Calvert News & Commentary

McDonald’s Corp (MCD) Meets Calvert Signature® Criteria and Added to Calvert Social Index®

McDonald’s now meets Calvert’s environmental, social and governance criteria as a result of progress in labor and human rights and a substantive dialogue with Calvert.

2/1/2013

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Calvert Investments (“Calvert”) recently determined that McDonald’s Corp (“McDonald’s”) now meets all criteria for investment in the Calvert Funds that apply the Calvert Signature Strategies®. This decision was made after careful research and analysis, as well as over nine meetings with the company in the past six years across a range of corporate responsibility and sustainability issues. Calvert has been encouraged by the company’s progress in the area of workplace practices, particularly in the company’s supply chain, and on obesity and nutrition— even as the company continues to face serious challenges in these areas. Calvert is also encouraged by the company’s evolution of its approach to environmental issues. Calvert and McDonald’s are mutually committed to continue our dialogue on each of these issues.

As one of the largest companies on earth – with 1.7 million employees at corporate and franchised locations, serving 64 million customers daily – McDonald’s presents immense sustainability challenges and opportunities.

Labor and Human Rights

McDonald’s core business strategy is built on the franchising model, with about 80% of its restaurants operated by independent franchisees. As a result, the company sets the tone with corporate-owned restaurant policies and practices, but has limited influence over how franchisees run their businesses. The industry has one of the highest turnover rates, making union organizing among fast food workers extremely difficult, even as these workers typically work for low wages and limited benefits, and increasingly rely on public assistance. In the US, all major restaurant chains except Starbucks lack policies to protect freedom of association that would make it easier to unionize. McDonald’s Code of Conduct is stronger than other competitors, in that McDonald’s has statements supporting the fundamental human rights of all people and the rights of its employees to associate or not associate with any group. For Calvert, this language is a first step in the right direction, but falls short of specific language adopted by the International Labor Organization (ILO) to protect employees that wish to unionize. To its credit, the company’s Code of Conduct does include standards for child, forced labor and non-discrimination, as well as strong whistleblower protection. Calvert will nonetheless continue to ask the company to strengthen its employee Code of Conduct to include full endorsement of freedom of association and the right to collective bargaining, or to sign the UN Global Compact, which would require the company to adopt these standards.

While the company’s performance on labor issues is hardly ideal, it is typical of a company its size. In addition, McDonald’s invited Calvert to provide input to an overhaul of its Supplier Code of Conduct. Calvert is pleased with the new Code, which now includes standards regarding human rights and human trafficking, freedom of association, and explicit support for the United Nation’s Universal Declaration of Human rights. The Code also includes stronger whistleblower protection, grievance and violation reporting procedures. As Bennett Freeman, Calvert’s Senior Vice President for Sustainability Research and Policy stated, “We’ve been encouraged by McDonald’s important new commitments on workers’ rights, particularly freedom of association and right to collective bargaining across its global supply chain, and we look to the company to recognize more explicitly those same rights in its own operations.”

Calvert remains concerned about working conditions and wages for fast food workers generally, and for employees of McDonald’s owned and franchised restaurants. We recognize that McDonald’s is obligated to pay only the minimum wage in each jurisdiction.1 Yet as investors, we believe that paying workers a living wage can increase productivity and yield a positive impact. A recent study in the Harvard Business Review found that companies like Trader Joe’s and Costco that pay wages above the minimum and offer opportunities for advancement have lower prices, better customer service and good financial performance relative to industry peers. 2 We believe that minimum wage increases are a first important policy step to helping low wage workers. Although we do not have a clear picture as to the degree to which franchisees may lobby against minimum wage increases, we have asked McDonald’s to discourage its franchisees from doing so.

Any franchising model poses challenges to maintaining uniform labor standards across a company’s brand. Yet McDonald’s has made an effort to train and support franchisees, and has been recognized for creating business opportunities for women and minorities. In an update to Calvert’s report, Examining the Cracks in the Glass Ceiling: A Survey of Corporate Diversity Practices of the S&P 100, due out in early 2013, McDonald’s ranks well above competitors in the cyclical consumer goods sector.

Obesity and Nutrition

Every day the company serves 25 million customers in the U.S. alone. As such, McDonald’s has enormous brand value and public health risk and opportunity. Given that Americans and other McDonald’s consumers eat outside of the home far more regularly than in the past, restaurants like McDonald’s have been blamed for the rise of obesity. McDonald’s has faced harsh criticism from NGO watchdogs like the Center for Science in the Public Interest (CSPI), which has charged the company with window dressing poor food choices and using toys to sell junk food. Others have accused McDonald’s of employing stealth marketing, such as marketing to children through video games. Nonetheless CSPI has applauded the company for being the first major chain to put nutritional information on its menu boards, for its healthful fruit and walnut salads and other new menu items, and for ending its offer to “supersize” fries and soft drinks. The company’s ability to modify its menu is limited by consumer choice and supply constraints. For example, when McDonald’s offered apple slices or French fries in its Happy Meals, only 11% of parents opted to purchase the apples. So the company made apples the default option. As a result, McDonald’s became the largest purchaser of apples in the U.S.

McDonald’s has been steadily improving the nutritional disclosure and content of its products. The company provides nutritional information to customers on the ordering board (in the US), and on trayliners, brochures, websites, and mobile devices. The company has reformulated its offerings to reduce sodium, sugar, and saturated fats, and has reduced some portion sizes. Even so, it must compete with a host of other restaurants that are not reformulating. A 2012 study of over 30,000 menu items from 250 restaurant brands found that 96% of entrees offered at US restaurants exceeded USDA recommendations for fat, sodium, and calories. 3 Although the restaurant industry has taken some initial steps to address this problem, the results show that the industry needs to refocus its efforts if it is to avoid potential regulation.

McDonald’s has signed on to various codes designed to limit marketing to children, or market only healthy options and activities. The company’s corporate policy stipulates that toys and characters will be used to promote balanced food choices and exercise, for example. The company also engages experts on nutrition and obesity; McDonald’s Global Advisory Council on nutrition and children’s well-being includes professors of nutritional science and research.

Calvert’s Senior Sustainability Analyst for the food and beverage industries, Ellen Kennedy, remarked, “I have encouraged the company to report regularly on the amount of healthy options taken at its restaurants, and to continue setting ambitious goals for offering healthy, delicious food. The company can’t get too far ahead of its consumers when offering healthier products, or it may lose market share to laggard competitors, or fail to attract franchisees. On the other hand, McDonald’s size affords it an opportunity to help make a positive shift in the way children and teens grow up thinking about food and nutrition.”

Environment

McDonald’s has taken a leadership role within the industry on environmental issues. The company has an enormous environmental footprint, particularly from water and energy use, carbon emissions, and land use/deforestation within its supply chain. It has committed to sustainable land management within its supply chain , working with the World Wildlife Fund to identify top commodities — including beef, palm oil, soy, coffee and packaging— that can contribute to deforestation and transition to certified sources where available. Certifications typically include Rainforest Alliance, Roundtable for Responsible Palm Oil, and others. Where there is no established certification program, as is the case for beef, the company is working with stakeholders and non-profit groups to develop certification schemes. In January 2013, the company announced that all fish that it serves in the US will be labeled and certified as sustainable by the Marine Stewardship Council (MSC), as is already standard practice in European locations. Calvert would like the company to develop a time frame for the goal of 100% sustainably sourced key commodities, even as we recognize this is an ambitious goal. Calvert has also asked the company to expand markets that offer vegetarian entrees, although we understand that past experiments in some markets have failed due to lack of customer demand.

The company also addresses sustainability at the restaurant level. Many locations recycle used cooking oil and corrugated boxes, representing over a third of solid waste at a typical location. In Europe, about 80% of used cooking oil is made into biodiesel, some of which is used as fuel for transporting supplies. McDonald’s also addresses energy and other issues as its store locations.

Animal Welfare

McDonald’s has good animal welfare policies and disclosure for a fast food company of its size. It was the first fast food company to address animal welfare in a serious manner, working with renowned animal welfare scientist Temple Grandin in the 1990s to develop more humane slaughter and audit methods for cattle. The company has been slower to act on animal welfare on-farm. However, in 2011 the company committed to source 12 million cage free eggs in the US, and has committed to phase out the use of gestation crates for sows by 2022. The company’s Global Animal Health and Welfare Team (which continues to include Dr. Grandin) is standardizing metrics of beef and dairy cows and working to assure humane poultry slaughter. As an investor, Calvert believes that strong animal welfare policies and practices are not just the right thing to do, but translate to better employee satisfaction in the supply chain and enhanced food safety.

The Challenge to McDonald’s – Continuing Improvement

Calvert is encouraged by the continuing improvement of McDonald’s sustainability framework as reflected in the newly released Supplier Code of Conduct, as well as by the growing sophistication of its stakeholder engagement. We will continue to monitor its progress and press for constructive change on all of the material issues discussed above, as we have done to date through our involvement in a McDonald’s stakeholder team facilitated by Ceres and Business for Social Responsibility (BSR). We believe that McDonald’s is poised to respond even more positively to the significant corporate responsibility and sustainability challenges it faces around the world.

Calvert Investments, 4550 Montgomery Avenue, Bethesda, MD 20814.

As of 1/31/2013, accounts managed by Calvert Investments held securities issued by McDonald’s Corp (MCD). Calvert may or may not still invest in, and is not recommending any action on, McDonald’s.

1. The current minimum wage floor in the US is $7.25 per hour.

2.Zeynep Ton, “Good Jobs Good for Retailers,” Harvard Business Review, January – February 2012.

3. Helen W. Wu and Roland Sturm, “What's on the menu? A review of the energy and nutritional content of US chain restaurant menus,” Public Health Nutrition, March 11, 2012, as cited by Robert Wood Johnson Foundation.



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