ESG Management Risks Arising from Overseas Business Partners and Subsidiaries in the Food & Agriculture Industry
In recent years, an increasing number of companies operating globally have experienced negative business impacts as a result of ESG-related incidents involving their business partners or subsidiaries. Against this backdrop, this article focuses on the food and agriculture industry, where such risks have become particularly pronounced, and provides an overview of ESG management risks posed by overseas partners and subsidiaries.
Table of Contents
Recent Examples of ESG Incidents in the Food & Agriculture Industry
In recent years, ESG incidents involving partner companies have become a growing attenion in the food and agriculture industry. Many companies in this sector rely heavily on imported raw materials and therefore often operate production bases abroad (*1). As a result, companies in the food and agriculture industry tend to build global supply chains, making ESG incidents at local partner companies increasingly visible while simultaneously difficult to fully monitor.
At the same time, rising global interest in ESG investment—such as green finance and transition finance—along with the introduction of international frameworks and regulations led by the United Nations, has elevated ESG incidents at partner companies into material management risks. According to the “UN Guiding Principles on Business and Human Rights,” endorsed by the UN Human Rights Council in 2011, companies are required to address not only human rights violations within their own operations but also those occurring at their business partners and subsidiaries (*2). Furthermore, initiatives such as the formulation of National Action Plans (NAPs) on Business and Human Rights (*3) and the enactment of “Modern Slavery Acts” in countries including the United Kingdom and Australia (*4)(*5) demonstrate a growing trend toward mandating disclosure of human rights initiatives across supply chains and subsidiaries (*6).
These developments underscore the importance of considering ESG issues not only within a company itself, but across the entire supply chain. Below, we introduce two cases in which ESG incidents involving business partners or subsidiaries in the food and agriculture industry came to light.
Case 1: ESG Risks in Overseas Joint Ventures
The first case involves a major Japanese beverage manufacturer and its joint venture with Myanmar Economic Holdings Limited (MEHL), a company closely linked to Myanmar’s military, which has been widely condemned by the international community. In 2015, the company entered a joint venture with MEHL to expand its beer business in Myanmar (*7). However, it was later revealed that MEHL functions as a major funding source for the Myanmar military.
The international community has raised serious concerns over the Myanmar military’s actions against ethnic minorities within the country, including the Rohingya, which have been characterized as ethnic cleansing. According to an internal investigation by Justice for Myanmar, a significant portion of the funds used to carry out the military coup in February 2021—during which numerous civilians were killed—originated from MEHL (*8).
In addition, the company acquired Myanmar Brewery Limited (MBL) and Mandalay Brewery Limited (MDL) as joint ventures with MEHL. Investigations by Amnesty International (*9) revealed that these two companies donated a combined total of USD 30,000 to the Myanmar military at the end of 2017, when military operations against the Rohingya intensified (*10).
Following the 2021 coup, international awareness of economic sanctions against the Myanmar military increased substantially. The Office of the United Nations High Commissioner for Human Rights published a report asserting that companies maintaining relationships with military-affiliated organizations such as MEHL may be complicit in violations of international human rights law and international humanitarian law (*11).
As a result of mounting international pressure, the company announced on February 5, 2021, that it would terminate its partnership with MEHL. Nevertheless, its branded products became targets of military-related boycotts within Myanmar. It is estimated that the company incurred impairment losses totaling approximately JPY 21.4 billion due to the dissolution of the joint venture and the resulting boycotts (*12).
This company is not the only one to have faced international criticism and economic sanctions as a result of involvement with the Myanmar military.
On a global scale, companies such as South Korea’s steelmaker POSCO, Singapore-based tobacco fund RMH, and China’s Wanbao Mining, which operates gold mines, have also been identified as engaging in joint ventures with MEHL. These companies have continued their partnerships without responding to UN reports calling for the termination of business ties (*14). As a result, it is expected that the investment situation of the relevant companies will worsen in the future (*15).
Case 2: Labor Issues at Palm Oil Plantations and Their Impact on Downstream Companies
The second case involves multinational brands such as Nestlé and Unilever sourcing palm oil from plantations associated with human rights violations. According to Amnesty International, labor conditions at five palm oil plantation companies operated by Wilmar—one of the world’s largest palm oil producers—constitute human rights abuses. For example, children as young as eight years old were reportedly subjected to heavy labor and denied access to schooling, while workers suffered severe poisoning after being required to use highly toxic herbicides that are officially prohibited (*16).
International companies identified as sourcing palm oil from Wilmar plantations with reported human rights violations include AFAMSA, ADM, Colgate-Palmolive, Everlands, Kellogg’s, Nestlé, Procter & Gamble, Reckitt Benckiser, and Unilever. Human rights NPOs have accused these companies of failing to address labor exploitation occurring within their supply chains (*17).
The Importance of ESG Considerations in Overseas Partners and Subsidiaries
As demonstrated by the cases above, ESG incidents involving overseas partners and subsidiaries in the food and agriculture industry are directly linked to corporate management risk. Traditionally, companies have tended to prioritize short-term financial gains over long-term ESG-oriented management. This shareholder-centric approach underestimated the intrinsic importance of long-term value creation. However, the investment environment has changed in recent years, placing companies in a position where long-term ESG considerations can no longer be ignored.
Specifically, investors are increasingly incorporating medium- to long-term and ESG perspectives into their selection criteria. The Principles for Responsible Investment (PRI), adopted by the United Nations in 2006, provide global guidelines stating that institutional investors should integrate ESG issues into their decision-making processes as part of their fiduciary duties. PRI encourages investors to consider long-term ESG information when evaluating companies. The number of institutional investors signing the PRI has continued to grow, reaching over 5000 signatories in 2024 (*18).
The PRI has contributed to a shift in the investment landscape, accelerating interest in ESG investing. ESG investing refers to investment strategies that consider not only traditional financial information, but also environmental, social, and governance factors.
There are dozens of ESG indices used by leading global investment institutions internationally comprising numerous evaluation criteria. In recent years, the scope of these evaluations has expanded to include corporate supply chains, making it increasingly important for companies to understand the ESG status of their related entities.
In September 2020, the World Economic Forum (WEF) published a report titled “Measuring Stakeholder Capitalism: Towards Common Metrics and Consistent Reporting of Sustainable Value Creation.” This report references existing frameworks such as GRI (*19), SASB (*20), TCFD (*21), and CDSB (*22), while emphasizing the impacts companies have on their stakeholders (*23).
The following sections explain which ESG indicators apply to the cases of Kirin Holdings and Wilmar discussed above.
Example Indicator (1): Involvement with the Military Industry and Violations of Indigenous Peoples’ Rights
Human rights violations within the supply chain—such as involvement with weapons or labor abuses—constitute negative factors in investment decisions.
In Kirin’s case, its joint venture with the Myanmar military has raised concerns regarding complicity in human rights abuses, including oppression of ethnic minorities and involvement with armed forces. One representative ESG framework, the Global Reporting Initiative (GRI), includes disclosure requirements under the theme of “Rights of Indigenous Peoples,” such as the following (*24):
The total number of identified incidents involving violations of indigenous peoples’ rights during the reporting period (with indigenous peoples defined as groups regulated wholly or partially by distinct customs, traditions, or special laws or regulations)
The status of the incidents and actions taken
Additionally, MSCI ESG Equity (*25) lists “involvement with weapons” as a screening criterion. As such, Kirin’s partnership with military-affiliated entities in Myanmar presents a very high likelihood of exclusion from investment universes under this perspective (*26).
Because MSCI and GRI assessments cover a company’s entire supply chain, MEHL’s persecution of the Rohingya may negatively affect Kirin’s investment environment.
Example Indicator (2): Labor Conditions and Human Rights
In the case of Wilmar’s palm oil plantations, environmental and labor issues increase the likelihood of exclusion from investment universes under criteria related to working conditions and human capital management. This risk directly extends to downstream companies such as Unilever and Nestlé that use Wilmar’s palm oil as a raw material.
For example, MSCI (Morgan Stanley Capital International) (*27) calculates globally recognized benchmark indices. Within the MSCI Japan Human Capital Investment Index (*28), the presence of scandals related to human capital management or workers’ rights is included in the initial screening criteria.
Challenges and Potential Solutions for ESG Management in the Food & Agriculture Industry
In recent years, ESG management risks associated with partners and subsidiaries in the food and agriculture industry have become increasingly pronounced. One major contributing factor is the complexity of supply chains. The food industry, in particular, often relies on imported raw materials, resulting in inherently global supply chains. These trends further complicate supply chains and make it increasingly difficult to identify ESG risks at downstream companies.
At the same time, these dynamics indicate that ESG management risks for related companies will continue to expand. Failing to adequately consider ESG data from subsidiaries and partners can have significant repercussions for overall corporate management. To prevent such outcomes, it is essential for companies to accurately identify where their risks lie.
Leveraging ESG Information to Enhance Corporate Value
As illustrated throughout this article, ESG risks arising from related companies in the food and agriculture industry can have negative impacts on corporate management. Many companies seek to enhance their corporate value through ESG management and investment, or to mitigate the risk of value erosion. The key question is how such opportunities and risks can be effectively managed.
First and foremost, it is critical to accurately understand these opportunities and risks. Achieving this requires comparative analysis of a wide range of ESG data—not only from within the company, but also across other companies and industries—from a long-term value perspective.
However, there are dozens of major ESG indices used domestically and internationally, each comprising numerous evaluation criteria, and these standards continue to evolve annually. As a result, it is not easy for many companies to continuously and comprehensively monitor global ESG trends and the associated business risks and opportunities.
Furthermore, linking identified ESG trends and indicators to a company’s own business data for quantitative analysis and strategic application requires significant data processing and labor. Even focusing on the “S” (Social) component alone involves numerous indicators and calculation methodologies, resulting in highly complex analytical structures.
To efficiently conduct both “broad” and “deep” analyses, it is far more effective for specialized expert teams with consolidated know-how to undertake this work, rather than individual companies addressing it independently. Such an approach reduces redundant processes and significantly increases analytical speed and effectiveness.
While this article has introduced a single ESG trend case, “cuoncrop” offers services such as the “ESG/SDGs Management 360° Assessment & Improvement Support,” which leverages a team of ESG management data analysis experts—many with backgrounds in global strategy consulting firms—along with proprietary analytical methodologies incorporating AI. These services support companies in identifying and improving the level of ESG activity necessary to be “selected” by investors.
Accordingly, cuoncrop’s services are suitable not only for companies that already have internal ESG analysis teams and are actively promoting ESG management, but also for relatively smaller companies that currently lack such teams yet recognize the need to shift toward ESG-oriented management. Companies interested in a scientific and efficient analytical approach to accelerating ESG management are encouraged to contact “cuoncrop”.
cuoncrop ESG Global Trend Research Division
References
*1
http://www.fmric.or.jp/management/zaimu19/3_kidachi_2007.pdf
*2
https://www.unic.or.jp/texts_audiovisual/resolutions_reports/hr_council/ga_regular_session/3404/
*3
https://www.mofa.go.jp/mofaj/press/release/press4_008862.html
*4
https://www.jetro.go.jp/ext_images/_Reports/01/aa1e8728dcd42836/20210026.pdf
*5
https://www.legislation.gov.au/Details/C2018A00153
*6
https://www2.deloitte.com/jp/ja/pages/risk/solutions/srr/human-rights.html
*7
*8
https://www.bbc.com/news/world-asia-56133766
*9
*10
*11
https://www.ohchr.org/EN/HRBodies/HRC/Pages/NewsDetail.aspx?NewsID=24608&LangID=E
*12
https://toyokeizai.net/articles/-/448339
*13
https://www.amnesty.org/en/latest/news/2020/09/mehl-military-links-to-global-businesses/
*14
https://www.amnesty.or.jp/news/2016/1202_6524.html
*15
https://www.mlit.go.jp/common/001362975.pdf
*16
*17
https://www.globalreporting.org
*18
*19
*20
*21
https://www.meti.go.jp/shingikai/economy/sustainable_sx/pdf/001_05_00.pdf
*22
https://www.globalreporting.org/how-to-use-the-gri-standards/gri-standards-japanese-translations/
*23
https://www.msci.com/our-solutions/indexes
*24
*25
*26