Responsible Investing: Feeding the growth of sustainable farming

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To meet the rising demand for meat globally, factory farming has become the norm in the past few decades. But the practice often comes with huge environmental risks and most of the world’s biggest listed suppliers of meat and fish do not actually have sufficient internal processes to address these issues, according to the UK-based Coller Farm Animal Investment Risk and Return (FAIRR) Initiative.

Deforestation, greenhouse gas emissions and food contamination are among the consequences that could result from a lack of action to address these risks. This will have a material impact on the financial performance of these companies in the long term, says FAIRR Initiative director Maria Lettini.

“Companies, investors and people in general should care about this topic. We think the intensive livestock production chain is really at the core of all the issues associated with the risks in the food system. It is not only the biggest consumer of the grain or soy we produce today to feed animals but it also provides meat across the entire chain of retailers. The environmental and social risks that come with it are so huge that I think it is time for the investor community to take note of it,” she says.

The FAIRR Initiative was established in 2015 by Jeremy Coller, who is founder and chief investment officer of Coller Capital. The firm invests in the secondary private equity market, which provides liquidity to private equity investors.

FAIRR was launched as a collaborative network that includes large investors such as Aviva Investors and Schroders. It aims to raise awareness of the material impact of factory farming and poor animal welfare on investment portfolios. In addition to promoting investor engagement with livestock companies, it recently released the Coller FAIRR Protein Producer Index to assess the sustainability performance of 60 of the world’s biggest listed companies in the sector.

One of the reasons Coller established the index was to provide investors with information on the poorly scrutinised animal and fish production sector. According to the latest FAIRR index, fewer than 25% of the companies on the index are represented in the Carbon Disclosure Project (CDP) risk database or invited to participate in the Dow Jones Corporate Sustainability Assessment.

“Jeremy always had personal philanthropic interest in animals and has been working through his foundation to improve animal welfare, particularly on funding initiatives that work on antibiotic resistance. Then he became more familiar with the responsible investment trend. We thought that the investor community really needed information on the environmental, social and governance (ESG) risks associated with factory farming,” says Lettini.

The report found that 60% of the companies on the index — 36 companies worth US$152 billion — were either not managing critical risks or had failed to disclose basic information. This includes major suppliers to McDonald’s and KFC such as Chinese firm Fujian Sunner and Indian firm Venky’s.

The one Malaysian company on the index was QL Resources Bhd, which was assessed as high risk and scored 19 out of 100 points on the index. QL is one of Asia’s largest egg producers and surimi manufacturers.


Impact of poorly addressed risks

The most poorly addressed risk is antibiotics mismanagement, with 46 companies having no policies or processes in place to eliminate routine use of antibiotics in the livestock industry. The overuse of antibiotics has been linked to antibiotics resistance in humans, with the World Health Organisation identifying it as one of the biggest threats to global health and food security. Consequently, a growing number of infections are becoming harder to treat.

“There is a real lack of information on how our meat is produced and put into the food system. I know that the majority of people are not aware that the majority of the antibiotics produced in the world today go to animals in factory farms. It is a growing number in China and Asia, and over 80% of the antibiotics produced in the US goes to factory farms. We need to tackle the fact that we are using antibiotics to prop up a system that supports keeping animals in really closed, confined systems that would be ill if they were not medicated,” says Lettini.

The close confinement of animals in factory farming is also linked to other impacts. This includes food safety issues due to the spread of diseases such as bird or swine flu. It is also related to deforestation because of the high demand for feedstock. The worst performing indicator in the index was in deforestation and biodiversity, with 84% of the terrestrial protein companies not having a zero-deforestation policy or target. In addition, reporting on greenhouse gas (GHG) emissions was also inadequate.

“Up to 70% of the companies show no or poor reporting on GHG. Of the companies in Asia, 97% are ranked high risk in terms of reporting emissions. When you look at China, the consumer income is growing and they want more meat. That needs some intervention because 80% of Brazil’s soy goes to China to feed the animals and factory farming is the number one cause of deforestation in the Amazon,” says Lettini.

The index also scores the companies on risk factors such as animal welfare, food safety, working conditions and water scarcity. If the companies do not address these risks, their operations and reputation may be affected.

“You have seen companies in water-scarce areas having to change their operational practices to make sure they have enough water. There are also environmental fines, where the cost becomes a serious component. We are seeing companies in the US that want to open new plants having to reconsider locations because of the community response. So, it becomes a licence-to-operate issue,” says Lettini.

“On the other hand, if you are not safeguarding your flocks, there may be issues such as bird or swine flu. If you are not taking a long-term approach to combat those diseases, it will be a recurring problem. If you are not ahead of that market trend, it means you will take a hit.”

The aquaculture industry and European companies on the index generally have performed well. The top-scoring company is Marine Harvest, which is the world’s largest salmon farmer. Among terrestrial protein companies, which derive meat from land-based livestock, New Zealand dairy producer Fonterra was the highest ranked.

Investors should play their part and support companies that are actively addressing ESG risks or exploring more sustainable alternatives, says Lettini. For instance, alternative proteins are gaining popularity in the industry, with huge retailers selling plant-based meat and farms seeking alternative animal feeds such as insects and algae. This segment is expected to reach US$5.2 billion by 2020, according to the report.

“Globally, we are seeing an increase in the consumption of plant-based foods. Last year, we saw plant-based food sales increase 8% and plant-based milk grow to almost 10% of the dairy market. You are seeing a shift in understanding the negative effects of meat. You are also seeing more products available in the market,” says Lettini.

For instance, US meat producer Tyson Foods launched a venture capital fund in 2016 to invest in plant-based meat and other food technologies.

Lettini hopes that the future iterations of the report will take into consideration policy implementation as well. Currently, the index does not score on performance. But the presence of policies does not guarantee risk reduction. For instance, Brazilian company JBS committed to not purchasing cattle from ranches responsible for deforestation in the Amazon after 2009. But subsequent reports found that the company continued to do so.

“We are not yet scoring on performance, but we are looking to see if they have policies and processes in place. We do look if there are targets they are working towards. We hope that judging performance will be next. We also hope companies will begin to disclose more for us to have some kind of assessment of their progress,” says Lettini.