AVCJ Awards 2021: Responsible Investment: The Arnott’s Group

KKR’s decision to buy Australian snack foods producer The Arnott’s Group through its core investments strategy – intended for relatively stable assets that require extended holding periods – was driven by economics, but there could be an environment, social, and governance (ESG) payoff.

“The core fund has a longer hold period, 10-plus years rather than five years, and that factors into our thinking around all topics, including ESG. It means we have more time to achieve our long-term initiatives,” said Rupert Pedler, an Australia-based principal with the firm’s private equity unit.

“We asked what the market would look like in 10 years and where we wanted to be. The long-term horizon in which we are operating with The Arnott’s Group allows us to be very proactive around sustainability in ways that go above and beyond what we can do with our other investments in Australia.”

KKR acquired the business in 2019 through a USD 2.2bn carve-out from Campbell International. It included a range of Asia-based food and beverage brands and distribution channels, assorted local manufacturing facilities, and exclusive rights to several global Campbell brands in certain markets.

Arnott’s was the crown jewel and key revenue driver – a portfolio of biscuits and snacks built around Tim Tam, one of Australia’s most internationally recognisable brands. KKR was not only taking ownership of a company, but also becoming custodian of a 150-year-old institution. “We felt like we had a responsibility to be leaders on sustainability rather than followers,” Pedler added.

Arnott’s already had a history of sustainable sourcing. The 140 local counterparties responsible for the ingredients that comprise 99% of the company’s products sold in Australia are bound by a responsible sourcing supplier code. The company was also a participant in numerous organisations devoted to ethical and responsible business practices.

KKR’s arrival prompted a comprehensive ESG benchmarking exercise. Sourcing – principally the development and expansion of existing programs – was identified as one of three main areas of focus. There is a goal to become 100% sustainably sourced across key ingredients by 2035.

Green citizen

Inevitably, Arnott’s is addressing the amount of energy used to manufacture its products and the amount of plastic that features in the packaging. Progress has been made on greenhouse gas emissions reduction through initiatives such as fast-tracking a renewable electricity pathway for the business and trialling solutions that eliminate or minimise gas power in the baking process.

“The majority of our operations are in Australia, and we are conducting a site-by-site assessment of the potential for renewable energy infrastructure,” said Simon Lowden, chief transformation officer at Arnott’s. “We are looking at the different options, whether it is solar, wind, or something else.”

The company is targeting net-zero emissions from operations by 2040 and across its value chain by 2050. On scope three emissions, which cover the supply chain, efforts are ongoing to understand what policies partners have in place and how they align with the broader agenda.

Water and waste are also priorities, with Arnott’s achieving significant reductions in water use in its facilities over the past three years and looking to reduce tis waste footprint. Only 2.7% of total waste generated was sent to landfill in 2020 and there is internal consensus this could be lower.

The company purchased 20,000 tons of packaging in 2020 in Australia and New Zealand alone, of which 69% is recycled on a weight basis. Analysis shows that 98% of materials currently used – plastics, cardboard, and cans – could be recycled. For soft plastics, on a weight basis, it is 73%.

KKR is working with the company on a new sustainable packaging strategy. Two goals have been set for 2025: reduce, reuse, or repurpose plastic packaging by 10% to meet Australia’s national target; and making 100% of overall packaging reusable, recyclable, or compostable.

Arnott’s recently pledged to make all its point-of-sale displays in supermarkets and convenience stores fully recyclable, which it is estimated will reduce plastic to landfill by 25.5 tons a year. In addition, the company has signed up to programs like the ANZPAC Plastic Pact Initiative, which promote accessibility to recycling infrastructure and the use of recycled materials.

“Sustainability is an industry effort,” Lowden said. “A lot of work needs to go into addressing how consumers deal with packaging at home, for example. It is education-led, helping to inform them about recycling. Discarded packaging is now collected by licensed recyclers and repurposed through various organisations.”

The third focus area relates to the communities in which Arnott’s operates and fostering inclusion, belonging and sustainability. This starts internally, with initiatives targeting gender balance and equality, and then extends outwards. The company has working groups addressing inclusion and belonging, and it is drawing up a reconciliation action plan aimed at indigenous Australians.

Being proactive

KKR has an ESG playbook that begins in the due diligence phase and contributes to the 100-day plan. It is largely reactive, prioritising the resolution of existing issues, the introduction of strong systems and practices, and the rollout of a reporting framework. Taking a deliberately proactive approach to ESG – which doesn’t happen on every investment – involves devising specific plans.

The recruitment of Lowden, who spent 20 years with PepsiCo, latterly serving as the company’s chief sustainability officer, at the start of 2021 has been integral to this effort.

The targets Arnott’s has set are regarded as challenging but realistic. Lowden noted that they had to be achievable in the given timeframe, not “targets for the sake of targets.” The company is also cognizant of the need for agility, so that it can head off problems before they gain momentum.

“We think it’s really important to get ahead of – and exceed - consumers’ expectations around brands being more sustainable and environmentally conscious,” said Pedler. “If we fall behind there could be a negative impact on demand for our products and for our business financially. We want to preserve the brand love people have for The Arnott’s Group.”

Pictured: Markus Elgoff of KKR (right) and Alvarez & Marsal’s Oliver Stratton

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• Topics
• Australasia
• Consumer
• Buyouts
• Australia
• KKR
• ESG
• AVCJ Awards