Yum China Holdings Inc. (NYSE: YUMC; HKEX: 9987) made news recently, vowing to cut its usage of non-degradable plastics by nearly a third over the next five years. However, sustainability research firm Chain Reaction Research (CRR) says the move does not mitigate deforestation risks in the company’s supply chain.
The operator of fast-food chains KFC and Pizza Hut in China said in a statement last week that it is replacing its plastic packaging with paper straws, paper bags, and biodegradable plastic bags. Starting this year, it plans to cut usage of harmful plastics by 8,000 tons annually to reduce overall use by 30% by 2025.
In particular, KFC China launched a campaign it called "Be Natural, Be You" to raise consumers’ awareness of environmental protection. This month, the chain is transitioning from using plastic straws and cutlery to paper and wooden items. Pizza Hut in China has stopped using plastic straws by late 2020 and will eliminate the use of non-degradable plastic bags by the end of 2022, Yum China said.
“Of course, plastic pollution is also a pertinent sustainability issue, particularly for fast food companies that require a lot of packaging,” said Tim Steinweg, senior analyst at Aidenvironment, in an email to CapitalWatch. “Reducing plastics is a good move, but it’s difficult to assess whether it’s a sign for more action to address deforestation or other sustainability issues.”
Steinweg was among the contributors to the July 2020 report by Chain Reaction Research which highlighted Yum China’s “sizeable deforestation footprint in its supply chains that originate in Brazil.” Citing the company’s large overseas purchases of meat, packaging, and palm oil, CRR links Yum China to deforestation in the Amazon.
In addition, CRR says, China has been the biggest importer of Brazilian soybeans, specifically, in the Cerrado region, where soy cultivation has been linked to “widespread deforestation, biodiversity loss, fires, emission of greenhouse gases, and disruption of water systems.”
Further, in 2020, soybean trade between the two countries only increased, returning to the levels of 2018, said Barbara Kuepper, senior researcher at Profundo and contributor to the CRR report.
“When comparing soybean exports from Brazil to China for the period January to October 2019 / 2020, these increased by around 18%, from 50.4 million in 2019 to 59.4 million tonnes in 2020,” Kuepper wrote to CW. “So, the risk exposure has certainly not decreased, especially when considering that China is the destination of a considerable share of Cerrado soy.”
The CRR report flagged the environmental damage it expects will lead to financial and reputation risks for Yum China ahead of the company’s secondary public listing, completed in Hong Kong in early September. While some of its major investors have increased their ownership in Yum China since, including BNP Paribas, CRR expects to see growing awareness among institutional investors of the systemic risks of both climate change and biodiversity loss.
“Deforestation risks are part of this discussion and I believe we can expect more assertive investor engagement on this topic in the near future,” Steinweg told CW. “Companies that are unable or unwilling to adequately mitigate deforestation in their supply chains may face divestments or exclusions.”
So, what should Yum China do? Follow industry best practices, as guided by the Accountability Framework, according to Steinweg. “This includes a public commitment to phasing out all deforestation from its meat and soy use, implementing this commitment in its sourcing practices, setting up monitoring systems and non-compliance protocols, and reporting on progress.”
In addition to KFC and Pizza Hut, Yum China operates the Taco Bell chain, as well as Chinese restaurants Little Sheep, East Dawning, and Huang Ji Huang, and a coffee shop COFFii & JOY.
In its reports, Yum China highlights its “Reduce, Reuse, Recycle and Replace” principles, focusing on the use of eco-friendly materials and reduction of waste, as well as “making sustainable development an integral part of business operations.” In 2019, KFC China supported the restoration of more than 1 million square meters of grassland in Inner Mongolia and last year was named in Dow Jones Sustainability Indices (DJSI) as Industry Leader for the Restaurant & Leisure Facilities. Yum China was also selected as a member of 2020 DJSI World and DJSI Emerging Markets.
Joey Wat, the chief executive officer of Yum China, said in a statement, "In line with our long-term commitment of supporting economic, social and environmental development, we are committed to working with customers, partners, and all other stakeholders to promote a more sustainable future."