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ESG Views - Alcohol
Alcohol has been consumed for thousands of years, and is historically as well as presently commonly associated and an important part of entertainment and social gatherings. However, harmful drinking can have negative health and social impacts. Governments and regulators have implemented stricter policies and taxes to monitor alcohol-related societal harm, imposing some downside risks for alcohol producers, but also opportunities to respond to the trend of premiumization, where quality is valued over quantity. By focusing on premium products, alcohol producers can improve their profitability while also introducing alternatives such as no or low alcohol products to contribute to reducing the harm of alcohol.
This article explores the topic of alcohol, discussing its negative health consequences and examining the tax and policy measures that have been implemented on alcohol producers as a result. We also examine how the alcohol industry has been proactively adapting to address its inherent concerns in the social side of ESG from the negative impacts of alcohol consumption.
Understanding the Impact of Alcohol Consumption
In general, there are four main categories of alcoholic beverages: beer, wine, spirits and other (commonly including fortified wines, rice wine, or other fermented beverages made of sorghum, millet or maize). According to the World Health Organization (WHO), global per capita alcohol consumption was estimated to be 6.4 litres at the most recent global status report.
The WHO identifies harmful alcohol use as a causal factor in more than 200 diseases and injuries, including heart, cancer, and liver diseases. It is also linked to mental and behavioural disorders, as well as injuries. Every year, harmful alcohol use results in three million deaths globally, representing 5.3% of total fatalities. In the age group of 20-39 years, approximately 13.5% of total deaths are related to alcohol (WHO, May 2022).
The WHO, along with the United Nations Development Program, has set up nine targets to achieve a 25% reduction in premature deaths from noncommunicable diseases (NCDs) by 2025, including a 10% reduction in harmful alcohol use. Reducing harmful alcohol use is crucial to achieving the United Nations' Sustainable Development Goals, including reducing premature deaths from NCDs by one-third by 2030 (WHO, May 2022).
In addition to health impacts, alcohol misuse can cause harm to others; approximately 29% of all road traffic deaths worldwide were attributable to alcohol and/or drug use (WHO, 2018). The European Commission estimated that one-quarter of all annual road fatalities in the European Union are alcohol-related (European Commission, 2019).
How Taxation and Pricing Policies Affect Alcohol Producers
Governments globally have introduced a range of policy and tax measures to reduce the harmful use of alcohol. Taxation in particular is a cost-effective tool that helps to reduce overall alcohol consumption and generates revenue that can be used to fund public health initiatives. In fact, a majority of countries (more than 90%) levies tax related to alcohol (WHO, 2018). Other policy measures include restricting the availability of alcohol through a licensing model that regulates alcohol production, distribution and sales, as well as setting (commonly 18 years) age limit for the purchase and consumption of alcohol.
In China, the government implements excise taxes on alcohol products. Excise tax reforms have been more frequent in Baijiu than in beer. The effective excise tax rate for Baijiu has increased from approximately 8% to 14% of gross revenue since 2014 whilst excise tax accounts for around 3.1% of the consumer price of a mainstream beer product as compared to 1.8% of a premium beer product (Bernstein, August 2021).
The Trend of Alcohol Premiumization and the Emergence of Alternative Products
The aforementioned global target to reduce harmful alcohol use by 10% by 2025 through increased regulation and taxation will ultimately lead to a decrease in alcohol consumption, which will negatively impact alcoholic producers. The higher costs of regulation and taxes will put pressure on the profitability of companies that are unable to pass on these costs to consumers. However, the trend towards reducing harmful alcohol use also presents opportunities for producers. As consumers become more educated about the potential dangers of excessive alcohol consumption, they are more likely to drink less alcohol but choose higher quality products, leading to what’s called the “premiumization” trend. Particularly across different consumer categories in Asia, this premiumization trend is observed with rising income. This trend opens up opportunities for producers to improve their profitability.
Albeit still relative niche in the Asia market, some brands also introduced no or low-alcohol drinks, as more consumers look for healthier and more moderate alcohol options. This trend also caters for rising demand from women and many women may generally prefer low alcohol products. These products are designed to provide the taste and experience of an alcoholic drink without the negative health and social impacts of excessive alcohol consumption. No or low-alcohol drinks also often have higher margins, in part due to the fact that they are sold for a similar price (following the same manufacturing, transportation and marketing process as the company’s other alcoholic products) but pay no excise tax since there is no/lower alcohol content.
How Responsible Drinking Campaigns Are Changing the Alcohol Industry
In recent years, many alcohol producers have launched responsible drinking campaigns aimed at promoting moderate and responsible consumption of alcohol. These campaigns often include education and awareness programs, as well as marketing and advertising campaigns that emphasize the importance of drinking in moderation and avoiding excessive alcohol consumption.
For example, China Resources Beer prints warnings on their packages, such as "excessive drinking is harmful to health" and "pregnant women and children should not drink alcohol". They also restrict minors from browsing their official website. In 2021, the company participated in the 2021 National Responsible Drinking Publicity Week, which has been held simultaneously in 550 cities above the county level in addition to the 5 main venues in Beijing, Shanghai, Shenzhen, Baoji and Chengde, which raise awareness society-wide on the issue of “drinking rationally and rejecting drinking and driving” (China Resources Beer, May 2022).
Alcohol companies are at times referred to as “sin stocks” and are sometimes excluded by investors with ESG investing objectives due to the inherent and undebatable negative social impacts of harmful drinking. Since the 1980s, governments and regulators around the world have implemented policies and taxes to monitor and reduce alcohol-related harm. While these measures may pose some downside risks for alcohol producers, they also present opportunities to respond to the trend of premiumization and the emergence of alternative products, such as no or low-alcohol drinks. We hold the belief that companies that exhibit a sense of responsibility towards society by diversifying their alcohol product range, and implementing effective responsible drinking campaigns are likely to reap long-term benefits.
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