Synlait's environmental ethos starts on the farm, writes Andrea Fox.
When professional New Zealand golfer Michael Campbell spoke of his deep spiritual feelings for the land it was "like a spear through the chest" for his high-flying international marketer mate and fellow Kiwi Hamish Reid, these days Synlait Milk's environmental guardian.
"I decided I wanted to spend the rest of my life working on environmental sustainability, and to return home," recalls Reid, who was at the time working in Europe with former Springbok captain Bobby Skinstad at Saatchi and Saatchi, building social and commercial pathways for the world's elite sportspeople.
Campbell, who'd just won the US Open, was an early client and keen to "do some good in the world", sharing his deep feelings for Aotearoa with Reid.
Back in New Zealand the pair in 2008 founded the award-winning charity Litefoot, which works with sports heroes to help sports clubs reduce their environmental impact.
Reid's marketing career at Pepsi, French food giant Danone and Saatchi might sound an unlikely backdrop for his role these days at listed paediatric nutrition maker Synlait, but the business world works in mysterious ways.
Litefoot had Reid's heart, but to pay the bills he did sustainability strategy consulting for corporates.
"I got a call from John Penno (Synlait managing director) saying he'd heard I did a weird combination of sustainability thinking and brand thinking, and could we have a chat?
"I was a bit down on the whole corporate sustainability work at the time. I was doing what I thought was pretty good work but none of it was really getting much traction because we weren't getting the messages to CEO level.
"So I sort of pushed John away. But he convinced me to meet for a coffee and it ended up being a two hour discussion. He just blew me away with his passion," says Reid, who was persuaded by Penno to consult to Synlait for six months before joining the permanent staff as director of sustainability and brand early this year.
"I'd follow the guy off a cliff — he's so aspirational."
Fold Reid's marketing smarts, huge positivity and environmental ethos into Cantabrian Penno's dairying science and environmental research background and you have the foundations of Synlait Milk's recent announcement of a bold sustainability commitment programme that has people talking.
Synlait marked its 10th year in business with a long list of commitments for the next decade, headed by a pledge to reduce greenhouse gas emissions by 35 per cent per kilogram of milksolids on-farm and 50 per cent off-farm by 2028.
Other highlights of the programme include reduction of water consumption on and off-farm by 20 per cent/kgMS and a 45 per cent/kgMS reduction in on-farm nitrogen loss by 2028.
Also announced was an increase in premium payments to milk suppliers for best practice farming under Synlait's Lead with Pride programme, including an incentive payment for not feeding any palm kernel extract.
Synlait promised never to build another coal-fired boiler and announced the installation of New Zealand's first large-scale electrode boiler at its advanced dairy liquids plant under construction at Dunsandel in the South Island.
Other initiatives included becoming part of the global movement of Certified B corporations and establishing a social investment fund to boost support for communities, organisations and projects aligned to Synlait's sustainability goals.
Penno, who steps down as managing director and chief executive on August 10 but will remain on Synlait's board of directors, says the company isn't asking each of its 200 Canterbury suppliers to improve their greenhouse gas emission performance by 35 per cent/kgMS. The ambition is across the supply base, he says.
"We are not asking our best farms to move, we are asking our other farms to move towards our best farms (performance). What we're providing is a framework to invite people into the system and provide a financial incentive to move up towards best practice."
Technology solutions will also be required to achieve the bold goals, says Penno, who will be succeeded as chief executive by former Fonterra Brands New Zealand managing director Leon Clement.
Synlait hopes to be the first to commercialise methane technology developed in the Netherlands over the past decade, which has been proven to reduce methane in that country's barn dairy industry by 60 per cent.
Synlait's new $260 million infant formula manufacturing plant at Pokeno in north Waikato will be powered by natural gas. It isn't possible to install an electrode boiler at its debut site in the dairying heartland because the area's electrical infrastructure isn't yet suitable.
The new plant will be operational for the next dairy season.
Nor is Canterbury's electrical infrastructure yet up to supporting electrode boilers at Synlait's existing Dunsandel site, where steam is generated by coal.
Synlait is trying to do the right thing here by community and consumer expectations around environmental and animal welfare, but Penno is the first to point out it's also a business.
The payback from the company's undisclosed but suggested significant investment in the new programme will be from positioning to ensure it continues to be a producer of premium dairy products which attract premium prices.
"We make good margins on products whatever they might be and we have positioned the company well to get the best returning markets and categories. The sustainability focus we've always had has been an important part of that," says Penno.
"We want to be at the premium end of the market and this is the expectation the premium end of the market has."
One blue chip customer's response came within minutes of the programme's announcement at Synlait's annual conference in June, says Reid.
"A Danone leader was there and he stood up and said on the back of these commitments Synlait is making, Danone commits to deepening our relationship with Synlait and buying more product.
"That was stunning — and that is profit from purpose. We had no idea he was going to say that," says Reid.
Penno says though the programme is necessary to capture the most valuable customers, it wasn't launched solely for this reason.
"When we put up the Lead with Pride programme the company had barely reached profitability. The company was only four years old. Here we were with our board saying we want to reward farmers and we're not quite sure how we're going to make money out of it, but we're sure it will."
Penno says the future is unpredictable around environmental sustainability and what governments may require of industry.
"The government is simply the voice-piece of the community, the government is only asking for things because the community's asking for them.
"There's not a choice of whether we respond to these things or not. There is significant risk in being left behind."
Penno, who has a PhD in animal science and co-founded Synlait Milk as a single Canterbury dairy farm, says he was researching the impact of dairying intensification on land and water while in his early 20s.
"In Synlait's early days when we doing a lot of property development and conversions to dairy I certainly fully understood the impact we were having on the environment. We were already concerned about it."
During the lead-up to Synlait's formation he was a director of Dairy Insight, the precursor to DairyNZ, and started an environmental leadership group to get the government and industry leaders working together to "really think about the way we needed to change to tackle these issues head on".
"When Synlait Milk was formed the whole strategy was about how might we add a lot more value to the product we were making from our farms or that we might change the way the farms might produce that milk.
"The two concepts were always hand in hand.
"Our view was if we could find a way of adding value to the products in our supply chain… we would be able to ask our farmers to farm differently and we would be able to financially reward them for that.
"So we started the Lead with Pride programme."
In the 2017 financial year Synlait paid nearly $9 million in premiums to its suppliers.
Under the sustainability programme's substantially increased potential financial incentives to farmers, over the next five or so years annual premium payments could double, says Penno. But it depends on how many more farmers join.
The Lead with Pride scheme is being piloted on farms in the Waikato to ensure it is appropriate in Synlait's newest supply territory.
The company has 200 suppliers in Canterbury — expansion into the Waikato should take its supporters to 300.
Leading greenhouse gas scientists Drs Harry Clark and Andy Reisinger of the New Zealand Agricultural Greenhouse Gas Research Centre ran their rulers over Synlait's target numbers for emission reductions on and off farm.
Once over their surprise at Synlait's confidence, the scientists declared them do-able, says Reid.
"The very first thing to be conscious of are things going on in the world and to be curious about them," says Reid.
"I think a lot of New Zealand businesses lack that a bit, which could come from our isolation. We operate in our little bubble and we don't spend enough time being curious about the rest of the world.
"Then you assess the environmental impacts the business has — when that's quantified it's a pretty easy journey from there."
Reid's first move was to run an audit of Synlait's social and environmental impacts, the main component of which was a greenhouse gas inventory.
"At Synlait it became very obvious our big opportunities are on-farm and getting our manufacturing system off coal. If we do just those two things very well we could potentially reduce our footprint by massive volumes."
Reid says the company's not stopping at 10 year targets.
"We want to achieve those faster than has been set out and strive for more. We think we could be getting our impact down to minus 50 per cent on-farm and minus 80 per cent in manufacturing."
After nailing the big impact areas, Reid and the leadership team looked to the technology that could get Synlait at least part of the way to a zero percentage.
"Then we said: what are the bets we are willing to place on the future to get us the rest of the distance? Should we do what most corporates do which is a very detailed bottom-up analysis of where the wins might be — one per cent here, two per cent there?," Reid says.
"That's not inspirational for anyone. So being Synlait and very entrepreneurial… we made it very inspirational. When people are confronted with a big target that's what unleashes innovation."
The response to the programme announcement has been "overwhelming".
Support from customers was a given because they want such initiatives, says Penno.
And that expectation is reflected in the voting public, he says.
"Some people have interpreted it as a swing to the left. It's not. It's the next generation of voters coming through, they think about this in totally different ways to the previous generation. And these are the people with the buying power and young families. They vote and buy in the same way."
Farmers have also been positive.
"We've been pleasantly surprised how supportive farmers have been because we've been making some pretty bold promises on their behalf. We're trying to be respectful of the relationship we have with them and while trying to lead we've got to make sure we don't get too far ahead of people."
Of Synlait's 200 Canterbury farmers, 63 are certified with Lead with Pride, and 30 are close to certification. "We've had a lot getting in touch and saying they want to be part of this — more than we expected. We've made it harder because expectations are higher but the financial payments are stronger too.
"As we grow our supply base in the Waikato we want to be very clear that this is what we stand for and this is where we are going."
Penno says Waikato farmer interest in joining Synlait has been "huge" but no contracts have yet been signed. "We have a lot of conversations going on. We don't really operate on a first-in, first-served basis, we want people to understand who we are and where we're going and to be comfortable with that. We want people who see the world the way we do.
"When you're dealing with milk so much of the value is created on-farm."
So what are the risks and challenges of the programme for Synlait, which Penno says is becoming one of the most profitable companies in the $16 billion dairy export industry?
It has yet to pay a dividend, by agreement with its shareholders returning all profits to fuel its growth ambitions, so direct returns to investors aren't at risk.
Reid, the self-described "eternal optimist" only sees opportunities.
"I know we have an incredibly galvanised team of 700 staff and 200 suppliers absolutely committee to hitting these targets. That gives us huge insulation from challenges because people are so up for it," he says.
Penno, noting the company is investing $125 million building a long-life liquid milk plant at Dunsandel in pursuit of a "very big future for liquid infant formula in China", says the sustainability programme is undoubtedly adding to Synlait's cost structure.
"Ultimately the risk is we spend money on it and it doesn't come through, and we are unable to deliver the premiums for whatever reason. It's one of those upfront things. You don't get to unwind the clock.
"It is adding to our cost structure in some way — it's not a lost-cost model we're operating. It's a premium product strategy.
"But we see far more that it de-risks the company. We know enough of the direction of travel on these issues that we've got to be in front of it, not behind.
"But the things we've put out there we've done with our eyes open."
"The risks of falling behind are huge."
Will this grunty sustainability initiative help head off the challenge of plant protein?
Penno says Synlait's market research shows much of the public interest in alternative plant protein is generated by sustainability and animal welfare concerns.
"That said, that's not why we are doing this. We are doing it because we want to position ourselves at the premium end of the market when it comes to milk product. And we genuinely think it will be a long time before plant-based product can replicate the sort of quality we can build into a milk-based product.
"But we have to take note of what consumers are saying when it comes to production systems. I guess it's the signal behind the debate we are listening to."
Business: paediatric and consumer-ready nutrition ingredients exporter
Listed: NZX and ASX NPAT HY(1) 18 $40.7m; HY(1) 17 $10.6m
Annual compounding growth rate by volume: 27 per cent. By revenue: 38 per cent
Manufacturer for A2 Milk in NZ, Australia, China
Total sales of finished infant formula HY(1) 18: up 165 per cent on HY(1)17 at 16,800 MT
Farmer suppliers: 200 Canterbury
100 pending for new Waikato plant 2019-2020 season