Stocks could be overvalued due to obesity risk

British fund group Schroders is warning that governments around the world are taking a tougher stance on sugar

Investors are responding to ESG concerns in the food and beverage sector relating to the global obesity epidemic, according to a new report from fund group Schroders.

In its research entitled Sugar in 2019, it warns that rising concerns about the negative health consequences of too much sugar are triggering regulatory action and financial pressures for companies in the sector.

Elly Irving (pictured), an ESG analyst at Schroders, warns that food and beverage companies continue to see valuations that are 35-40 per cent higher than those in the tobacco sector. She warns that investors have, so far, failed to ‘price in’ the risks of growing concerns among politicians, rising activism in the sector, and the financial pressures that companies will face to meet regulatory changes, reformulate products and hike advertising spend.

“The media, consumers and regulators are all increasingly focused on the role of sugar in our diets,” Irving explains. “Data from Google Trends demonstrates the continued momentum in consumer interest in sugar in soft drinks compared to a ‘known’ risk of cancer from smoking.

“There’s no indication that this picture will reverse, putting ever-more pressure on companies to reformulate their products and ensure the impact of sugar taxes are minimised.”

Many countries around the world, including Australia, Malaysia, South Africa and the UK, have already introduce taxes to encourage companies to put less sugar in foods and encourage consumers to make healthier choices. Public Health England has also set a series of sugar reduction targets for a host of sub-sectors ranging from confectionery to yogurts and breakfast cereals.

“These voluntary targets are a warning shot from regulators,” says Irving. “Unless food companies can demonstrate progress then we believe sugar taxes could extend to these high sugar food categories too.

“Many international food majors are taking the threat seriously, using the UK as a test market for new recipes, reformulations and portfolio mix. Other countries that have introduced a sugar tax… could follow a similar path and extend regulatory focus to these food categories too.”