Nestlé's ESG Struggles: Can the Giant Overcome Controversies and Operational Risks?

Nestlé, the world's largest food and beverage company, has long been a symbol of stability and reliability. Yet beneath its iconic packaging lies a complex web of environmental, social, and governance (ESG) challenges that could cloud its future. From water usage disputes to supply chain controversies, Nestlé's ESG underperformance raises critical questions about its long-term financial resilience. Let's dissect the risks and their implications for investors.

The ESG Landscape: Nestlé's Ranking Struggles

Nestlé's ESG Risk Rating from MSCI paints a clear picture: the company ranks 71 out of 547 in the Food Products sector as of June 2025, placing it toward the higher-risk end of its industry. This ranking lags far behind peers like Danone (ranked 12) and PepsiCo (ranked 18), signaling significant gaps in ESG performance. A S&P Global ESG Score of 58/100 (as of June 2025) further underscores its mediocrity. While Nestlé has made strides in managing material issues like product governance and environmental policies, its failure to align fully with climate goals and address supply chain controversies remains a liability.

Key Controversies and Operational Risks

1. Environmental Concerns:
   Nestlé faces repeated criticism for excessive water use in operations, particularly in regions facing droughts. In India, for example, its Maggi noodles plant in Gujarat has been at the center of disputes over water rights. Additionally, its land-use practices and biodiversity impacts—such as deforestation linked to palm oil sourcing—have drawn scrutiny.

2. Supply Chain Ethics:
   Allegations of human rights violations in Nestlé's global supply chains, including child labor accusations in cocoa sourcing for chocolate products, have haunted the company. While Nestlé claims progress in traceability, the lack of transparency and recurring incidents suggest systemic weaknesses.

3. Product Safety and Quality:
   Recalls of products like infant formula due to contamination risks have dented consumer trust. These incidents not only incur financial costs but also erode brand equity, a critical asset for a company reliant on premium pricing.

Governance and Climate Goals: Half-Measures?

Nestlé's governance framework has come under fire for its delayed response to ESG issues. While the company has pledged to achieve net-zero emissions by 2050—aligned with the Paris Agreement—it has only partially met targets for Gender Equality and Clean Water and Sanitation (SDGs 5 and 6). Its climate strategy lacks the urgency of peers like Unilever, which has set stricter intermediate goals. A MSCI Implied Temperature Rise (ITR) score exceeding 3°C above preindustrial levels (compared to the 1.5–2°C target) highlights its inadequate decarbonization roadmap.

Financial Implications: Risks and Rewards

The ESG missteps carry tangible financial consequences:
- Regulatory and Legal Risks: Stricter environmental regulations in markets like the EU and India could force costly operational overhauls.
- Consumer Backlash: Younger, sustainability-conscious buyers may shift to competitors with stronger ESG profiles.
- Investor Sentiment: Asset managers prioritizing ESG may divest, pressuring Nestlé's valuation.

Historically, Nestlé's stock has underperformed peers like Danone and PepsiCo, which have outpaced it in both ESG ratings and revenue growth. However, its scale and diversified portfolio remain strengths. A turnaround in ESG performance could unlock value, but the path is fraught with execution risks.

Investment Considerations

1. Short-Term Caution:
   Investors should weigh the risks of regulatory fines, brand erosion, and activist campaigns. Nestlé's current ESG underperformance suggests a hold or underweight rating unless progress materializes.

2. Long-Term Opportunities:
   A sincere pivot toward stricter supply chain audits, aggressive decarbonization targets, and transparency could reposition Nestlé as an ESG leader. Success here might justify a buy rating, especially if its valuation becomes undervalued relative to peers.

3. ESG-Driven Alternatives:
   For investors seeking exposure to the food sector without Nestlé's risks, Danone or PepsiCo—both with stronger ESG profiles—offer better risk-adjusted returns.

Conclusion

Nestlé's ESG challenges are not insurmountable, but they demand urgent action. The company must move beyond incremental improvements to address systemic issues in its supply chains and climate strategy. For now, its financial health remains at odds with its ESG shortcomings. Investors seeking stability may want to tread carefully, while those with a long-term horizon might view Nestlé as a turnaround opportunity—if management commits to meaningful change.

In a world where ESG is no longer optional but essential, Nestlé's next move could define its legacy for decades to come.