve financial accounting of exchange-listed products and incorporated natural capital into financial tools. He has also worked at Morgan Stanley's carbon offset company, Wells Fargo Capital Management, and American Express. He is an adjunct at John Hopkins University.