Kraft Heinz

From the discussion with investors, the company referenced increased internal discussions that acknowledged the climate opportunity of portfolio diversification. Yet, there is still no recognition of the material risks from the current company’s exposure to animal agriculture commodities. The company is spending time and resources on understanding its climate risks. KHC’s approach has not evolved to consider portfolio diversification as a climate mitigation tool to tackle its Scope 3 emissions nor publicly acknowledged the link between its current protein portfolio and its environmental impacts, including climate change. Its high exposure to animal agriculture commodities persists; the top two sources of emissions are dairy and meat. The company recognises that all areas of its portfolio require active management to support its decarbonisation commitment and that the initial focus will be on high-impact areas, which include meat and dairy. Its diversification efforts continue to be driven by consumer demand and the ambition to take advantage of the commercial opportunity that plant-based foods and alternative proteins represent. Internally the company hinted it has identified plant-based expansion as a possible ESG opportunity and that it sees it as an area of growth. However, the company shared that despite the numerous benefits of plant-based products it does not assume that plant-based expansion is always an ESG opportunity, as it has also identified risks related to it. The company clarified it is committed to the science and that each opportunity needs full footprint evaluation. Kraft Heinz used an Artificial Intelligence tool to conduct a materiality analysis, which scanned the web and assessed upcoming legislation to help the company prioritise its risks. The analysis found that climate change poses a material risk. The company stated it would conduct a broader climate risk assessment in 2022, covering the supply chain risks of animal agriculture, specifically the impacts of deforestation on its ingredients and agricultural commodities (including cattle). It stated it would report the findings publicly in the next reporting cycle, yet it is unclear if this will be a quantitative TCFD-aligned scenario analysis. Kraft Heinz completed its first cradle-to-cradle LCA, which, among other findings, showed significant differences in the environmental impact of beef vs beans as a protein source. It is unclear if these findings will drive any climate mitigation actions or setting targets to diversify its product portfolio.

Starting from a low baseline from Phase 5, with no Scope 3 emissions target and limited sustainable sourcing practices, the company has progressed in developing its climate strategy. It committed to a net-zero target by 2050 for its Scope 1, 2 and 3 emissions. It has also set an interim target that covers all three scopes, which aims to reduce emissions by 50% by 2030. The company anticipates publishing targets for SBTi approval by November 2022 and the pathway of action to net-zero will be announced in 2023. The company is on track with its health targets. In July 2018, the company committed to setting and getting approval from the SBTi for interim GHG targets. Today, KHC does not appear as a ‘company taking action’ as it does not have any SBTi-approved targets. Nevertheless, the company published a new net zero target alongside the previously committed interim targets; we assume it will get both targets approved. KHC confirmed its 2030 interim target is a key focus, and it hopes to be able to bring forward the net zero target year. As part of its Healthy Living & Community Support pillar, the company aims to ‘increase its plant-based offerings’ by 2025; in its annual report KHC shares it is on track for this qualitative goal. The company shared it will address the fact that without a target figure there is no way to measure the progress the company has made. The company shared it is focusing on first finalising data reporting to then establish governance oversight and evolve its medium-term targets. Also, the company is on track to achieve its nutrition goal (control kcal, saturated fat, sugar, and sodium content), aiming to have 85% of its portfolio compliant by 2025, which includes plant-based products. KHC reached 75% of compliance with the nutrition goal in 2020. The company is looking into sustainably sourcing some of its main ingredients, including tomatoes and beans. It is conducting a controlled experiment to understand the impact of these crops. Yet, animal welfare is the primary risk addressed by the company through its sustainable sourcing practices related to animal agriculture. Last year, KHC published a Sustainable Agricultural Practices Manual as guidance for suppliers aiming to improve their practices through 2025. Currently, the single target for sustainable sourcing covers tomatoes, despite dairy and meat being the commodities with the most significant carbon footprint. Regenerative agriculture is a key pillar of Kraft Heinz's carbon strategy, and the company hopes to be a leader in the regenerative agriculture space; a Director of Sustainable Agriculture was hired in March 2022. In Europe, the KHC achieved its commitment to purchase 100% free-range eggs by 2020. Its overall strategy for health and sustainability is focusing on hitting all its 2025 targets and then will set more robust targets for 2030.

There has been considerable progress on KHC’s plant-based product portfolio, it is clear about not wanting to focus on the niche vegan/vegetarian consumers with its plant-based assortment, rather it wants to cater the wider consumer base with subtle changes and more plant-based products. The company has made noteworthy progress in using reformulation to limit its exposure to animal-derived ingredients, partnering with NotCo, launching new products in underserved categories, and investing in the latest round of New Culture (a fermentation-enabled dairy company). The company stated it wants to ensure that its plant-based alternatives are nutritional and environmentally conscious; it shared with investors that it has a live project improving the dietary profiling of all its SKUs and recipes. KHC’s focus for product portfolio is on incremental volumes and mix improvement coming from new products. The company shared alternatives are a core part of the company’s R&D platform but expanding through innovation is a small percentage of the company’s portfolio. Kraft Heinz thinks it could make a bigger impact by reducing the meat content in some of its core products. One of the company’s short-term goals is to increase the number of “vegan swaps.” For example, replacing cream with a plant-based substitute. As it investigates how to reduce its reliance on meat and dairy, the company is prioritising subtle changes that will not impact the taste or quality of the product. These decisions are based on impact, volume sales, and technical ability. The company expanded its product portfolio within the past 12 months through vegan mac & cheese in Australia, vegan mayonnaise, and vegan soups. It also launched “Made for Veggiez” sauces to accompany plant-based meals - dressings are an underserved category. In February 2022, KHC partnered with NotCo and founded a new venture ‘Kraft Heinz Not Company’ with R&D facilities that will focus on plant-based innovation across KHC product categories. NotCo is a Chilean start-up focused on scaling plant-based foods that appeal to the mass market. In terms of venture investments, through its VC arm Evolv Ventures the company participated in the latest round (November 2021) of investments in New Culture, a fermentation-enabled dairy company which has been working on Mozzarella cheese.

KHC is seeking to normalise plant-based diets and target the mass consumer. Its customers are not responsive to the sustainability dimensions of alternatives so it focuses on promoting them for their health and nutrition benefits. The company is exploring eco-labelling, yet it shared that this might have a larger decarbonisation impact downstream in the supply chain rather than on consumer choice. KHC understands the levers of consumer engagement for its target market. Hence, nutrition and health are the main emphases rather than the sustainability dimension of protein choices. The company sees it role as supporting the mass market’s conversion to more plant-based foods. From consumer research, it found that the share of its target market specifically following these items is relatively small. In its discussion with investors, the company highlighted the challenge of the relatively slow uptake of plant-based foods by mass consumers; the company wants to avoid its plant-based products being delisted by retailers. One of the solutions that Kraft Heinz mentioned is that it would like to see greater commitment from retailers to hold for longer periods of time vegan labelled items. Nevertheless, the company’s goal is to cater its products towards a flexitarian diet. Kraft Heinz participates in some pilot programs for eco-labelling, but it shares it has some concerns over how the product comparison is done. For example, the company believes that plant-based and meat products should be directly compared for their environmental impact. The company also noted that eco-labelling might have a larger impact downstream in the manufacturing process rather than on consumer choice. In the last 12 months, the company continued to encourage consumer uptake through promotion. For example, it collaborated with Channel 4 to launch a plant-based comedy series ‘Flex Kitchen’ hosted by comedians, which promoted the normalisation of plant-based dishes. The company continues to partner with food service companies to promote its products. For example, its partnership with Absurd Bird in the UK during Veganuary 2022 to offer a plant-based burger.

The company has invested in data systems to track and disclose at SKU level, simultaneously it is working on its definition of plant-based. The company shared with investors the current split of its portfolio and that 30% of Kraft Heinz's total GHG emissions are linked to meat and dairy. Kraft Heinz has a qualitative goal to continuously add new plant-based products, but does not have a numerical target; it is currently having conversations about how to improve its tracking and reporting and hopes to have a quantitative goal with a metric in the future. No timeframe was shared for this. The company said it will disclose more metrics and definitions on its plant-based portfolio in 2023. KHC spent $10 million on a data collection system that allows it to pull data in real time through the connection of all its systems and information. This will help the company to track and report SKU-level breakdowns. The company currently tracks and reports new products containing plant proteins per market and SKU. It has two SKU tags based on the ingredient statement : • NA: Not certified as Vegan due to manufacturing conditions. • IZ: does not contain animal-derived ingredients, 90% of the total portfolio. The company shared with the coalition that 54% of total sales across the business are plant-based. The company is currently undertaking a full evaluation of the technical definition of plant-based within its portfolio, seeking greater clarity. The next step would be consumer validation and testing of on-pack communication. Regarding supply chain emissions, it reports its Scope 3 emissions, including purchased goods and services. In its CDP 2021 Climate report, the company disclosed that 95% of total GHG are Scope 3 and 38% of its Scope 3 emissions are linked to dairy. Absolute Scope 3 emissions increased almost 8% YoY, while carbon intensity stayed flat. The company does not disclose emission data for meat or other animal-derived ingredients. Nevertheless, in its meeting with investors, the company shared that 30% of Kraft Heinz's total GHG emissions are linked to meat and dairy. The company does not publicly disclose this Scope 3 breakdown but hopes to in the future. To track the decarbonisation of its supply chain, as a first stage it asked its suppliers to take a self-assessment, the next step will be to begin measuring their specific outputs. The company provided no timeframe for this, yet it highlighted its desire to collaborate with its farmers as partners. It understands that there is a balance between collecting farmer data and respecting their confidentiality. Kraft Heinz also wants to allow its meat and dairy suppliers a reasonable amount of time to reach their reduction targets.

The company participated in the technical round table on measuring a portfolio transition. For the first time, the company agreed to meet with investors for an engagement dialogue. It showed a willingness to learn about best practices, whilst being transparent about the challenges it faces with portfolio diversification in its operating markets and target consumers. KHC also shared its increased resource across ESG (approx. 12 new roles in the last 12 months), which means it has a greater capacity to learn from and support the wider industry. KHC responded to FAIRR’s follow-up questions via email and provided feedback on the final assessment.