Ukrainian agribusiness shows sustainability can win—even in a war

Kernel, a Ukrainian agriculture firm and one of the world’s largest sunflower oil producers, shows how even during a terrible war, contextualizing and aligning all the elements comprising sustainability puts the best outcomes for people, the planet, and the business all within reach.

Kernel’s example should serve as a stark reminder to leaders in all industries that flinching on sustainability at the first sign of inconvenience is not acceptable either morally or from a business standpoint—even if the current global context is a harsh one filled with competing demands across war and security, geopolitics and supply chains, inflation and cost pressures, and digital transformation and cybersecurity.

As the producer of one-third of global anthropogenic emissions, agriculture holds an immense opportunity and responsibility for addressing the climate crisis and the entire sustainability context, described in Exhibit 1 and our separate outline. Food, farming, and all agriculture integrate with every person, supply chain, and system. Agriculture firms must be clear on their internal sustainability, how they adapt their strategies and help their customers, and how they can influence the systems-level change sustainability demands, that we outline and discuss in Exhibit 3. The opportunities and responsibilities span all 17 UN Goals and all environmental, social, and governance (ESG) factors.

Kernel’s corporate climate governance (CCG) story shows what it looks like to embed sustainability throughout an organization, and what senior leadership teams in any industry must act on. Marta Trofimova, Sustainability Manager at Kernel, helped us understand Kernel’s approach, including its disclosure reporting, work with EY, and impacts on lives and systems.

Exhibit 1: Breaking down the global sustainability context through systems and organizations; agriculture is intertwined throughout that context

Source: HFS Research, 2022

Addressing sustainability means weaving it throughout the company’s strategy and operations

Kernel’s 2022 annual report included a sustainability report aligning with TCFD standards (the Taskforce for Climate-Related Financial Disclosure). The report quickly and concretely outlines Kernel’s climate governance approach, including the board of directors formally adopting the sustainability committee’s process to develop climate-related KPIs (beyond the qualitative ones already in place).

The disconnect between top-level strategy and functions throughout organizations was the cornerstone of our presentation to COP26, the 2021 UN climate summit, and judging from our data, little has changed since. Metrics, targets, accountability, and incentives must start from the CEO and board, and cascade throughout the supply chain, finance, and all business operations. Kernel is making good progress.

Crucially, the CEO and CFO are directly involved in our efforts to embed sustainability throughout the company. Management KPIs, even if only qualitative to begin with, are a first step in measuring and addressing all elements of sustainability in our value chain—that can then cascade from managers throughout the company.

– Marta Trofimova, Sustainability Manager, Kernel

Kernel’s report, summarized in Exhibit 2, covers all forms of the organization’s sustainability actions:

• assessing climate-related physical and transitional risks
• analyzing business opportunities associated with low-carbon development
• evaluating Scope 1, 2, and 3 (direct, indirect, and value chain) emissions across its 15 business categories in line with the Greenhouse Gas (GHG) Protocol
• disclosing information on its sustainable economic activities in line with the EU Green Taxonomy guidelines, which Kernel did for the first time in 2022

When the environment in Ukraine allows the company to return to its growth-oriented strategy, Kernel plans to set SBTi-aligned decarbonization targets (the Science Based Targets Initiative) and integrate them with its modeling and data. Kernel has set an internal carbon pricing system using scenario analysis of climate transitional risks. It has improved its CDP (formerly the Carbon Disclosure Project) rating from D to B, and it hopes to soon make the A-list, underpinned by the CDP’s increasing focus on detailed road-mapping and results rather than goals and ambition alone.

EY and Kernel’s work focuses on sustainability for people, the planet, and the business

The EY Sustainable Value Study found 69% of companies report revenue increases from strong climate actions and benefits to employee retention and brand perception. Numerous studies and examples have emerged of firms being rewarded for their sustainability efforts (as well as the desperate climate crisis and moral reasons for businesses to act—as we outline here) including in the food and beverage sector, closely related to agriculture (see our past report outlining several such examples) and we recommend the book Net Positive and the work of Imagine, a group built on collaboration for systemic change, for more depth.

By keeping a balance between meeting demand in food markets, using sustainable supply chains, and diversifying energy sources, Kernel directly strengthens the level of food and energy security in Ukraine, Eastern Europe, and the world.

– Larysa Marchenko, EY Partner, Strategy and Transactions

EY supported Kernel as a corporate advisor with assessments of the industry context for climate change-related risks and opportunities, the integration of the shared socioeconomic pathways (SSPs) related to carbon regulation scenarios and business planning, and structuring the strategic opportunities related to the following areas:

• soil organic carbon (SOC) sequestration techniques and implementation
• decarbonization of agribusiness operations and improving climate resilience
• optimizing the footprint of infrastructure and logistics assets
• producing renewable energy and biofuels from Kernel’s agriculture and oilseed crushing residuals

Ukrainian energy and commodity markets are already effectively integrated with international platforms. Therefore, the creation of additional Ukrainian business value from decarbonization and supplying products with a low carbon footprint is a completely logical continuation of European integration initiatives. Kernel is a regional leader in sustainable agribusiness and is building the appropriate business case and supporting climate agricultural practices. Kernel’s initiatives are even more relevant in view of the challenges that Ukraine and the world economy will face in 2023.

– Kostiantyn Taranets, EY Ukraine Senior Manager, Climate Change and Sustainability Services

Kernel’s main takeaways, much like its sustainability strategy, cover broad swathes of the global context

Drawing on the Kernel’s experiences with EY, Marta summarized some key takeaways applicable for any organization:

• Greenhouse gas (GHG) emissions accounting: Before talking about decarbonization, organizations must put in place processes and systems to calculate carbon footprints. Market players should standardize approaches to accounting for the GHG emissions associated with farming operations like tillage and fertilizer application, as well as the approaches to verifying the carbon footprints of agricultural commodities. Applying the Intergovernmental Panel on Climate Change (IPCC) methodology can be a starting point.
• Do get better data, but don’t get paralyzed by perfection: Companies should also endeavor to reduce data uncertainties (for example, during lab analysis of soil organic matter or using satellite images and climate data). The goal should be to integrate GHG-emissions accounting with company-wide management and financial analytics. However, given the
  quality of the UN Goals and roadmaps which underpin them, firms can start moving now; in many cases, rough calculations can tell your organization where to immediately focus time and energy.
• Emissions reduction, sequestration, and offsetting: Organizations need to define quantifiable decarbonization measures in farming that will be accepted and agreed upon by key market players, academia, policymakers, and service providers.
• The role of agriculture in delivering climate goals: There should be more commodity-oriented dialog at the policy and decision-making level involving all major players in the ecosystem, including large agriculture firms like Kernel.
• Sustainable finance: Financial institutions and services firms need to deliver concrete criteria on green finance in agriculture. See our separate report on the critical “confidence” role of financial and all services firms on sustainability.

Exhibit 2: Kernel weaves all sustainability factors across the UN Goals and ESG throughout the company and ecosystem

Source: Kernel annual report, 2022

Kernel emphasizes the business opportunities from climate-resilient practice throughout its value chain

Kernel’s combined heat and power (CHP) units produce energy from sunflower seed husks—a side product from the oilseed crushing process—creating new efficiencies and a more circular value chain. We separately outline a chemicals company’s efforts with EY to build and implement a circularity measurement process aligned with the company’s strategy and global context.

Long-term collaboration with key partners improves Kernel’s sustainability and the sustainability of its customers and ecosystem. In addressing its Scope 3 value chain emissions, Kernel aims to exert systems-level influence through its purchasing of goods and services. Kernel maintains a dialog with trading partners like John Deere and Yara, suppliers of its agriculture equipment and fertilizer, to explore the joint decarbonizing of the industry value chain and developing low-carbon fuels and fertilizer, sustainable machinery, and more.

A focal point of Kernel’s human capital and social sustainability work is ensuring sustainable wages and benefits, such as healthcare and general support, for employees during wartime—including support returning to work, cover for disability, training, and career advancement, upskilling including sustainability, and adapting to wartime health and safety (mental and physical). Anti-corruption and compliance processes form part of Kernel’s governance measures, as does supporting local communities and society as
a whole.

Exhibit 3: Organizations have three key spheres of influence over sustainability

Source: HFS Research, 2022

Kernel is addressing sustainability with customers and supply chains, and it is leveraging its position in the ecosystem

Moving from internal sustainability to cover all three spheres of influence in Exhibit 3, a starting example is Kernel’s sharing of expertise with farmers. In 2018 Kernel launched the Open Agribusiness project to help farmers in Ukraine sustainably increase yields and improve technological and business approaches to reducing cost and emissions, maximizing income, and building resilience to risks and volatilities. Open Agribusiness now has more than 50 partners covering 168,000 hectares. Kernel seeks to disseminate its low-carbon farming practices to local farmers and all partners to help align them with SBTi decarbonization pathways. Efforts will include training farmers on the possibilities of voluntary carbon offsets markets, which might create new revenue opportunities for all.

Kernel is identifying and supporting the most material roles of its stakeholders in addressing the global sustainability context (see Exhibit 4), like helping suppliers decarbonize, which also reduces Kernel’s Scope 3 impact. Supplier assessments and traceability are top of the agenda, as are collaborations with the biggest and most influential firms, such as John Deere.

Kernel participates in business associations, namely the European Business Association and American Chamber of Commerce in Ukraine, where it contributes to developing common business positions on matters ranging from the energy transition, food-energy balance, developing bioenergy and biofuels in the REPowerEU initiative, and government communication.

Exhibit 4: Kernel has mapped its influence over sustainability throughout its ecosystem

Source: Kernel annual report, 2022

The Bottom Line: Kernel has integrated all the elements of sustainability throughout its organization and ecosystem during wartime. There’s no excuse for the agriculture sector—or any industry—to lose sight of the opportunities and responsibility of sustainability that link across the global context.

Too often, the slightest inconvenience or new source of pressure causes sustainability to fall down the priority lists of senior leadership. But that’s not on purpose. Rather, it screams that sustainability mostly still exists in a silo away from the core strategy and operations of most organizations. To rectify this, Kernel provides an example that even under unimaginable pressure, the vast array of sustainability can be embedded—and be an environmental, social, and financial win.

Kernel’s industry peers, and leaders everywhere, must move quickly to align themselves and their strategies to the global context—and focus on their biggest impacts and potential positives in their internal, customer-facing, and ecosystem-leading spheres of sustainability influence.