Hans Janssen (FrieslandCampina) on Putting Value on Sustainability

Staggered control 
Janssen believes the close involvement of member farmers is a major advantage of the cooperative model. He began his career at food company Unilever and previously has held the role of CFO at medical supplier Mediq and stock exchange-quoted construction group Heijmans. He also admits that the governance structure of a cooperative is more complex, and as a result the decision-making process is different. The cooperative owns 100% of the company Royal FrieslandCampina N.V., one of the world's largest dairy companies with annual revenues of €11.5 billion (2021), branches in 32 countries and approximately 22,000 employees (after a complete reorganization in order to restore the disappointing results achieved in recent years). The members of the cooperative have ultimate control through a tiered structure – all important decisions are voted on – and supervise the policies pursued.

Net climate neutral by 2050
Sustainability is a key theme in this policy. Over the coming years, FrieslandCampina will invest over €1.5 billion in achieving its climate ambitions. The company has set itself the goal of substantially reducing scope 1, 2 and 3 greenhouse gas emissions by 2030: By 63% compared to 2015 in its own activities (scope 1 and 2, including global production and transport), by 33% in milk production at affiliated dairy farms (scope 3) and by another 43% in 'other scope 3', such as raw materials and packaging. By 2050 at the latest, FrieslandCampina wants its production to be net CO₂ neutral and its biodiversity to be net positive. That even stronger focus on sustainability demands multiple value creation for a wide circle of stakeholders and broader financial performance criteria that include non-financial KPIs in management, monitoring and accountability. This all comes together in the role of the CFO.

You worked in a variety of sectors and switched to a cooperative as the CFO of a stock exchange-quoted company. What does this different context mean from a sustainability perspective?   
‘There is a common theme: They are all large Dutch companies with long histories that are firmly rooted in society. Whether it is food, health or construction, they are all socially-relevant sectors. That appeals to me and has always been a guiding principle in my career choices. It is precisely because the social impact is so great that sustainability plays an important role in all these sectors. In construction, for example, requirements are increasingly being imposed on what, where and how you can build from an environmental perspective. The impact is even greater in the dairy sector. It encompasses all aspects of our business operations: Clients, suppliers, employees and financiers are demanding that we act responsibly as a company.’

As CFO of Heijmans you had to deal with shareholders, and at FrieslandCampina you had to deal with members. What differences do you notice in the dynamics from a sustainability point of view?
‘Shareholders are more distant – they sometimes step onboard today and off tomorrow. Nevertheless, shareholders are also increasingly focusing on sustainability, because a sustainable strategy and business operations can add value – and not focusing on sustainability can destroy value. Our members are closer to the company – they are both our owners and our suppliers. So if we want to reduce CO₂ emissions in the lifecycle of our products, we need to work with our members in order to reduce greenhouse gas emissions from the milk production process. Since our members are so closely involved in the business, we can engage in constant dialogue about increasing sustainability. That is a big advantage. You might also think of it as a restriction, but the fact remains that farmers are independent entrepreneurs: They have the freedom to make their own decisions about investments in more sustainable business operations. As a company, we do try to make this as attractive as possible for them. After all, members must be able to recoup those investments.’

What is FrieslandCampina’s strategy in that regard?
‘We try to create value through more sustainable production. For example, we have a milk stream with the On the way to PlanetProof environmental label for farmers who meet stricter requirements for animals, nature and climate. The stricter requirements call for substantial investments on the farm, which is why we charge more for those products. Our member dairy farmers can therefore continue to invest in sustainability.
The biggest challenge in increasing sustainability is putting a value on it. Can you make the client pay for improved biodiversity, for example? That is an area of tension. As citizens, people consider sustainability important, but as consumers they are only prepared to pay extra for it to a very limited extent. Our farmers not only need to be able to recoup their investments – they also need to have the financial resources to make the investment in the first place. One option would be to set up investment funds in order to make farms more sustainable.’

How important is collaboration across business and sector boundaries to achieving sustainability goals?
‘You could not do it without partnerships – you would not be able to do it alone. This year, for example, 200 of our members will be adding the feed additive Bovaer to their cows' feed. Bovaer is a substance that can reduce methane emissions by 30% on average and thus contribute to CO₂ reduction on the farm. Bovaer was developed by DSM and is supplied to participating farmers by feed manufacturer Agrifirm. We are also working with Agrifirm to develop deforestation-free soy. We support our members with projects for solar panels on barn roofs and manure digesters, in combination with a financing program. 3,400 of our members are also energy farmers and we subsequently purchase their energy for our own production. In this way, we are trying to establish various partnerships, including with clients, financial parties, NGOs and universities. Together with Rabobank and the World Wildlife Fund, we have developed a biodiversity monitor that measures the impact of a dairy farm on biodiversity based on a number of KPIs. We have also developed a measures tool that provides information about improvement opportunities in the area of sustainability.’

FrieslandCampina also operates in Asia and Africa. How do you shape the sustainability policy there?    
‘We developed the Dairy Development Program, using our Dutch members’ knowledge to help local farmers increase their milk production. Each year, we train 70,000 farmers in countries such as Indonesia, Nigeria, Pakistan and Vietnam. Our goal is to improve milk quality and increase productivity per cow in the most sustainable way possible. By doing this, we also contribute towards improving the farmers’ quality of life in those countries. However, sustainable production is not just about getting more milk out of the cow. It is also about getting the dairy products to the consumer. In Nigeria, for example, we have a mobile yoghurt plant that allows us to process the milk into long-life yoghurt close to the source and then transport it to our sales channels in the country.’

FrieslandCampina's climate plan requires an investment of €1.5 billion, while the return on investment is often difficult to calculate. What role do you play as CFO? Do you take the lead or do you sometimes put on the brakes?
‘It involves dialogue between sustainability experts, the business and finance. The experts specify which measures will result in which CO₂ savings in the area of feed, barns and energy, for example, and what they will cost. These are estimates, as you also need to factor in inflation. The business specifies the revenue they expect to achieve from sustainable products on the market. As the CFO, I mainly try to monitor the balance. Of course, we have to make investments in order to significantly reduce our CO₂ footprint by 2030, but we also have to make sure that the company is still profitable and can pay its salaries. Normally you give a financial forecast for one year, but in this case it is a commitment for no less than nine years. You therefore have to be able to justify it to your members and other stakeholders effectively. As the CFO, you also ask yourself whether you can say we are achieving our sustainability targets and whether we can measure that.’

And?
‘A strategy for measuring sustainability KPIs is still very much in development. We already use internal CO₂ pricing for our factories, but biodiversity is still difficult to measure and value financially, so we are trying to develop better KPIs for that purpose. Ultimately, we want to map out the entire chain, from grass to glass. As a finance discipline, we need to develop new skills for measuring and reporting non-financial KPIs, and that can feel quite uncomfortable. Due to evolving scientific knowledge, we have had to recalculate our sustainability reporting strategy several in recent years.’

FrieslandCampina is also on the list of companies that Friends of the Earth believes should accelerate their sustainability policies, as a follow-up to the lawsuit filed against Shell. How do you deal with that external pressure?
‘Our ambition for climate-neutral dairy was already in place. We set out that ambition in more specific detail in the climate plan that we sent to Friends of the Earth. We have carefully coordinated this with our Supervisory Board, which also represents our members. We have embedded sustainability into our governance. We recently set up a Sustainability Committee within the Supervisory Board. The Committee can help make considerations, at the intersection between the interests of the company and its members. The internal control, management and accountability of the sustainability policy are the responsibility of the Audit & Risk Committee. Setting targets and linking those targets to the remuneration policy are the responsibility of the Remuneration Committee.’

We regularly see angry farmers protesting against nitrogen measures with their tractors on the Malieveld in the Hague. Farmers Defence Force also blocked FrieslandCampina's headquarters in October 2019. What do you notice about the pressure on the sector among your own members?
‘Farmers’ livelihood is at stake, so of course it comes up during every meeting. The sector needs clarity about the future. Farmers are very willing to invest in sustainability, but they do want certainty about continuity and earning capacity. That is only logical, as these are people who have been in the business their whole life, and often for generations. They also know our company inside out. There is a huge amount of empathy, and we put our heads together. We always have in-depth discussions on a variety of subjects during meetings. Issues such as how we are going to solve the currency problem in a specific country and what “deferred tax claims’ means on page 156 of the financial statements are raised. Questions such as ‘why are FrieslandCampina desserts no longer available at my local supermarket?” also come up. The level of commitment is huge.’

Last year, FrieslandCampina experienced upheaval when four directors left consecutively within a short space of time, including the Chair of the Cooperative Board, who is also the Chair of the Supervisory Board.
‘The external turmoil within the sector caused by the nitrogen measures and climate agreement were also expressed internally. There was some unease around the fact that there were discussions about renewing member financing, which was necessary for the future marketability of member bonds in order to reduce the skewed growth of contributed capital and improve the quality of the company's equity. That has since been resolved. And there was tension because competing parties are trying to entice our members to switch to them. Some members left, but fortunately we are now seeing that some farmers who previously left now want to come back. We also have a new Chair with broad support among the farmers, and that has restored the peace.’ 

As the CFO, how do you deal with uncertainty in the external environment, such as the impact of the war in Ukraine and rising inflation?
‘We sold our business in Russia last year and our sales market in Ukraine is limited. The direct implications are therefore minimal. However, the indirect implications are significant: Scarce raw materials and increased prices. So we are constantly thinking in terms of scenarios. For example, what if inflation increases even further? We are currently facing a 25% increase in costs across the board. The price of milk has increased significantly, although that is good news for our members. The price of packaging for baby food has increased considerably. Or take transportation, for example: Sea containers have become ten times more expensive. So we have to maintain our margin as this is what ensures our survival. That is why we have started to keep a close eye on things and respond quickly. We give our operating companies up-to-date market information on price developments and we have teams that help the operating companies maintain their margins, for example by looking at price elasticity, promotional pressure, packaging size and product composition. You need data for that, which is where our finance discipline comes in.’

Back to sustainability. As a CFO, what legacy do you want to leave behind?
‘We have made real progress, but although we have been reporting in an integrated way for several years, there is still a lot of room for improvement. We need to be able to clarify the sustainability implications of each decision in order to make the right decisions. I hope we manage to embed that within the entire organization. That would be a nice legacy.’

This article was published in Management Scope 06 2022.