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Home , Culling, Farm, Food industry, Free range, Intensive animal farming, Intensive farming

FARMING: ASSESSING INVESTMENT RISKS

2016 report

Find out more, or join us, at: fairr.org Follow us: @FAIRRinitiative FACTORY FARMING: KILLER STATS INVESTORS CAN’T IGNORE

DOWN INVESTORS IN 52.3 reason for rapid user of MCDONALDS AND KFC O O HIT BY US$10.8BN LOSS 27.6 N 1 spread of (H5N2) N 1 OF CAP IN 2014 DUE TO 11.4 and swine (H1N1) flu in the US SAFETY SCANDAL AT A CHINESE SUPPLIER 7.9

losses due to US bird of all antibiotics in the US now used UP 88.2 [FarmEcon] [CDC] $3.3bn flu outbreak in 2015 80% in factory ALTERNATIVE FOOD TECH COMPANY 65.3 HAMPTON CREEK SET TO BE FASTEST GROWING 59.9 FOOD COMPANY IN HISTORY, BENEFITING 12.7 FROM IMPACT OF 2015 85% US BIRD FLU CRISIS 66.2

of all soya DOWN 39.4 globally is used in animal feeds, SCANDAL LEADS TO 57.1 a major cause of LARGEST RECALL [WWF] IN US HISTORY, 28.4 of global GHG AND BANKRUPTCY emissions, more FOR MEAT-PACKER 75.5 14% consumer HALLMARK/WESTLAND than the O IN 2012 24.9 N 1 of in [FAO] DOWN 11.4 sector* drought-stricken INVESTORS IN TYSON [Pacific Institute] EXPOSED AFTER 7.9 *from sector as a whole, with factory California COMPANY REVEALS farming as key component ENVIRONMENTAL 88.2 VIOLATIONS. rise in 'heat stress' days set to hit and rising hit on profits of California POSSIBLE $500M OF 59.9 [UC Davis] 21% industry due to warming $250m due to drought in 2015 REGULAR CONTRACTS AT RISK 12.7

fairr.org fairr.org | 1 KEY FINDINGS FOREWORD AND IMPLICATIONS FOR INVESTORS

Animal factory farming is exposed to at least 28 environmental, social This report explores the industrialisation of the world’s meat and production, a relatively recent Increasingly, major investors and governance (ESG) issues that could significantly damage financial trend, and assesses the potential risks that a range are paying attention to value over the short or long-term. Many of these risks are currently of environmental, social and governance (ESG) issues present to that model. Looking at the industry through an factory farming’s risk and hidden from investors. ESG lens produces alarming results that should raise a incorporating them into red flag to mainstream investors across the world. This is the first study to undertake this important analysis. their decisions All 28 issues can potentially affect the financial performance of companies across the food value chain. Including large agri-, NEW TREND CREATES A KNOWLEDGE GAP AMONG INVESTORS For example there is evidence that the 2009 H1N1 strain food retailers and . Over 70% of the world’s are now factory of swine flu, which killed over 150,000 people and wiped farmed, including an estimated 99% of US farm animals. billions off the value of many investments, Cattle can hold upwards of 100,000 cattle at originated in a US factory farm. Factory farming also A knowledge gap exists within the investment about any one time – equivalent to almost the entire cow catalysed the spread of H5N2 bird flu in the US this year, managing these risks and opportunities. Even among those population of Greece in one farm. This industrialisation estimated to have cost £3bn to the wider economy. of meat and fish production is currently set to continue investors who are integrating ESG issues into their investment at pace as prosperity in emerging economies rises. Increasingly, food companies and consumers are starting decision-making processes. to see these risks and now some major investors and asset Our research reveals the many investment risks that need managers the world over are paying attention to factory to be considered if this trend continues. Most obvious are farming’s risk and incorporating them into their decisions. The window of opportunity for investors to act is finite and shrinking. the short-term risks such as the threat of a reputational or regulatory backlash against any investee company involved But there's still a long way to go. Even many of the The magnitude of risks generated by animal factory farming is set to increase in factory farming and shown to have poor ESG (including investors publicly committed to taking ESG issues into through rising costs, the shifting gravity of production to developing animal welfare) standards. However this report also digs account as signatories of the UN-supported Principles deeper and explores, perhaps for the first time, some of of Responsible Investment overlook this issue when it countries with less robust , the impacts of and the longer-term risks that might affect value. comes to their risk . increasing social concerns over animal welfare and . It identifies 28 ESG issues which can have a negative PROTECTING LIVESTOCK, financial impact on companies connected with animal PROTECTING VALUE Investors should undertake additional research in a number of areas to factory farm-related investments. These range from food This report does not have all the answers, but it does safety scandals to environmental fines and the industry’s highlight a knowledge gap which I urge the investment support the initial exploratory findings contained in this report. If they are reliance on government subsidies, and affect companies community to address. That would not only create a to close the knowledge gap and protect long-term value creation. right through the value chain. One particularly worrying more sustainable farming industry but would also give issue is the overuse of antibiotics. Around 80% of all investors the information they need to help safeguard antibiotics produced in the US are now used on farm long-term value. animals and there is a real risk of drug resistant developing as a result of this. In addition, factory farms also Jeremy Coller provide ideal conditions for viruses to develop and spread. Founder, FAIRR Initiative

Research by Verisk Maplecroft fairr.org | 3 EXECUTIVE SUMMARY

> Ignoring ESG issues associated with animal The key risks are: factory farming leaves investors exposed to While industrial farm animal significant material risks. production has benefits, •• Environmental – These are the most quantifiable Animal factory farming has not historically received of the three (ESG) areas and include issues such as meaningful attention from the responsible investment it brings with it growing climate change, water scarcity and water . community. However, in a relatively short period of time concerns for , For the latter the example of North Carolina is cited, it has come to dominate global meat production despite which permanently banned new factory farms in wider risks over its potential impacts on areas such the environment, animal 2007 to protect water courses and prevent pollution. as public health, the environment and . welfare, and impacts on Reports indicate that if the industry was forced to The available literature studied for this report shows meet the costs of its pollution, this could equate to 3 that these risks are material for mainstream investors, rural . billions of dollars2. The chapter also cites the large especially those with significant exposure to the contribution of the livestock sector to climate change  Pew Commission on Industrial Farm agricultural and food value chains. (14.5% of all man-made GHGs) and shows how the Animal Production (US) costs of ‘heat stress’ could significantly harm cattle > Animal factory farming is a new phenomenon that in the next 30 years. has established itself as the predominant mode of the sector’s vulnerability to and regulation and livestock production. we believe that this report is the first study to reveal •• Social – The report concludes that there is a Over the past half century drivers such as population unpriced risks from the impacts of wider environmental, tremendous amount of financial value potentially growth, rising incomes and urbanisation have driven social and governance issues on animal factory farms. at risk as a result of social issues. These include a sharp increase in meat consumption and a shift health impacts from the overuse of antibiotics towards factory farming as the way to meet demand. > Animal factory farms are vulnerable to at least in factory farms, pandemic risk and reputational An estimated 70% of farmed animals are now raised 28 ESG issues that may damage their financial damage to companies due to changing consumer in this system, including 99% of US farm animals1. performance and returns. attitudes. For example, it describes how the 2015 Now many Asian countries have started to industrialise This diverse range of 28 issues are split into outbreak of bird flu in the US, thought to have their animal farming systems at pace and scale. ‘environmental’, ‘social’ and ‘governance’ risks. been catalyzed by factory farms, caused over The links between ESG issues and financial outcomes $3.3bn of economic costs. The example of Yum! > A knowledge gap exists about animal can be complex and difficult to assess, but nevertheless and McDonalds losing US$10.8bn of combined factory farming risks among investors. a hard line can often be drawn between issues such as market capitalisation after a food safety scandal This report analysed several economic, academic and droughts or food contamination and financial performance. in a Chinese supplier is also explored. NGO studies to understand whether there was financial This report has developed a framework to link ESG issues vulnerability for long-term investors due to the rise of with four key financial levers: ‘production and price’, . Most of these studies focused on ‘market access’, ‘reputation’ and ‘legal and regulatory’.

THAI CPF DOWN 15% DUE TO AVIAN FLU (2013) YUM! AND MCDONALD’S LOSE $10.8BN OF COMBINED MARKET CAP IN EXPIRED MEAT SCANDAL (2014)

4 | fairr.org fairr.org | 5 INVESTORS

ANIMAL FACTORY FARMS •• Governance: There are four broad governance > A toe in the water. issues that impact the animal factory farming This report aims to broaden the current industry, with potential changes to subsidy support understanding of risk linked to investment in from presenting the most significant animal factory farming, but it is clear that further financial risk. For example, one study argues that in-depth research and engagement between the success of the animal factory farming model investors and the industry would help close the is due largely to subsidy support, including almost knowledge gap that exists. Ideas for further research US$4bn that the US industry receives in benefits and other practical steps are offered in the last annually from subsidised grain. Shifting production chapter of this report. to developing countries also raises concerns for investors due to less robust corporate governance in these countries. Intensive farming practices raise material, health, > Some leading investors have already started 13 ENVIRONMENTAL ISSUES 11 SOCIAL ISSUES 4 GOVERNANCE ISSUES to integrate animal factory farming risks into environmental and Disease outbreaks | GHGs Excessive antibiotics | Infectious Policy changes investment processes. operational risks that Deforestation & loss diseases | Social backlash Weak oversight Historically, investors have been largely unaware of Natural hazards | Climate change Changing consumers | Poor Corporate governance investor risks in this area. However in recent years investment organisations | Water scarcity working conditions | Human Sustainability disclosure some parts of the financial community have taken cannot afford to ignore. Resource scarcity rights | Shrinking labour pool steps to improve their understanding. Some investors Poor animal welfare | Waste Community health impacts have begun to consider it in both their investment Given that they also rely High water use | Loss of rural jobs | Land rights analysis and active processes. This includes heavily on government degradation Social licence to operate development financial institutions such as the IFC and EBRD as well as several mainstream investors such as subsidies the model does CASE STUDY: A warming CASE STUDY: The dense CASE STUDY: Animal factory PGGM, BNP Paribas and Aviva Investors. In this report not look like a sustainable climate is set to make factory concentration of animals in farming is highly vulnerable we provide a list of available resources that investors farming less financially viable. factory farms may lead to major to changes in its commercial are currently using to integrate animal welfare practices one for long-term investors E.g. increasing cattle ‘heat health issues. E.g. in 2009 swine context. For example, ESG and highlight the Business Benchmark on Farm Animal and they should take action stress days’ by 21% by 2045. flu caused the MSCI US Agri & factors may threaten subsidy Welfare (BBFAW) – an independent benchmark that The US dairy industry already and Food Index to plunge 1.5%; support such as the US$4bn of ranks how the world’s leading food companies to manage the risks. loses US$897m/year from heat lost 12%. Over benefits the US industry receives are managing and reporting their farm animal  Alan Briefel, Executive Director, FAIRR stress on cattle. 150,000 people died from the virus. annually from subsidised grain. welfare practices.

TYSON FOODS’ $500M GOVERNMENT CONTRACTS AT RISK DUE TO RELEASE OF TOXIC CHEMICALS TESCO DOWN 13.7% DUE TO POOR WELFARE EXPOSEÉ (2008)

6 | fairr.org fairr.org | 7 REPORT PURPOSE AND METHODOLOGY CONTENTS

This report aims to provide investors with a better The case studies on the financial impacts of ESG issues Key findings 2 CHAPTER 4: IMPLICATIONS AND understanding of the short- and long-term financial on food sector companies and bovine heat stress were NEXT STEPS 45 Foreword from FAIRR Founder 3 impacts of ESG issues on companies directly involved developed through original research. The financial 4.1 Overview 45 in animal factory farming and indirectly linked via the analysis of company performance was undertaken value chain. The specific objectives are to: through the use of proprietary datasets and open source EXECUTIVE SUMMARY 4 4.2 Implications of the findings for investors 45 information on stock prices. Bovine heat stress was 4.3 Next steps 46 •• Identify the key ESG issues that are relevant to quantified by calculating the annual average Heat Stress CHAPTER 1: CONTEXT – PUTTING ALL animal factory farming; Days in a current (1981-2000) and future (2026-2045) OUR IN ONE BASKET 10 •• Establish empirical evidence of the short- and climate. This was achieved by adjusting Maplecroft’s APPENDIX 48 long-term financial impacts of ESG issues on proprietary Country Risk Indices – specifically Heat 1.1 Overview 10 animal factory farming; Stress (current climate) and Heat Stress (future climate) 1.2 The development and geographical •• Help investors to understand the key issues and 2015 indices – by a common measure of heat stress, the LIST OF FIGURES AND TABLES expansion of animal factory farming 11 highlight where knowledge gaps exist; temperature-humidity index (THI): Figure 1: A new phenomenon. Graph shows the rapid •• Identify activities that could be undertaken by 1.3 Limited information has created a increase in the global production of main livestock interested stakeholders in the financial community THI = T – [0.55 – (0.55 x RH/100)] x (T – 58), where T is dangerous knowledge gap for investors 12 compared to human population growth (1963–2013). to protect investors against the risk present in the dry-bulb temperature and RH is relative humidity.4, 5 Figure 2: ESG issues as drivers of financial performance animal factory farming-related investments. CHAPTER 2: 28 ESG ISSUES AND within the context of animal factory farming. THEIR IMPACTS 15 We hope investors can use this report practically as Figure 3: Future heat stress and impacts on key cattle part of their strategic decision-making and day-to- 2.1 Overview 15 producing countries day operations, or to help develop lending or 2.2 From pandemics to pollution, a wide range Figure 4: Financial impact of food safety scandal to guidelines that incorporate animal factory farming of ESG issues affect key financial levers 15 fast-food chains in 2014 criteria. The evidence and leading practice case studies can also provide support for shareholder activism, 2.3 Environmental issues and impacts 17 Figure 5: US producers see share prices plummet such as pressuring companies to establish better following swine flu outbreak, Apr 2009 2.4 Social issues and impacts 24 management systems or eliminate risky practices. Figure 6: Major Asian firms see share price 2.5 Governance issues and impacts 32 declines during outbreak, 2013 Methodology and structure Table 1: ESG issues that may have an adverse impact This ESG analytics and research in this report were CHAPTER 3: INTEGRATING ANIMAL on financial performance and returns from animal produced by Verisk Maplecroft with the aim of identifying FACTORY FARMING RISKS INTO factory farming current and emerging ESG risks that are relevant to INVESTMENT PROCESSES 35 animal factory farming. This review drew on a wide Table 2: Key environmental issues number of sources including academic journals, industry 3.1 Overview 35 and government publications, company documentation, Table 3: Key social issues 3.2 Investing in food and agriculture 35 NGO reports and studies and media reports. Table 4: Key governance issues 3.3 Integrating animal factory farming risks into investment processes 36 Table 5: Integrating ESG issues into equity research

3.4 Integrating farm animal welfare opportunities into investment decisions 42

8 | fairr.org fairr.org | 9 1.2 THE DEVELOPMENT AND production in many of these countries is now beginning CHAPTER 1: GEOGRAPHICAL EXPANSION to stagnate. For example, while major producers such as CONTEXT – PUTTING ALL OUR OF ANIMAL FACTORY FARMING , Argentina and Russia demonstrated rapid growth in meat production over the past decade, this is not expected to EGGS IN ONE BASKET Over the past half century, the increase in global continue. Many key meat-producing countries and regions agricultural has been achieved largely will be unable to satisfy rising global demand. This is due through the intensification of production.The global to a number of reasons, including: constraints on natural human population increased from 3.2 billion in 1963 resources, competition from for land and water, and to just over 7 billion in 2014. To meet rising demand, inadequate investment in supportive infrastructure.11 1.1 OVERVIEW Animal factory farming as a production process world food production has also grown dramatically. originated in the and has since been Increasing yields, cropping intensity and have By comparison, is increasing Over past decades, traditional livestock farming replicated in other Western nations. More recently, driven production. Greater catches as well rapidly in emerging markets. Meat production in the least has been largely replaced by highly industrial animal factory farming is becoming established in as the expansion of have meant that world developed countries doubled over the two decades prior to production systems, or animal factory farms. new geographies, including South Asia (), fisheries production has also increased with the aim of 2012.12 Although this growth is likely to continue based on An estimated 70% of animals farmed for food (), sub-Saharan and South meeting the growing demand for food. current trends, there may be an increasing differentiation globally are raised within a factory farming system.6 America. In this context, it is more important than in these markets between conventional industrial farming Large poultry farms can contain more than ever that investors understand the potential risks At the same time, population growth, rising incomes (which we argue represent high-risk investments), more 500,000 , pig farms can contain associated with investment in animal factory farming and urbanisation (particularly in developing nations) medium-risk factory farms that take animal welfare issues more than 10,000 hogs, and cattle feedlots can and related industries. have resulted in a sharp increase in the demand for into account and non-industrial farming. In this context hold upwards of 100,000 cattle at any one time meat and fish. There were approximately 7 billion providers of plant-based alternatives to meat also (that is almost the entire dairy cow population of cattle, , , and poultry in 1963.8 By 2013, appear as a strong growth opportunity. Greece in one farm7). their numbers had risen to more than 25 billion, with the majority contained in factory farms. The rise in Many Asian countries have already started to production of key livestock species alongside industrialise their animal farming systems, with population growth is illustrated in Figure 1. the pace and scale of change most visible in China. 25 Many Asian governments are encouraging a shift from The shift towards factory farming as the predominant small-scale, subsistence and non-intensive farming 20 mode of livestock production began in the United States towards more intensive farming systems. While animal and other industrialised countries. Animal factory stocks in developed countries have been largely stable PROJECTED farming began to emerge in industrialised countries over a 40-year period from 1963 to 2013, there has been 15 following the Second World War.9 This process entailed significant growth in countries such as China, Vietnam a shift in animal production systems from smaller scale, and Indonesia. China is a strong supporter of the 10 mixed species systems to large-scale, intensively industrial production model and this is reflected in the farmed and highly mechanised systems, focusing primarily tremendous growth in livestock produced in the country.

5 on a single species. There was also a marked shift in the structure of the industry, with fewer and fewer farms Growing Chinese livestock NUMBER OF ANIMALS/HUMANS (BILLION) producing increasing numbers of animals. As part of this Between 1993 and 2013: 0 consolidation, corporations assumed a more dominant •• Head of cattle increased from 80 million to role, with many livestock farmers functioning under the 114 million in 2013, an increase of 43%. 1963 1973 1983 1993 2003 2013 2021 control of larger companies. By 1997, half of the world’s •• The number of pigs increased from 367 million Animals Humans , and more than half of the world’s pork, poultry to 482 million, or 31%. Source: FAO and eggs, were produced by animal factory farms (or •• Chicken numbers increased from 2.7 billion to FIGURE 1: A new phenomenon. Graph shows the rapid increase in the global production of main livestock ‘concentrated animal feeding operations – CAFOs’).10 5.5 billion, or 104%.13 species (cattle, pigs, sheep and goats, and poultry) compared to human population growth (1963–2013). Future growth in meat production and animal factory China has become the world’s largest producer farming is expected to be driven by developing countries. and consumer of pork, the second largest producer Thus far, developed countries have accounted for the of poultry14 and the world’s third largest majority of intensively farmed livestock systems. However, producing nation.15

10 | fairr.org fairr.org | 11 FUTURE PROJECTIONS as alternatives to meat, taking market share from animal the national or regional level.28 Studies have also There is little within the investment literature that Population growth, affluence and urbanisation will protein sources and reducing global meat demand. downscaled the impacts of widely experienced events is targeted specifically at animal factory farming. continue to shape consumer preferences and drive to the producer level. For example, drought in 2012 This contrasts with much greater focus on other demand for meat or similar . Key demographic led to a US$155,000 increase in feed costs for broiler sectors that present severe environmental or and socio-economic drivers include: 1.3 LIMITED INFORMATION HAS farms in Georgia.29 Livestock-related disease outbreaks social challenges. These sectors include: clothing and CREATED A DANGEROUS also focus attention on the impacts on key producers apparel due to the association with poor working conditions; •• is expected to grow by a third KNOWLEDGE GAP FOR INVESTORS or regions. During the 2009 swine flu outbreak, oil and gas because of the contribution to climate change; between 2014 and 2050, rising from 7 billion to reported a drop in its domestic pork , and the industry because of its association with 9.1 billion.16 The vast majority of this growth will Several economic studies have focused on the while industry analysts downgraded stock and lowered human rights abuses and exposure to water scarcity. occur in developing countries. financial vulnerability of animal factory farming annual earnings for both Tyson Foods and Smithfield •• Per capita incomes are projected to be a multiple to changes in policy and regulation, suggesting Foods.30 Meanwhile, hog producers in Indiana were This report aims to take a first step to broadening the of today’s levels, with some emerging economies significant unpriced risks within the sector. estimated to have lost US$20 a head at the peak of the current understanding of risk linked to investment in catching up to developed nations in per capita terms.17 NGO reports and academic research argue that the outbreak.31 There is less information available regarding animal factory farming, by identifying and expanding •• Urbanisation processes will accelerate, resulting in success of the animal factory farming model is due the financial impact of reduced stocks on the sector or on the ESG issues which affect the sector. These issues 70% of world population living in by 2050 largely to subsidy support received either via direct or on individual farms, although fines for environmental are listed in Table 1 and discussed in more detail in the (up from 54% in 2014).18, 19 indirect channels. One landmark study provides detailed or labour law infractions are commonly available. following section. analysis of subsidy support received by the industry The global demand for animal protein is expected to in the US, including almost US$4 billion that CAFOs However, there is limited information available which increase 70% by 2050,20 largely as a result of increasing receive in benefit annually from subsidised grain.24 measures and quantifies the materiality of broader …a rough estimate of the affluence. This has already been observed in China, where The industry also receives public support in the form ESG issues in relation to animal factory farming. a fourfold increase in per capita income following economic of funding to help prevent pollution from farms There is a growing body of academic research examining the total cost of cleaning up reforms in the 1970s coincided with a 30% increase in (US$125 million in 2007) and publicly-met remediation relationship between ESG issues and financial performance – the soil under U.S. hog and average meat consumption per person (between 1978 costs for cleaning up the land under hog and dairy the majority of this research highlights a positive relationship and 1997).21 However the future trend towards increased CAFOs (US$56 million just in Kansas).25 Reports indicate between ESG issues and performance.32 However, the dairy CAFOs could approach 33 meat consumption is far from a certainty. Growth in meat that if the industry was forced to meet the costs of its impacts of ESG issues can vary across sectors, meaning that US$4.1 billion. consumption has started to falter in some developed pollution, this could equate to billions of dollars.26 investors need detailed information relating to the specific  Union of Concerned Scientists countries, suggesting that evolving consumer preferences sector, country, or asset class, etc. that they are interested in. could re-shape future meat demand. There is a slowly growing trend in countries such as the US and the UK Several economic studies towards more plant-based or ‘flexitarian’ diets, with meat have focused on the financial TABLE 1: ESG issues that may have an adverse impact on financial performance and returns from playing a less important role in meal planning. This has animal factory farming arisen out of an increased awareness of health, animal vulnerability of animal factory welfare and environmental sustainability issues, and farming to changes in policy awareness and availability of plant-based proteins as an CATEGORY KEY ISSUES alternative. Since the 1980s, for example, the consumption and regulation, suggesting Disease outbreaks, GHG emissions, deforestation and , natural hazards, 22 of has declined in the UK. This has been partly significant unpriced risks climate change, water pollution, water scarcity, resource scarcity, poor animal welfare, attributed to a number of food-related health scares, waste generation, high water use, air pollution, soil degradation and . including the 2013 horsemeat scandal. Meat consumption in within the sector. Environmental the US has also been declining for almost a decade, largely because of health concerns and economic constraints.23 Excessive use, spread of infectious diseases/ pandemics, social WHO's classification of processed meat as carcinogenic in The strongest links between the impacts of backlash, changing consumer preferences, poor working conditions, human rights violations, late 2015 is likely to encourage a further decrease in red ESG issues on financial performance related to labour availability and productivity, health impacts on surrounding communities, loss of rural meat consumption in these markets. animal factory farming are drawn from short-term Social livelihoods, land rights violations, social licence to operate compromised. and anecdotal reports. There are numerous examples Policy changes (e.g. removal of government subsidies, changes to policy, trade restrictions), Food companies such as Hampton Creek of reports describing the numbers of livestock culled weak regulatory oversight, sustainability disclosure, corporate governance. (see page 43) and Beyond Meat are across different geographical areas as a result of also emerging which in the coming years may offer drought and rising feed costs on the livestock.27 Governance protein-dense plant-based foods that consumers select Often this is translated into economic costs at

12 | fairr.org fairr.org | 13 CASE STUDY 1: MARKETS INFECTED BY 2015 AVIAN FLU OUTBREAK CHAPTER 2: 28 ESG ISSUES AND THEIR IMPACTS

The virus was thought 2.1 OVERVIEW 2.2 FROM PANDEMICS TO POLLUTION, to have spread further ESG ISSUES THAT AFFECT KEY and faster than any There is growing evidence that ESG issues can FINANCIAL LEVERS impact the performance of companies connected to other historical outbreak animal factory farming across the agriculture and food A range of diverse ESG issues have previously because of the role of value chain. The most visible financial impacts come resulted in financial harm to animal factory from short-term events, but the financial performance farming-related investments, or have the potential factory farms in modern of companies linked to animal factory farming is also to do so. However, the links between ESG issues and farming contingent on longer-term environmental, social and financial outcomes are complex and difficult to assess regulatory trends and the ability for companies to – identifying material issues remains more of an art successfully anticipate and navigate these changes. than a science. Nevertheless, a hard line can often be In the first half of 2015 the US suffered the worst Financial costs This section highlights these key changes, pointing drawn between some short-term issues and financial outbreak on record of the deadly H5N2 strain of avian The financial implications of H5N2 have been towards issues that responsible investors may wish performance, such as in the case of droughts or food influenza. At the time of writing it had led to nearly staggering. The value of the dead alone has to incorporate into their investment approaches. contamination scares. 50 million hens and other poultry being destroyed, been estimated at over $190 million, with US and America’s $6 billion poultry exports, suffering taxpayers asked to foot the bill of 'restocking' the The animal factory farming industry can cause In other cases, it is challenging to separate the impacts dramatic falls of around 14% and rising34. birds. 40 countries placed bans on all US poultry significant negative environmental and social impacts, of ESG issues from other drivers of long-term value. and many food companies including Hormel and and it is also highly vulnerable to wider ESG trends, This includes the costs to companies in dealing with The virus was thought to have spread further and Post Holdings issued warnings following such as resource scarcity, consumer preferences and community opposition to new developments or the faster than any other historical outbreak because of declining sales due to limited supplies and lost regulatory changes. These risks place animal factory effects on investor confidence inspired by robust the role of factory farms in modern farming. revenue from market closures. farming alongside other high impact sectors such as sustainability disclosure. Finally, ESG risks may oil and gas, mining and clothing & apparel as sectors actually counteract one another. For example, a The crowded and confined conditions of factory In , the largest producing state, egg that require diligent monitoring and management. concern with animal welfare would emphasise farm poultry sheds create a disease incubator, production dropped 21%. This contributed to reducing the intensity of production but potentially meaning that when the virus got in it quickly skyrocketing egg prices between January and increase environmental impacts on a per animal basis. spread. Coupled with the large flock sizes of up June which infected stocks such as food makers to five million birds in a concentrated space – like Unilever, food distributors such as Sysco, and This section provides responsible investors with a an outbreak of bird flu in one hen house means firms including McDonald’s whose costs better understanding of the relationships between key you have to cull the chickens in the neighbouring all soared. ESG issues and their financial outcomes. A framework hen houses too. has been developed to link ESG issues with four key The cost of H5N2 to the wider economy has been drivers of financial outcomes (referred to here as There are less than 200 commercial egg farms in estimated to be over $3bn. ‘financial levers’): production and price; market access; existence in the US today, compared to over 10,000 reputation; and legal and regulatory. This framework is forty years ago35. The US egg shortage also created new markets shown in Figure 2. for companies like Hampton Creek whose egg free Despite significant measures in place, products became highly sought after as the outbreak H5N2 was able to penetrate the defences on a large continued and led to it being christened the fastest number of factory farms. growing food-company in history. (See case study 9).

14 | fairr.org fairr.org | 15 Definitions

Relationship between ESG issues and their impacts on financial outcome. PROFITABILITY & INVESTMENT RETURNS •• Production and price: refers to the impacts on production, which are determined largely by weather conditions and disease. Price risk refers to changes in the prices of inputs and outputs and is generally IMPACTS

FINANCIAL Animal factory farming, wider food value chain (e.g. food retailers, restaurants) external to production processes. •• Market access: refers to the ability of producers to sell to different markets, including national markets and specific customers (such as government bodies and private sector firms). •• Reputation: refers to the damage done to a company’s reputation or brand.

•• Legal and regulatory: refers to the financial impact that may arise from changes in laws and PRODUCTION & LEGAL & or from violations of existing laws and regulations. MARKET ACCESS REPUTATION PRICING REGULATORY LEVERS FINANCIAL

2.3 ENVIRONMENTAL events have a strong bearing on changes to production ISSUES AND IMPACTS and the price of inputs and outputs, particularly feed. In contrast, conventional, -based livestock 13 environmental issues impact the animal factory operations are less reliant on imported feed. Animal welfare Disease outbreaks Disease outbreaks Environmental farming industry regulations LEGAL AND REGULATORY ISSUES ARE Environmental issues are the most quantifiably Disease outbreaks Animal welfare Water pollution KEY DRIVERS OF FINANCIAL RISK Animal welfare material of ESG issues Resource scarcity Global health Animal welfare Legal and regulatory impacts are the most frequent pandemics Antibiotic use Legal and regulatory impacts are the most consequence of environmental issues, associated with Natural hazards & Community impacts common ‘E’ issue 11 out of the 13 identified issues.With respect to legal weather Changing (health, pollution, Local health and regulatory levers, there are numerous examples of consumer livelihoods) impacts Long term production risks due to environmental Climate change farms being penalised for violations of environmental laws. KEY preferences factors are likely to be highly material ISSUES Labour violations Global health For example, following a 500,000-gallon spill in Social license to Policy changes pandemics 2008, the 1,000-cow dairy operation at Teabow Farms, operate Weak regulatory ENVIRONMENTAL ISSUES CAN IMPACT ALL Maryland, was forced to reimburse the town of Walkersville oversight Social license to Global health FOUR FINANCIAL LEVERS: PRODUCTION AND and Frederick County for providing emergency water operate pandemics Sustainability PRICING, MARKET ACCESS, REPUTATION supplies, testing and other costs.37 disclosure Policy changes AND LEGAL & REGULATORY Policy changes The animal factory farming industry can cause Given the significant harm to the environment caused Corporate Weak regulatory environmental harm but it can also be negatively by animal factory farming (e.g. water pollution), the governance oversight affected by environmental factors. Firstly, animal industry as a whole is highly regulated in developed and factory farming can cause significant damage to the developing countries. Therefore, violations of national local and global environment, through for example, environmental laws and regulations can result in heavy water pollution, emissions and fines and other types of penalties. For example, in 1997 deforestation – the latter either directly through land US-based pork producer Smithfield Foods was fined conversion for farms or indirectly through the clearing US$12.6 million for violating the . of land for feed production. These characteristics are key drivers of legal and regulatory risks for the industry. THE INDUSTRY IS HIGHLY VULNERABLE TO THE COMBINATION OF INCREASINGLY Secondly, animal factory farming is highly vulnerable to DEMANDING ANIMAL WELFARE STANDARDS RISK ENVIRONMENTAL SOCIAL GOVERNANCE

CATEGORIES harm caused by environmental factors. Individual farms, AND THE GROWING BODY OF STRINGENT companies and the industry as a whole can suffer as a ENVIRONMENTAL LAWS. result of natural hazards, adverse weather conditions, There is a clear trend towards the introduction of more animal disease, resource scarcity (including access to stringent environmental regulations in both developed FIGURE 2: ESG issues as drivers of financial performance within the context of animal factory farming. water and land) and climate change. These types of and developing countries. This is occurring alongside

16 | fairr.org fairr.org | 17 the introduction of higher animal welfare standards. Natural hazards, particularly droughts and TABLE 2: Key environmental issues More stringent environmental laws would effectively heatwaves, have led to substantial financial impacts force companies to ‘internalise’ costs that have previously by affecting production. These types of events can IMPACT ON EXTENT OF been borne by society, undermining profitability. be experienced by actors across large geographical FINANCIAL LEVERS IMPACTS areas. For example: Magnitude Regulators are unlikely to rapidly introduce measures (systemic, that would cause dramatic economic harm to the •• Annual losses for the US dairy industry as a result of Production Legal & widespread, industry, particularly in locations where it is a key heat stress have been calculated at US$897 million, 40 ISSUES & price Market Reputation Regulatory isolated) Timescale provider of jobs and tax revenue – over time however, or almost US$100 per cow (see case study 2). such changes could erode margins within the sector. •• In 1999, Hurricane Floyd hit North Carolina causing Disease outbreak a a a a S The following examples illustrate some of the sector’s extensive flooding and damage to local farms. As a Greenhouse gas (GHG) emissions a a L key vulnerabilities to more stringent environmental laws: major livestock-producing region, a large number of livestock were lost, including more than two million Deforestation and biodiversity loss a a a S–L •• : The livestock sector chickens, 1,180 cattle, 28,000 pigs and 752,970 Natural hazards (e.g. as a whole is responsible for 14.5% of man-made turkeys.41 The estimated cost of the damage was heatwaves, drought, flooding) a S greenhouse gas emissions,38 exposing the sector over US$13 million. and weather conditions to regulatory and social pressure to reduce its contribution to climate change and potentially In addition to the immediate impacts on animal Climate change a L imposing costs on producers. factory farms, natural hazards can affect input and Water pollution a a S–M •• Water pollution: The geographic concentration output pricing throughout the meat value chain. of animal factory farming can lead to serious Extreme cold weather, for example, can result in Water scarcity a a M–L contamination of . Environmental slower weight gains and affect livestock movement, Resource scarcity/competition for a a a M–L degradation caused by the substantial growth of contributing to severe escalations in the price resources (e.g. land, feed inputs) industrial hog production led the state of North of beef.42 Drought, on the other hand, combined with Poor animal welfare a a a S Carolina to permanently ban new hog CAFOs, high feed costs, can prompt unplanned sales by while simultaneously introducing more stringent farmers, temporarily reducing prices due to the Waste generation a a S environmental regulations to protect water courses. sudden increase in meat supply.43 Price volatility High water use a S–M •• Farm animal welfare: the has for feed and meat presents challenges for actors introduced the most stringent legislation on this across the value chain. Air pollution a a S issue. A 2010 report found that European “animal Soil degradation and welfare policies increase the costs of a M desertification in farming” and that more demanding farm animal The impact of emerging welfare standards than in international competitors “means that there is the potential for negative diseases and accelerating 39 Definitions impacts in the future.” climate change means that Magnitude livestock sector-related Describes the extent of impacts from ESG issues in terms of geographical spread and diffusion across the value chain: PRODUCTION AND PRICING AFFECTED BY SHORT AND LONG TERM Systemic: impacts affecting a high proportion of operations across a large and potentially non-continuous area investments need to tackle ENVIRONMENTAL ISSUES Widespread: impacts affecting a high proportion of operations within a particular region or country an ever evolving set of Isolated: localised impacts to individual operations or a small number of physically proximate operations. Short-term production risks are highlighted by the vulnerability of animal factory farming to natural production, and hazards (which are likely to increase in frequency Time-scale disease problems – Refers to the general time horizon in which financial impacts may be experienced: due to climate change) and regulatory responses Short-term (S) = evidence of significant impacts currently being experienced or may be measurable for up to two years to disease outbreaks. There are at least eight often in rapidly declining environmental issues with the potential to affect Medium-term (M) = significant impacts may be measurable over two years up to five years environmental conditions. 47 Long-term (L) = significant impacts may be measurable over a period greater than five years productivity at the farm level, thereby reducing Uncertain = significant impacts may be measurable over an uncertain time period financial performance at the facility and company level.  Global Agenda for Sustainable Livestock

18 | fairr.org fairr.org | 19 Regulatory responses to threats posed by disease Similarly, severe drought in California forced many farmers Securities and Exchange Commission (SEC) filing that it was outbreaks can also lead to sudden and severe to sell all or some of their cattle in 2014 due to increased being sued by the State of as a result of alleged Even as factory farming bears consequences. For example, in April 2014, Japanese costs and competition for feed. As of September 2014, the environmental violations. In addition, the US Environmental significant responsibility officials ordered a farm owner to cull more than 100,000 US Department of Agriculture indicated that 83% of cattle in Protection Agency (EPA) had launched a criminal chickens following tests which confirmed the presence of California were located in areas of “exceptional drought”.51 investigation against the company.53 Both these actions for planetary warming, it avian influenza in Kumamoto prefecture, southern .42 followed the discharge of a feed supplement into a local also numbers among the The authorities also restricted shipment of around 400,000 The economic impacts of future heat stress on livestock waterway in May 2014, which resulted in the death of a large chickens in the prefecture.45 In the previous outbreak in are likely to be severe, with intensively raised animals number of fish as well as odour problems. In addition to industries that will feel the 2010–2011, nearly two million chickens were culled across facing unique vulnerabilities. Discounting the costs of direct financial penalties (fines and compensation), criminal impact of climate change nine prefectures.46 Similarly, an outbreak of PEDv (Porcine adaptation and extreme weather events, by 2080 the costs charges may result in “government contract suspension and 55 Epidemic Diarrhoea Virus) caused severe economic to the UK livestock industry as a result of heat stress has debarment”.54 Tyson Foods has reportedly received most keenly. damage to US pig farmers in 2013 with large numbers of been estimated at £5.8 million in production losses and US$4.7 billion from US government contracts since 2000,  Animals & Society Institute hogs culled and restrictions placed on sales and transport. £34 million in mortality losses.52 The impacts on animal with current contracts worth an estimated US$500 million. factory farming are likely to increase over the next few Medium- to long-term production risks (such as decades but do not appear to be fully appreciated by the resource scarcity and climate change) are more likely to industry (see Case study 2). CASE STUDY 2: FACTORY-FARMED CATTLE FEEL THE HEAT FROM CLIMATE CHANGE have gradual financial impacts. Increasing competition for scarce resources is recognised as a threat to animal REPUTATIONAL RISKS AFFECT FINANCIAL factory farming. According to the OECD and the FAO, OUTCOMES AT COMPANY AND INDUSTRY SCALE The economic cost of heat stress can be significant. In the In part this is because pastured cattle are able to seek competition for land and water will limit the increase Environmental issues are a key driver of reputational risks, US alone, heat stress is estimated to cost the dairy and beef shade, water and air movement to help keep cool. in meat production in many regions and countries.48 In but the financial consequences of these risks are difficult industry as much as US$897 million and US$369 million per In contrast, radiant heat is increased for cattle from addition, by concentrating meat production into fewer and to assess. Reputational risks can arise from both operational annum, respectively.56 For , this figure translates the dirt or concrete surfaces on which they are housed. larger facilities, the industry becomes more reliant on feed and strategic issues. Poor animal welfare, disease outbreaks, to an annual average of US$100 per cow.57 However, future grain inputs due to the reduced role played by pasture-fed or incidents leading to severe water pollution are often due to climate change will alter regional temperature regimes in There are concerns within the industry that insufficient production. This trend increases the financial risks to the breakdowns in management controls. In contrast, conflicts many parts of the world. The latest Intergovernmental Panel attention has been paid to the future impacts of climate sector stemming from high and volatile feed grain costs. over land, water, and deforestation caused by the growing on Climate Change (IPCC) report, released in 2013, identifies change on the industry, particularly as temperatures of feed grain are strategic issues that must be addressed by that future increases in heat stress are a significant threat to become warmer and more unpredictable, and less hardy the entire industry (alongside other key stakeholders such as the health of animals and humans alike.58 species of cattle are being introduced to food chains.60 [Meat] supply response may government and civil society). be limited in many countries Companies involved in animal factory farming can New data reveals extent of global heat stress change Nevertheless, the reputational risks arising from both benefit from a better understanding of future heat The current and future exposure of cattle to heat and regions by constraints company-specific and industry-wide issues can produce stress risks. Investors can also use information stress has been assessed using the most up-to-date on natural resources [and] negative consequences for companies. These reputational such as this to develop a greater appreciation for the climate model data. This analysis reveals the extent consequences include restricted access to and potential extent and frequency of losses from heat of heat stress impacts as a result of climate change competition for land and water markets, constrained ability to operate and expand, and the stress, and how this can impact financial performance. at the global, national and subnational level: from alternative crops... 49 loss of suppliers or customers. For example, in January •• By 2045, each cow globally will experience on average 29 2008, celebrity Hugh Fearnley-Whittingstall targeted Intensively farmed cows more vulnerable to heat stress more Heat Stress Days per year than they do at present.  OECD-FAO global food retailer Tesco over its alleged stocking of Cattle are very sensitive to heat stress, which can have •• Across all 247 countries, the number of days on intensively reared chickens. Through a nationally televised adverse physiological effects, resulting in decreased which Temperature Humidity Index (THI) exceeds show in the UK, Fearnley-Whittingstall contended that milk yield, breeding inefficiency, slower weight gain and 72F (i.e. a Heat Stress Day) will increase from 49% Animal factory farming has already been affected by the broiler chickens sold by Tesco failed to meet the Farm general poor health. Heat stress symptoms occur when to 58% by 2045, equating to an increase of 33 Heat extreme weather events that were consistent with the Animal Welfare Council’s ‘Five Freedoms’ standard that the the cow is unable to regulate its body temperature. Severe Stress Days per year. predictions of climate change. For example, record heat and company had adopted as its animal welfare policy. The airing heat stress can cause cattle to become uncoordinated •• The top 10 countries with the greatest head of cattle drought across much of in 2014 led to the deaths of the series coincided with a 13.7% fall in the company’s and weak, and can result, ultimately, in death. account for 59% of the global total. On average, of thousands of cattle and forced farmers to send cattle to share price between 2nd and 15th January of that year. these countries currently experience 160 Heat Stress slaughter. According to media reports, some farmers claimed Although all cattle are vulnerable to heat stress, feedlot Days per year – a number which is set to rise to that without significant rains their operations would be In another case, in August 2014 the US-based chicken, cattle are typically more at risk than pastured cattle.59 more than 193 by 2045, representing a 21% increase. worthless and they would need to abandon their properties.50 beef and pork processor Tyson Foods announced in a

20 | fairr.org fairr.org | 21 1 TEXAS, USA Head of Cattle = 1,190,000 Increase in Heat Stress Days per year = 32 (from 148 to 180) !3 Cattle in Texas currently experience Heat Stress Days 41% of the time, rising to 49% by 2045. Assuming the relationship between the loss and heat stress is static, this increase in the number of heat stress days per year (from 148 1 to 180 days) translates into a 25% increase in economic losses.

2 2 ETHIOPIA Head of Cattle = 53,990,061 Increase in Heat Stress Days per year = 76 (from 248 and 324) 4

The projected increase in the number of Heat Stress Days (76 per year) is the greatest 5 of any country in the 100 countries with greatest head of cattle. This means that cattle in Ethiopia will face heat stress conditions on 9 days out of 10 by 2045.

3 Top ten cattle producing countries Head of Cattle = 9,900,000 by head of cattle, 2013 DAYS INCREASE Increase in Heat Stress Days per year = ! ! IN HEAT STRESS 3 (from 1 to 4) HEAT STRESS DAYS PER YEAR (2026–2045)* 101–120 4 MATO GROSSO, BRAZIL 81–100 Head of Cattle = 28,427,059 331–365 121–150 ! 61–80 Increase in Heat Stress Days per year = 301–330 91–120 41–60 23 (from 320 to 344) 271–300 61–90 21–40 241–270 31–60 <21 5 211–240 < 31 ! QUEENSLAND , AUSTRALIA 181–210 No data Head of Cattle = 12,800,000 151–180

Increase in Heat Stress Days per year = * Heat Stress Days are calculated as the number of days 33 (from 156 to 189) per year that the temperature-humidity index exceeds 72. Data sources: Maplecroft, 2014; Hadley Centre, 2014; Met Office, 2014; FAOSTAT, 2014 | © Maplecroft, 2014

FIGURE 3: Future heat stress and impacts on key cattle producing countries

22 | fairr.org fairr.org | 23 2.4 SOCIAL ISSUES to them when choosing food.63 This confirms multiple Companies implicated in poor animal welfare AND IMPACTS surveys indicating that UK and European citizens scandals may face severe reputational damage We believe there are also would like to see an improvement in the welfare of and consumer boycotts. Clients may also cancel a number of potential 11 social issues impact the animal factory farmed animals.64 Companies failing to respond to contracts or avoid purchasing from companies that farming industry. shifts in public perceptions risk missing out on market have been linked to these practices. Corporate headline risks that could opportunities. In contrast, companies may be able approaches to farm animal welfare are seen Health impacts from antibiotic misuse and pandemic tarnish the image of to future-proof their investments by recognising the increasingly by investors as an indicator of how risk show high potential for material impacts. importance of farm animal welfare and associated companies respond to shifting social attitudes and companies, Social issues are challenging to measure but put large issues such as sustainability. consumer preferences, and can also reveal how well including concerns over amounts of financial value at risk. they are positioned to manage risks embedded within 70 Increasing public concern over farm animal their supply chains. animal cruelty… Reputational damage due to changing welfare and associated food safety standards consumer attitudes present both short-term  Citigroup Global Markets heightens reputational risks to companies and and long-term risk. therefore potential financial impacts. The food sector as a whole is sensitive to changing public SOCIAL ISSUES ARE A KEY DRIVER OF sentiment as regards animal welfare issues. TABLE 3: Key social issues FINANCIAL OUTCOMES BUT CHALLENGING For example, research by academics at Kansas State TO IDENTIFY AND MEASURE found that that media coverage of animal IMPACT ON EXTENT OF There is a tremendous amount of financial value welfare issues in the US reduced pork and poultry FINANCIAL LEVERS IMPACTS potentially at risk as a result of social issues. demand over the study period.65 Mounting public However, it is difficult for companies involved in concern related to these issues also means that it Magnitude animal factory farming or linked to the wider value is more likely that companies will face scrutiny from (systemic, chain to fully grasp the implications as the relationship pressure groups and the media. There are multiple Production Market Legal & widespread, between social issues and financial outcomes can be examples from , North America and Asia where ISSUES & price access Reputation Regulatory isolated) Timescale unclear. There is also less of an emphasis on social companies have been targeted because of their links Excessive antibiotic use a a a L issues within the available literature. Therefore, the with industrial meat production: Spread of infectious diseases/ emergence and extent of costs due to social issues is •• In July 2014, an undercover investigation by a a a a S global health pandemics often hard to predict, fully recognise and account for; newspaper revealed multiple costs can also unfold over a long period of time. Each of alleged hygiene failings in the UK poultry industry.66 Social backlash against poor a a a S the social issues identified inTable 3: Key social issues, The report led to questions over the auditing systems animal welfare standards apart from one (labour availability and productivity), used by leading to ensure good Changing consumer preferences a a M–L includes a significant reputational component. hygiene standards and prompted several of them This alone creates additional challenges in to launch emergency investigations into their Poor working conditions a a S specifying the financial impact. chicken suppliers. Human rights violations a a S •• In July 2014, an undercover TV investigation revealed Labour availability and REPUTATIONAL AND MARKET that a Shanghai meat factory was selling out-of-date a a M–L productivity CHALLENGES ARE AMPLIFIED BY chicken and beef to a number of US fast food chains, STRENGTHENING SOCIAL ATTITUDES including McDonald’s and Yum Brands, which owns Health impacts on surrounding a a M–L Changing consumer preferences around animal KFC and Pizza Hut. Although the chains immediately communities welfare standards present longer-term risks and stopped using the supplier, both experienced drops Loss of rural livelihoods a U opportunities for investment in animal factory in their share prices. farming. US surveys have found that 95% of •• In 2008, evidence of animal cruelty and health concerns Land rights violations a a U consumers want farm animals to be treated well61 and were brought against Californian-based Hallmark/ Social licence to operate more than 80% of people feel it is important that the Westland Meat Packing Company, prompting the US compromised due to opposition a a S–M chickens they eat are raised humanely.62 In the UK, a Department of Agriculture to recall over 140 million to new development 2012 report published by the RSPCA’s Freedom Food pounds of beef (the largest beef recall in US history). farm assurance scheme found that for 48% of Britons A US$500 million court judgement was also made For definitions and colour key, refer to Table 2 on page 18. animal welfare is either ‘extremely’ or ‘very’ important’ against the company, and it went bankrupt in 2012.

24 | fairr.org fairr.org | 25 as Russia and China introduced import bans on pork CASE STUDY 3: EXPIRED MEAT SCANDAL CONSUMES VALUE In the case of animal from the US (see Case study 4 for further information on OF FAST-FOOD COMPANIES ALONG SUPPLY CHAIN welfare, failure to keep pace the financial impacts of global health pandemics and food safety scandals at a sector level.). On 20 July 2014, a major food safety scandal in China it is too early to know how quickly sales will rebound with changing consumer broke in the local and international media. Following in China and the corresponding full-year financial expectations and market a investigation, Chinese authorities accused impact to Yum! Brands. However, if the significant sales Resistance in the Shanghai Husi Food Co. (owned by US-based impact is sustained, it will have a material effect on opportunities could put foodborne zoonotic OSI Group) of intentionally selling meat beyond its full-year earnings per share.”68 In its October quarterly companies and their investors shelf life. The food manufacturer had been supplying report, Yum! said that “since July 21st, China Division bacteria and fast- restaurants in China and Japan, has experienced a significant, negative impact to sales at a competitive disadvantage Campylobacter is clearly including Yum! Brands, McDonald’s and Starbucks. and profits at both KFC and Pizza Hut. While sales are in an increasingly global rebounding, same-store sales continue to be negative.”69 linked to antibiotic use in 71 In the aftermath of the news, buyers quickly cancelled . food animals, and foodborne their orders from the Shanghai supplier and in some Financial analysis for July to October (see Figure 4)  International Finance Corporation cases the OSI Group as a whole. Within days the shows that the fall in sales had a substantial impact diseases caused by such OSI Group had also withdrawn all implicated products on the company share prices of Yum! and McDonald’s. resistant bacteria are well from the marketplace. Despite this, the negative The companies recorded a fall in share price of 8.29% HEALTH IMPACTS, PARTICULARLY 76 news coverage rapidly hit fast-food sales in China, and 7.4%, and a drop in equity of US$3.6 billion and FROM ANTIBIOTIC USE AND POTENTIAL documented in people. prompting a decline in the full-year earnings of fast- US$7.2 billion, respectively, between 18th July and PANDEMICS, POSE SECTOR-WIDE  World Health food restaurants as well as a drop in share prices. 20th October 2014. REPUTATIONAL AND REGULATORY RISK Global health pandemics and public concerns over Referring to the Shanghai incident in its August By November 2014, the value of Yum! and McDonald’s animal welfare have resulted in clear financial The animal factory farming industry may suffer quarterly report, McDonald’s issued a warning that “As a share prices and equity had risen again, although impacts to the agricultural sector as a whole and reputational impacts and is subject to unforeseen costs result of the China supplier issue, the Company’s global they still remained lower than that recorded before to individual companies. Animal factory farming has due to impacts to human health arising from excessive comparable sales forecast for 2014 is now at risk.”67 the scandal broke. Comparably, Starbucks, who were been implicated in a number of global health scares. antibiotic use. According to estimates, approximately less visibly associated with Shanghai Husi Food Co., There is evidence that the 2009 H1N1 strain of swine 50% of all antibiotics used in the UK and 80% of all In a financial report released just days after the incident reported a less significant drop in equity of US$2.4 billion flu – which the CDC estimates resulted in between antibiotics sold in the US are given to farm animals.77 broke, Yum! Brands stated that “The result has been between 18th July and 20th October 2014. Furthermore, 151,700 and 574,400 deaths globally72 – first originated Moreover, farm use of antibiotics has increased over a significant, negative impact to same-store sales at by November 2014, Starbuck’s equity value had risen to in US factory farms in 1998.73 In addition, poultry factory the past decade while human medical use is declining.78 both KFC and Pizza Hut in China over the past 10 days… levels almost matching that prior to the scandal breaking. farming was implicated in the emergence and spread Antibiotic resistance presents an increasing human of bird flu (or avian influenza) in both 2015 and 2003. and animal health risk globally, linked to a higher risk The large number of densely confined birds facilitates of death and more severe illness. The additional costs 130 the mutation of viruses into harmful strains and of healthcare associated with antibiotic resistance 20 July 2014: Major food safety 125 scandal breaks, implicating international trade contributes to the global spread. are huge – estimated costs to the US economy reach 120 several US fast food chains as high as US$20 billion in direct healthcare costs.79 115 The industry at both a national and regional level is There is substantial debate over the use of antibiotics 110 McDonalds highly exposed to negative financial consequences in within animal factory farming, particularly those 105 YUM! Brands the event of disease outbreak. According to one study, considered critically important for human and animal 100 Starbucks SHARE PRICE the H1N1 outbreak led to an 11% drop in global pork medicine. The debate is driven by concern over the 95 74 90 trade. In the US, farmers were estimated to be losing development of drug-resistant bacteria in humans, such 85 18 July–20 October: Yum! Brands share price US$30 to US$35 on every sold pig. Major producers as E. coli, Salmonella and MRSA, which can be linked falls 8.29%, McDonald's share price falls 7.4% 80 such as Tyson Foods and Smithfields Foods were to high antibiotic use in farm animals. In June 2015 an May Jun Jul Aug Sep Oct reducing their herds and selling assets, and thousands investigation by the Guardian newspaper in the UK found DATE (2014) Source: Bloomberg of producers were predicted to be put out of business.75 that the livestock-associated MRSA CC398 virus, which The sudden reduction in consumer demand saw pork is linked to the intensive farming of pigs, had spread to FIGURE 4: Financial impact of food safety scandal to fast-food chains in 2014 prices drop in many countries. Market access was also humans. In Denmark 1,271 people contracted the CC398 restricted for many producers as major importers such bug as a result of the infection80.

26 | fairr.org fairr.org | 27 Some companies within the industry are beginning to As animal factory farming becomes more dominant address reputational risks presented by antibiotic use. in Asia, low labour standards and enforcement In the last two years, a number of large food producers regimes are likely to pose increasing reputational that operate animal factory farms have taken significant risks to investors. steps to reduce the amount of antibiotics they use. In September 2014, Perdue Farms, the third largest Another often cited example of mismanaged social chicken producer in the US, announced that it had risks is (now AgriStar) stopped using antibiotics at its chicken .81 in Postville, Iowa. In this case, a 2004 undercover expose The following month Tyson Foods – the second into animal cruelty prompted investigations into worker largest producer of chicken, beef and pork globally – rights abuses and the use of undocumented workers. announced it was no longer using antibiotics in its In 2008 the plant was subject to the largest single- 35 chicken hatcheries.82 Changing consumer attitudes site immigration raid in US history and the plant went towards antibiotic use are also presenting commercial bankrupt as a result85. opportunities. Despite the risk of increased production costs, sales of antibiotic-free meat are growing quickly When animal factory farms impact on local – indicating increased consumer demand. According to communities, costs borne by companies are likely to market research, the value of US sales of antibiotic-free arise as a result of conflict. Issues such as the loss chicken rose by 34% in 2013.83 of rural livelihoods or health impacts may become Regulatory restrictions on the use of antibiotics in antibiotics in the US would cost producers US$4.50 per intertwined with environmental concerns and result in farm animals will result in financial harm, as animal animal during the first year and cost the industry over LOCAL IMPACTS UNDERMINE THE community opposition to proposed or current facilities. factory farming is dependent on high use of antibiotics US$700 million over a 10-year period (at 2003 prices). INDUSTRY’S REPUTATION, JEOPARDISING Examples of community opposition to factory farms as a main driver of profitability. Within the industrial SOCIAL LICENSE TO OPERATE exist in multiple jurisdictions, in both developed and model, antibiotics are used for both prevention and However, these European bans remain limited as they There are multiple social issues linked to the impacts developing countries. treatment of disease and for growth promotion. only cover drugs deemed presently valuable for humans of animal factory farming on those working in the Restrictions on prophylactic antibiotic use could and treatment of birds for direct human consumption, industry and on surrounding local communities. In 2014, community opposition was mobilised against undermine productivity due to the increased prevalence rather than addressing the full chain of chicken production Social issues include impacts on rural livelihoods and a proposed 25,000-pig factory farm near Foston, in the of disease and sickness in densely packed facilities. (including parent birds). Therefore, this negative impact health, poor working conditions, and human rights county of Derbyshire, UK. The concerns cited by the More comprehensive bans on antibiotics that constrain on industry may be minimal compared to what could be and land rights violations. Where adverse impacts are opposition group included: animal welfare; the use of drug use in the entire chain of chicken production on the horizon in the regulatory future, as consumers experienced by workers – including illegal, migrant or antibiotics, and their potential impact on human health; (including parent birds) would cause more significant and governments begin to demand more meaningful seasonal workers, those on low wages, and child, air pollution and bad odours; the economic effects on financial harm, as they would require a complete elimination of drugs from the production system. forced or trafficked workers – costs to the company smaller producers, and increased traffic.86 The strength restructuring of the infrastructure of the animal are likely to arise in the form of fines, compensation of opposition contributed to lengthy delays in the factory farm model. A related investment risk stems from trade or legal fees, and reputational harm. approvals process for the Foston Farm. The farm was restrictions arising over the use of antibiotics in first proposed in 2009 and had still not been approved Some European countries, including the . For example, in 1989 the EU banned In 2005, Human Rights Watch found that in the US, as of November 2014. and Denmark, have banned the use of preventative the import of beef from animals raised using growth “meat and poultry industry producers set up the antibiotics in farming, while it is still legal in the UK – the move was in response to concerns workplaces and practices that create [health and In Germany, civil society halted the development of 11 and the USA (with antibiotic use for growth promotion about the addition of six hormones to the vast majority safety] dangers, but they treat the resulting mayhem factory farming operations within a four-month period87 also legal in the USA). There is mixed evidence relating of American beef. Now rising fears over antibiotic as a normal, natural part of the production process, while in the Netherlands, a judge ruled against what to the economic impact of these bans, as they do not resistance are prompting many jurisdictions, including not as what it is – repeated violations of international would have been the country’s first animal factory apply to the whole supply chain and only cover certain the EU, New Zealand and South , to introduce human rights standards”. In response to a high number farm – a proposed development for housing 1.1 million antibiotics. For example, according to the World Health restrictions and bans on the import of livestock and of fatalities and injuries on Wisconsin dairy farms, the chickens and 35,000 pigs.88 There is very limited Organisation (WHO), Denmark’s 1998 ban on use of poultry products grown with antimicrobial drugs. Occupational Safety and Health Administration (OSHA) empirical evidence as to the economic costs of these some antibiotics for broiler chickens and swine did The introduction of these measures can have a negative established a more rigorous inspection regime in 2012.84 events to the affected companies. However, it is likely not significantly affect farmers’ incomes; in contrast impact on producers in countries with more lax Approximately 40% of the state’s 34,000 dairy farm that costs will emerge as a result of delays during industry-funded research found that several large regulations. While it is difficult to predict or quantify the labourers are immigrants, the implication being that the approval or process, extra staff time producers experienced severe health problems and aggregate magnitude of impact to affected producers, it they are less likely to be familiar with health and safety required to manage conflicts, and reduced productivity large costs. It has been estimated that a similar ban on is an area that investors can readily monitor and assess. rights and responsibilities than domestic workers. due to disruptions.

28 | fairr.org fairr.org | 29 CASE STUDY 4: RISK OF PANDEMIC DRIVES UNDERPERFORMANCE OF FOOD COMPANIES the easing of concerns over the pandemic and a better is involved in the manufacture and of understanding of the risks presented by the virus, as well feedstuffs, and meat and milk products. The company Global health pandemics – such as swine flu, US-based Smithfield Foods, Tyson Foods and Hormel as a general improvement in economic conditions. was China’s biggest poultry supplier in 2012. avian influenza (bird flu) and Bovine Spongiform Foods were three of the world’s largest pork producers. Encephalopathy (BSE) – pose a major financial risk As illustrated in Figure 5, each company suffered a drop in AVIAN FLU (2013) Between 29 March and 31 December 2013, the share to investments in companies linked to animal factory share price following initial confirmation by US authorities The H7N9 strain of bird flu was first recorded in China in prices of both companies underperformed relative to many farming, including those in the wider meat supply chain. of several human cases of swine flu in April 2009. Between March 2013. According to the World Health Organisation, industry peers and the MSCI Asia Agriculture and Food It is difficult to disentangle the financial impacts on 14 April and 28 April, Smithfield Foods experienced the most cases of human infection were reported following Chain Index for large periods. Over these months shares companies arising from pandemic outbreaks from other greatest decline, with shares dropping 12.8%. The company exposure to live poultry and contaminated environments. in CPF fell by 15%, reducing its market capitalisation by factors that can affect performance. However, analysis of was linked to the initial disease outbreak at a Mexican The virus spread prompted and restrictions on live US$1.23 billion. It was not the first time the company had the US swine flu outbreak of 2009 and the China avian flu subsidiary. Tyson share prices declined by 5.6% over the poultry markets in China, resulting in significant economic been adversely affected by the virus. During a bird flu outbreak of 2013 indicates a correlation between these period and Hormel shares dropped by 3.1%. In comparison, impacts. A 2014 study of the February to May 2013 outbreak outbreak in 2003–04 the company’s shares experienced a events and the underperformance of companies with the MSCI US Agriculture and Food Chain Index – which estimates poultry industry losses of US$1.24 billion in sudden 6.5% drop after Thailand confirmed its first human significant exposure to the pork and poultry sectors. includes US listed companies operating across the the ten affected provinces and US$0.59 billion across deaths from the virus and Japan and the EU imposed bans agriculture food chain – fell by 1.5% over the period. eight neighbouring, unaffected provinces, with lost sales on Thai chicken products.94 SWINE FLU (2009) accounting for the majority of the losses.93 The 2009–2010 H1N1 strain of swine flu began in Tyson Foods and Hormel Foods make reference to Although the share price of New Hope Liuhe increased by spring 2009, spreading to the US via Mexico. As the swine flu in their financial reports for 2009, outlining Several large poultry producers have been adversely 20% between March and December 2013, between the end of outbreak unfolded in April 2009, investors responded the risk to business from impacts on production, affected by the most recent outbreak, including March and 26 July the share price declined by 23%. According by moving money from exposed sectors, with shares export restrictions and changing demand for pork Thai-based Charoen Pokphand Foods PCL (CPF) to Forbes Asia, as a result of bird flu net profits at New Hope in pork producers, and firms suffering products. Smithfield stated that the company’s first and Chinese company New Hope Liuhe Co Ltd. Liuhe dropped 15% in the first half of the year to US$141 as a result. The outbreak forced major US producers quarter 2009 loss “reflects the continuing adverse CPF is Thailand’s largest agribusiness, operating in million.95 The company’s Chairman Liu Yonghao stated to reduce their swine herds and sell assets, while the business environment in the hog production segment … 12 countries including China where they are heavily that bird flu had “tremendously impacted” Chinese poultry viability of thousands of smaller producers was also the sharply lower hog prices reflect the impact of the involved in swine and poultry production. New Hope farmers96 and that in response to the virus he was looking to threatened.89 By January 2010, there were confirmed (H1N1) outbreak at the end of the prior quarter…”92 Liuhe operates across multiple countries in Asia and invest outside of China, mainly in developed countries.97 cases in 171 countries and 14,738 deaths attributed to the virus (although the true figure is likely to be much Although the impact on share prices was significant, it was 90&91 200 higher ). The US experienced more deaths than any also short-lived and these large companies performed 29 March to 31 December: CPF and New Hope Liuhe share prices Source: Bloomberg underperform against MSCI Asia Agriculture & Food Chain Index; other country (2,328). well over the course of the year. In part this was due to 180

160

160 140

140 120

120 SHARE PRICE 100 100 80

80 March 2013: H7N9 strain of 60 SHARE PRICE bird flu first recorded in China US authorities confirmed several human cases of swine flu in 29 March to 26 July: New Hope 29 March to 31 December: New 60 April 2009. Following these announcements between 14 April Liuhe share price falls 23% Hope Liuhe share price falls 15% and 28 April, Smithfield's shares dropped 12.8%, Tyson's 40 40 dropped 5.6% and Hormel dropped by 3.1%. The MSCI US Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Agriculture & Food Chain Index fell by 1.5% over this period. 2013 20 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec New Hope Liuhe Co Ltd Charoen Pokphand Foods Public Co. Ltd MSCI Asia Agriculture & Food Chain Index 2014 Shanghai Greencourt Investment Group Henan Shuanghui Investment & Development Shenzhen Agricultural Products Beijing Shunxin Agriculture Jiangxi Huangshanghuang Group Food Jiangxi Huangshanghuang Group Food

Tyson foods Hormel foods Smithfield foods MSCI US Agriculture & Food Chain Index Source: Bloomberg Chuying Agro-Pastoral Group Guangdong Guanghong Holdings

FIGURE 5: US pork producers see share prices plummet following swine flu outbreak, Apr 2009 FIGURE 6: Major Asian poultry firms see share price declines during avian influenza outbreak, 2013

30 | fairr.org fairr.org | 31 2.5 GOVERNANCE ISSUES In the US, the animal factory farming industry receives TABLE 3: Key governance issues AND IMPACTS public support in the form of funding (US$125 million in 2007) to help prevent pollution from farms, and publicly IMPACT ON EXTENT OF 4 broad governance issues impact the animal met remediation costs (US$56 million just in Kansas) FINANCIAL LEVERS IMPACTS factory farming industry for cleaning up the land under hog and dairy CAFOs.99 In China, animal factory farming has received government Magnitude Animal factory farming vulnerable to changes to support via various subsidies and land access.100 (systemic, the commercial context in which it operates Production Market Legal & widespread, Changes in government policy, particularly subsidy Feed prices often account for the largest proportion ISSUES & price access Reputation Regulatory isolated) Timescale support, present significant financial risk of operating costs. Therefore, increasing feed costs Policy changes (e.g. removal of are likely to have a material impact on financial Shifting production to developing countries government subsidies, changes a a a M performance. Evidence indicates that grain subsidies presents strong longer-term risk due to less to policy, trade restrictions) created over a number of decades indirectly benefit robust corporate governance in these countries Weak regulatory oversight a a a a S CAFOs in the US by almost US$4 billion annually.101 As a result of the US Farm Bill (1996), Sustainability disclosure a S–M GOVERNANCE ISSUES DETERMINED BY prices dropped to 26% below production costs, Corporate governance a a S–M CORPORATE AND POLITICAL DECISION MAKING thereby dramatically reducing feed costs for industrial Within this report, governance refers to both internal operations.102 This decline reduced hog CAFO operating corporate management activities and the external costs by 15%, saving these types of operations For definitions and colour key, refer to Table 2 on page 18. commercial context as defined by politics and regulatory US$947 million annually between 1997 and 2005.103 decisions. Like most industries, animal factory farming is highly vulnerable to changes to the commercial context Academic research shows that changes to the Farm Bill reputation can help to shield companies from financial appropriate, communicated”.110 The substantial in which it operates. Strong evidence suggests that the saw the US gain average monetary harm.105 Overall, evidence suggests that companies and potentially material financial risks presented by future success of the industry is dependent on continuity benefits of US$1.25 billion per year between 1997 and with high ratings for corporate social responsibility (CSR) ESG issues underscore the importance of strong corporate in government policy. This is particularly true with respect 2005.104 The research concluded that although the and ESG issues enjoy a lower cost of capital.106 governance with respect to animal factory farming. to direct and indirect subsidy support. There is also Farm Bill was designed to support family farmers, Such companies are also a lower risk to investors.107 growing recognition among corporations and investors that agribusiness and industrial livestock operations are major companies which can show they are more prepared for beneficiaries. Furthermore, it found that government Large corporations with significant exposure to animal China’s the ESG issues they face are better positioned to manage policies were effectively driving industrialisation in the factory farming (either directly through ownership of has faced a real crisis them. In turn, enhanced disclosure on ESG issues can livestock production system by “making factory farms operations or indirectly as a result of their position with help to attract investment and drive long-term value.98 appear more cost efficient than diversified, independent the wider value chain) have begun to focus on improving of confidence over operations that grow their own feed.” their sustainability reporting. Smithfield Foods released the past seven years. POLICY CHANGES COULD an integrated report in 2013, fulfilling the application level DRAMATICALLY AFFECT PRODUCTION, GOOD CORPORATE GOVERNANCE A from the Global Reporting Initiative for the first time. Despite government PRICING AND MARKET ACCESS REQUIRED TO MANAGE EMERGING The company’s “reputation for and safety” was a efforts, the number of Changes in government policy, particularly ESG RISKS AND OPPORTUNITIES cited as a key factor in Chinese pork producer, WH Group’s subsidy support, present significant financial risks to The range and significance of ESG issues related to US$4.7-billion acquisition of Smithfield in 2013.108 scandals continues to animal factory farming. The industry receives subsidy animal factory farming underscores the importance keep coming. [Should the support in both developed and developing countries. of strong corporate sustainability disclosure. Good corporate governance is also likely to become The majority of attention has focused on the US, where The evidence presented above includes multiple an increasingly important factor due to the exposure US trust Chinese food the animal factory farming industry receives direct and examples of how ESG issues have impacted financial of animal factory farming to ESG issues and high processing given] China’s indirect government support. Direct support includes performance. However, animal factory farming is exposed levels of industry growth in developing economies. payments, which protect farming operations to ESG issues that can result in financial impacts over There is strong empirical evidence that good corporate poor enforcement of their from income losses stemming from weather-related medium and longer term horizons. Disclosure and governance affects overall company performance,109 own laws and rampant disasters or reduced revenue. Indirect support arrives transparency can provide investors with insight into although there is little information specific to animal 113 via the purchase of subsidised grain (or policies which how companies are managing their ESG exposure. factory farming. It is also recognised that a key function corruption? result in crop overproduction), and public funding to Additionally, although not specific to animal factory of corporate governance is, according to the OECD, to  Chris Smith (US Republican politician) help prevent pollution and remediate polluted land. farming, there is evidence showing that a strong ESG ensure that “risks are understood, managed and, when

32 | fairr.org fairr.org | 33 Furthermore, animal factory farming is assuming a more Legal and regulatory frameworks and government dominant role in developing countries, where corporate oversight is also generally weaker in developing CHAPTER 3: governance is less robust than in developed countries. countries, increasing the potential risks associated INTEGRATING ANIMAL FACTORY FARMING Less developed countries are expected to account for with many ESG issues. For example, the explosion in 77% of additional meat output growth between 2012 and pig production in the Chinese of Jiaxing in Zheijiang RISKS INTO INVESTMENT PROCESSES 2021.111 Despite being lauded for ‘quality and safety’, province has led to severe environmental damage, corporate governance concerns were among the reasons improper production and processing practices, and a why the China’s WH Group’s initial IPO was cancelled in black market meat trade. The severity of the problem April 2014.112 In contrast, UK poultry producer Moy Park was brought to international attention when, in demonstrates a robust approach to corporate governance March 2013, more than 16,000 dead pigs were found 3.1 OVERVIEW and a progressive attitude towards sustainable meat in the region’s waterways, threatening drinking supplies. Businesses that address production. These factors have contributed to a positive In locations such as these there will be a greater onus The food and agriculture sector presents significant or enhance animal welfare outlook and keen investor interest in the company’s on companies to ensure they are mitigating risks to investment opportunities with a growing world potential IPO (see Case study 5). their own operations and in their supply chains. population driving ever-increasing demands for more are likely to win or retain a food. However there are signs of growing recognition competitive advantage in the amongst stakeholders, including many in the financial 119 sector, that investments in agriculture should not global marketplace CASE STUDY 5: STRONG GOVERNANCE OF FARM ANIMAL negatively affect people, livelihoods and the natural WELFARE ISSUES BOOSTS REVENUE AND INVESTOR INTEREST  International Finance Corporation environment.

UK poultry producer Moy Park, was purchased by The company’s animal welfare programme is based on Within this context, animal factory farming is under However, there are signs that the financial community Brazil-based chicken giant JBS in June 2015, for a the concept of the Five Freedoms, in which all Moy Park increasing scrutiny and some leading investors are is beginning to recognise the need to ensure that reported $1.5bn. farmers must be trained. Furthermore, the company looking more carefully at risks associated with the investments in agriculture, including meat production, has a fully traceable supply chain in place and actively sector including development finance institutions are responsible and do not negatively affect people, Moy Park’s progressive strategy to focus on works to reduce its . It also operates and those who define themselves as mainstream livelihoods and the natural environment. In response, its high-quality, high-welfare chicken appears to an ‘Antimicrobial Stewardship Forum’, which aims to responsible investors. a number of instruments – guidelines, compacts, support strong sales and the company’s continued educate poultry producers in principles, standards, etc. – have been created to help development. The company has not been implicated and best practice to reduce usage of antimicrobials. inform responsible investment across the agricultural in recent food safety scandals involving the UK poultry 3.2 INVESTING IN FOOD AND sector and specific sub-sectors, such as livestock industry. In the second quarter of 2014, Moy Park’s Sustainability disclosure is supported through a AGRICULTURE production. For example, the International Finance revenue rose by 0.6% to £356.4 million.114 plethora of literature, including Moy Park’s ‘Farming Corporation (IFC) issued voluntary guidelines and Way’ booklet and Corporate Responsibility brochures, The food and agriculture sector presents significant recommendations for clients on how to incorporate animal Moy Park was the first company in the UK to introduce as well as the company . Moy Park’s clear investment opportunity. Overall food production welfare considerations in intensive livestock operations. and organic birds. The company is now the commitment to corporate responsibility and must increase by around 70% between 2005/07 and Instruments such as these are increasingly being used largest producer of organic and free range chicken responsible farming has been awarded in several 2050 to meet rising global food need.118 This is being by investors to help improve financial performance, in the UK and Ireland.115 Although the company’s ways. The Business Benchmark on Farm Animal driven by population growth and, currently, by greater manage risk and contribute to the economic, social and chickens are raised using in a variety of ways – organic, Welfare (BBFAW), which assesses companies on their demand for animal protein as a result of rising wealth. environmental sustainability of the agricultural sector (see free range, indoors – all methods aim towards higher approach to managing farm animal welfare, recognises Meanwhile, there has also been an upward trend Case study 6: International financial institutions get on the welfare standards. For example, Moy Park has the efforts of Moy Park (under the Marfrig Group). in in recent years. On the back of these front foot to monitor factory farms). stringent stocking density standards and antibiotic- fundamentals, appetite for agricultural investment use policies.116 According to Moy Park’s principles, it is In 2013, Moy Park reached Tier 2 (‘Integral to Business is strong and can be met through several options There is also growing engagement by investors on committed to working with its farmers to ensure Strategy’) of the BBFAW, improving from Tier 4 (‘Making including commodity futures, equity in farming and ESG concerns specifically related to animal factory that the best welfare conditions are provided for Progress on Implementation’) in 2012. Moy Park was food production companies, and agricultural ETFs. farming. Led by the international financial institutions, all of its birds.117 also the first poultry company to be recognised in the For many investors the sector is attractive because of a small group of private investors are now looking Business in the Community’s Corporate Responsibility the significant potential for positive returns or value more carefully at risks associated with poor animal Index. This was improved upon in 2014, when the preservation. It also provides an opportunity to diversify welfare which primarily stem from the proliferation of company was awarded a ‘3 star’ rating in the index. portfolios, manage inflation risks and provide exposure animal factory farming. Awareness of the additional to emerging markets. ESG challenges that are linked to the intensification

34 | fairr.org fairr.org | 35 of livestock production is also rising. Largely within 3.3 INTEGRATING ANIMAL manage key factors driving risk and returns and CASE STUDY 7: LEADING the context of responsible investment, animal factory FACTORY FARMING RISKS INTO select the best-positioned companies. The integration INVESTORS PUTTING ANIMAL farming risks are: INVESTMENT PROCESSES of animal factory farming risks also recognises that FACTORY FARMING •• Being integrated into ESG research negative impacts from the sector may affect long-term ON THE ESG AGENDA and decision making; INTEGRATING ANIMAL FACTORY sustainable returns by undermining social, environmental •• The focus of engagement and active FARMING RISKS INTO ESG RESEARCH and economic systems. Integrating the risks from animal ownership; and AND DECISION MAKING factory farming depends on creating the appropriate There are a number of different investors that are •• Providing the basis of greater Integrating animal factory farming risks into ESG policies and associated documentation and then integrating ESG risks associated with animal factory demands for disclosure. research and decision making helps investors to implementing these into the investment process. farming into their investment processes. These include asset owners and investment managers, Financial institutions have developed policies, and institutional investors, those with a specific guidelines and position statements to steer and ethical mandate and mainstream investors. There are CASE STUDY 6: INTERNATIONAL FINANCIAL INSTITUTIONS explain their activities in relation to animal factory also a wide range of ways in which investors, or their GET ON THE FRONT FOOT TO MONITOR FACTORY FARMS farming. Rabobank, reportedly one of the world’s providers, are approaching this challenge, largest investors in factory farms,126 has established including via use of ESG research, engagement and Several international financial institutions (IFIs) have production121 and mammalian livestock production.122 livestock farming position papers127 and a separate active ownership, and encouraging greater disclosure established policies, guidelines and tools to ensure In 2013, the IFC commissioned an update of the animal welfare statement.128 Triodos excludes with respect to animal factory farming risks. that they do not fund projects that would result in 2006 GPN to reflect emerging best practice and (animal) factory farming from financing due to increased significant environmental or social harm, including thinking on the issues.123 sustainability risks, unless firms can demonstrate In one of its first documents the FAIRR Initiative those that would be considered animal factory that they are proactively attempting to prevent published case studies from nine investors or farming. Pressure from outside stakeholders European Bank for Reconstruction and controversies.129 investment agencies to show how they are taking (such as NGOs) has encouraged financial institutions Development (EBRD): In May 2014, the EBRD these issues into consideration. The featured to consider the environmental and social dimensions revised its Environmental and Social Policy (ESP) A number of ethical investment funds include investors are: of their investments. These same pressures are to guarantee agribusiness clients’ compliance with factory farming as a negative investment screening helping to driving improved practice within the EU animal welfare laws.124 This is the first time that criteria, excluding companies involved in the rearing financial sector, such as how issues such as an IFI has introduced compulsory animal welfare of animals in intensive conditions.130 For example, animal factory farming should be treated. standards for investments. The revision followed ethical funds sold by Standard Life Investments the publication by International, avoid investments in companies that use intensive Key examples of how IFIs have sought to influence Compassion in World Farming and Four Paws of a investment in animal factory farming include: report in 2013 in which the EBRD was criticised for providing loans to non-EU companies using extreme One of the key elements : A 2001 World Bank report farm animal confinement practices. of our research process recommended that the organisation “avoid funding large-scale commercial, grain-fed feedlot systems Equator Principles (EPs): Eighty financial is what we call ‘horizon and industrial milk, pork and poultry production institutions located in 34 countries have adopted scanning’, that is looking except to improve the public good areas of the Equator Principles (EPs), a environment and food safety.”120 framework to provide environmental and social out for those issues and due diligence for certain project finance advisory risks that may not be International Finance Corporation (IFC): services, project finance, project-related corporate In 2006, the (IFC) incorporated the issue of animal loans and loans.125 The identification of material today but that may welfare in intensive livestock operations into its projects requiring environmental and social review significantly impact on our investment decisions through a Good Practice and due diligence is based on the IFC performance FARMING Note (GPN) on animal welfare. The GPN provides standards and would be applied to animal factory investments in the future. voluntary guidelines and recommendations for farming projects. One such issue is farm IFC clients, rather than compulsory requirements. 134 In 2007, the IFC published environmental, health animal welfare. The case study can be accessed via the and safety guidelines for intensive poultry FAIRR.org website or by clicking here  BNP Paribas

36 | fairr.org fairr.org | 37 farming methods.131 Ethical funds offered by Kames decided not to adopt specific policies on animal to engaging with portfolio company management – ENCOURAGING GREATER CORPORATE Capital do not include companies that have any welfare or factory farming although it does continually these approaches are contingent on factors such as DISCLOSURE ON ANIMAL FACTORY FARMING involvement in intensive farming.132 Firms such as monitor and report on both issues.133 However, PGGM investment strategy and governance models. Food companies and agribusiness are increasingly PGGM, a Dutch service provider, have recognises that animal welfare can be a material factor The amount of influence that an investor bears will expected to report on their performance with respect in investment decisions. also reflect the level of investment and the of to farm animal welfare and material sustainability the portfolio company or region it is based in.137 issues. Citigroup cites animal cruelty as a ‘headline The key risks from the There are a number of practices that investment firms Examples of active engagement and ownership on risk’ that can impact companies, while investor support stock sheet drew on ESG are using or could use to integrate animal factory animal factory farming risks include: firm Glass Lewis believes that a ‘high-profile [animal farming risks into ESG research and decision-making. •• Proxy voting: A number of investment firms – welfare] campaign launched against a company could analysis, highlighting that “crop Investors are utilising the available evidence to support such as JP Morgan, Russell Investments, First result in shareholder action, a reduced customer base, failure due to climate change investment objectives with respect to animal factory Affirmative and AllianceBernstein (part of AXA) – protests and potentially costly litigation.’ These positions farming. Key stages where these activities are taking place include animal welfare within their proxy voting are situated within a broader consensus that companies impacts on feed prices. Feed include: due diligence, such as screening and company procedures and guidelines. that address ESG issues achieve better growth, cost costs are a very significant investigation; investment decision; and the investment •• Shareholder resolutions (animal welfare): savings, and profitability.142 Therefore, improved agreement.135 Table 5 illustrates ways to integrate ESG Ethical engagement policies have also provided disclosure in farm animal welfare and sustainability part of the livestock producers’ issues into equity research and the variety of resources the basis for investors to discuss animal factory issues provides investors with the information they P&L and disruptions to that are available to support these activities, such as the farming production systems with companies they need to manage their exposure to risks of investing in Business Benchmark on Farm Animal Welfare (BBFAW), hold equity. In 2014, Wespath co-filed a shareholder companies linked to animal factory farming. the supply chain caused by which provides a tool for investors to assess corporate resolution (alongside the Humane Society of the US climate change would impact animal welfare policies and performance. and Green Century Capital Management) with Tyson With investors and NGOs working together on issues Foods that encourages the company to consider and related to farm animal welfare and sustainability, on farm profitability with a ENGAGEMENT AND ACTIVE OWNERSHIP report on the reputational, financial and regulatory demand for action on animal factory farming could consequential knock-on to ON ANIMAL FACTORY FARMING RISKS risks associated with its use of gestation crates. significantly increase. From an investment perspective, Investors are engaging with their portfolio A coalition of US SRI investors filed a shareholder there have been largely separate debates over the 136 [the company]”. companies to encourage improved performance on resolution in 2007 with US-based Dean Foods over exposure of animal factory farming to farm animal farm animal welfare and broader sustainability issues. the company’s organic milk claims despite operating welfare and sustainability risks. However, these appear  The Co-operative There are varying approaches that an investor can take factory farming conditions. In 2008, a shareholder to be converging as long-term sustainability issues resolution was filed against Tesco over its animal provide greater justification for re-evaluating how food welfare practices. animals are raised. The business case for corporate •• Shareholder resolutions (sustainability): disclosure on sustainability issues has been established Since 2011, there have been 39 shareholder – 89% of the more than 160 academic studies, research resolutions filed by members of the CERES papers and meta-studies showed that companies with investor network with companies in the food and high ESG performance ratings exhibit market-based beverage sector over sustainability-related issues.138 outperformance compared to industry peers.143 Even , with its sustainability The evidence base specific to farm animal welfare and animal welfare policies, has come under is less mature. fire from shareholders over its failure to produce an annual sustainability report and validate However, there is growing awareness within the its credentials.139 financial sector of the risks associated with farm •• Monitoring: Responsible investment policies animal welfare. Multi-stakeholder initiatives such as can also help investors prioritise which ESG issues the Business Benchmark on Farm Animal Welfare they should focus on in the short and medium-term have developed to provide firms with the information with their portfolio companies. For example, they need to understand the business implications of Co-operative Asset Management encourages farm animal welfare for the companies in which they companies to shift from intensive farming systems.140 are invested. This information is used to provide The Co-operative has written to Kellogg’s regarding investors with reassurance that these types of issues its use of animal factory farming systems, including are being effectively managed across their operations barren battery cages.141 and supply chains.

38 | fairr.org fairr.org | 39 TABLE 5: Integrating ESG issues into equity research INVESTMENT PURPOSE TYPES OF RESOURCES EXAMPLES ACTIVITY AVAILABLE

INVESTMENT PURPOSE TYPES OF RESOURCES EXAMPLES Analysis of To enable a better Governments provide early •• Economics of Heat Stress: ACTIVITY AVAILABLE financial reports understanding of warning or consultation Implications for Management (De 150 Industry analysis To enable a better There are studies revealing the •• Monitoring and how companies opportunities regarding proposed Vries, A., 2014) understanding risks associated with changes in Evaluation 2013 (OECD)144 are managing changes to legislation or •• Intergovernmental Panel on Climate of the sensitivity particular parameters, such as •• OECD-FAO Agricultural Outlook ESG risks and regulations. Change: Impacts, Adaptation and 151 of animal resource availability, temperature 2014–2023145 opportunities Vulnerability (2014) factory farming and government subsidies. •• Beyond Factory Farming: related to There are multiple datasets •• PreLex: monitoring of European 152 as a whole to Sustainable Solutions for Animals, animal factory and tools available to model the Commission proposals particular ESG Analysis also highlights the People and the Planet (Compassion farming and impacts of key climate parameters •• Attitudes of EU citizens towards 153 issues ‘hidden costs’ associated in World Farming, 2009) the subsequent on operational performance. Animal Welfare (EC, 2007) with animal factory farming, •• Livestock’s Long Shadow: impact on key demonstrating the industry’s Environmental Issues and Options performance Surveys are regularly published on sensitivity to key issues (e.g. (FAO, 2006) metrics changing consumer attitudes and greenhouse gas emissions). buying preferences.

Macroanalysis at To enable a better Research highlights the impacts •• CAFOs Uncovered: The Untold the country level understanding of of evolving regulations or subsidy Costs of Confined Animal Feeding ESG issues that regimes on animal factory farming Operations (Union of Concerned are likely to affect and long term constraints on Scientists, 2008) animal factory growth, such as land or water •• Costs of compliance with EU farming within a availability. regulations and competiveness of particular country the EU dairy sector (Bezlepkina, I.V. There is extensive information et al, 2008146) available that can be used to •• Assessing the economic cost of assess country-level factors which endemic disease on the profitability can impact the industry, such as of Australian and sheep levels of government investment producers (Meat and Livestock in supportive infrastructure Australia, 2008147) and long-term economic or •• International Monetary Fund (IMF) demographic trends. regional and country reports148

Analysis of To enable a better Corporate documentation •• Business Benchmark on Farm company strategy understanding of and third party information Animal Welfare (2012, 2013)149 how companies demonstrates corporate •• Company CSR/Sustainability reports are managing awareness and management of ESG risks and ESG issues. opportunities related to animal factory farming and the subsequent impact on key performance metrics

40 | fairr.org fairr.org | 41 3.4 INTEGRATING FARM ANIMAL and good animal welfare standards as part of their CASE STUDY 9: EGG SUBSTITUTE COMPANY SET TO BECOME WELFARE OPPORTUNITIES INTO marketing in 2012 and saw revenues rise 23%. INVESTMENT DECISIONS. FASTEST GROWING FOOD COMPANY IN HISTORY There are also exciting opportunities to invest in By integrating farm animal welfare issues into their companies developing plant-based alternatives to Established in 2011 Hampton Creek is a US based In just four years of operation, Hampton Creek has investment process, investors are also becoming satisfying the world’s growing demand for protein, food tech company built on the belief that there are attracted a number of large customers. Such as aware of opportunities around the potential changes including companies related to the technology and more sustainable, humane and cheaper ways to feed , a global catering company who supply in the market. This is because as food safety scandals infrastructure of those more sustainable alternatives. the planet than animal factory farms. Based in San over 4bn meals a year to schools and across and other risk from factory farmed meat appear to be The case study on the growth of Hampton Creek is Francisco, the company has analysed thousands the US. and UK and the store 7/11. Hampton changing consumer behaviour, companies with high a good example of this, as are US of plant proteins to find low-cost, environmentally creek estimates the switch to Just Mayo in 7/11 products animal welfare standards are positioned to benefit. company Impossible Foods which uses specific friendly and healthy alternatives to animal-based will save 81m gallons of water and 191m grams of CO2 proteins and nutrients from greens, , and proteins to use in a range of products, such as a each year158. The case study of American fast food chain Chipotle is grains to recreate the complex taste of meat Canadian yellow pea protein as a substitute for a good illustration of this trend. Chipotle used and dairy products. egg. Its current products include: ‘Just Mayo’, The 2015 outbreak of Avian flu crisis in the U.S has shown ‘Just Cookies’ and ‘Just Scrambled’. both the vulnerability of current egg production models and the potential of companies such as Hampton Creek. Growing and harvesting plant protein is less The outbreak led to the death of more than 45m birds CASE STUDY 8: TASTY FINANCIAL RESULTS FOR US RESTAURANT THAT resource intensive and expensive than egg production. (80% of which are egg laying hens in factory farms) in the PUTS HIGH ANIMAL WELFARE STANDARDS AT HEART OF ITS BUSINESS This means Hampton Creek products are cheaper first half of 2015159. The Avian flu outbreak has led to an egg than equivalent products containing eggs. Just Mayo shortage in the U.S with egg prices more than doubling. US restaurant chain, Chipotle, has a history of increasing actions are making things better, not worse. It’s our the company’s first product for example can be sales and share prices by recognising the importance promise to run our business in a way that doesn’t exploit supplied to supermarkets for about 10% less than Since the avian flu crisis hit, Hampton Creek reports of animal welfare. After a visit to an animal factory farm animals, people or the environment. ” the normal cost of regular egg based mayonnaise. receiving enquires from most major fast food chains and in 1999, Chipotle’s CEO Steve Ells implemented a new Steve Ells154 In terms of resource use, Hampton Creek estimates predicts its revenue run rate will from $48m to $120m sourcing policy for ‘natural’ pork. Under the Chipotle it has saved over one billion gallons of water in the by next January. The company looks on to become policy, ‘natural’ refers to animals that are: In recognition of the low awareness among consumers of last year157, an issue that is becoming increasingly the fastest growing food company in history160. •• Fed a vegetarian farm animal welfare and factory farming issues in the US, critical to business – no more so than in California •• Not given growth hormones or antibiotics in Chipotle has invested in awareness-raising campaigns where the company is based. their feed over a number of years, including an award-winning •• Allowed to roam free in a pasture and are animated film in 2014, to support their sustainability treated humanely. strategy. Industry metrics following Chipotle’s ‘Cultivate a Better World’ marketing campaign showed improved Following the switch towards sustainable sourcing customer loyalty.155 Social media activity during the efforts in 2000, Chipotle was forced to raise the price campaign reportedly contributed to a 23.2% increase in of its pork burrito by US$1. Typically, sales would be Chipotle’s revenue during the first half of 2012. expected to drop following a price increase, however Chipotle saw sales increase sharply as a result of its Chipotle’s initial public offering in 2006 rose 100% commitment to better welfare pork. Since then, Chipotle during its first day on the New Stock Exchange, with has broadened its natural sourcing policy to include share prices rising from US$22 to US$44 per share.156 chicken and beef where possible. Chipotle is now The company’s announcement in 2013 that it will strive to reported to be the largest restaurant buyer of naturally remove GMO ingredients from its products was followed raised meat in the US. Other sustainability efforts, by a 15% increase in stock prices. Chipotle’s share price such as sourcing local and organic produce, support sat at US$619.25 (as of 23 June 2015). The share price Chipotle’s commitment to ‘food with integrity’. remained relatively high compared to historic levels even after an E.coli outbreak in late 2015 offered a reminder "Food with Integrity" is our commitment to always look that managing potential health risks is an ongoing closer, dig deeper, and work harder to ensure that our challenge for even progressively-minded food retailers.

42 | fairr.org fairr.org | 43 CASE STUDY 10: HEINZ – GLOBAL FOOD GIANT IMPROVES CHAPTER 4: PRACTICES FOLLOWING POOR BBFAW RANKING IMPLICATIONS AND NEXT STEPS

Heinz is a global company, which has Other animal welfare policy commitments introduced plants on six continents and products for sale in 200 by the company include a commitment to work with countries and territories. In the 2013 edition of the suppliers across the globe in order to reduce the use Business Benchmark for Animal Welfare (BBFAW), of battery cages for laying hens and to work with pork the company was named and shamed as a company supplier to phase out gestation crates. Already in the in the bottom tier (tier six) of the benchmark. UK Heinz uses free-range eggs in its mayonnaise, 4.1 OVERVIEW 4.2 IMPLICATIONS OF THE A tier six ranking on the benchmark means that whilst in the US the company aims to source 20% of FINDINGS FOR INVESTORS animal welfare does not appear to be an issue on its eggs from free-range facilities by the end of 2015. This report draws on a wide range of sources to assess a company’s business agenda and is the lowest the potential material risks of animal factory farming The social and environmental impacts of animal possible benchmark ranking. These efforts and improved transparency on policies from an ESG perspective. A strong case is made for factory farming identified in this report support were enough for Heinz to improve by two tiers to tier responsible investors to incorporate these risks into the case for greater scrutiny of the sector as part A number of publications including the Financial four in the 2014 benchmark. There remains room their investment approaches. However, the limited of responsible investment practice. Animal factory Times reported on the results of the benchmark and for improvement in Heinz’s policies and practices. extent to which investors have engaged with animal farming is associated with severe environmental Heinz received negative publicity for the poor score. However this is clear evidence that investor tools like the factory farming historically indicates a need to raise and social impacts, which can be experienced at benchmark can lead to improvements at companies. more awareness of the financial risks associated local, regional and global scales. This places animal Heinz has since acknowledged that consumers have with the sector. factory farming alongside other high impact sectors concerns about animal welfare and has worked to including oil and gas, mining, and clothing and apparel. improve and publicly disclose its animal welfare A number of activities can be undertaken to help Environmental and social risks can have a significant policies for its operations and throughout its address existing knowledge gaps and provide the financial impact on investments, including reducing supply chain. With help from the Humane Society investment community with a better understanding the value of the asset or diminishing dividends as a of the United States Heinz has introduced a new of the risks associated with animal factory farming. result of changes in the operating costs. The reputation sustainability procurement policy and an animal These activities include: of investors may also be at stake if stakeholders welfare programme based on the principles of the associated them with environmentally or socially five freedoms for animal welfare. Under the policy, •• Further in-depth research, which explores in more damaging investments. all Heinz suppliers are required to adhere to the five detail the connection between the issues and freedoms and can be audited to ensure compliance. financial returns and distinguishes animal factory The negative financial impacts of ESG issues on farming from traditional livestock production. animal factory farming highlight the importance of •• Analysis of the effect of strong ESG management integrating analysis of these issues into investment (including high animal welfare standards) on the research and decision-making. ESG issues can affect long-term financial performance and investment financial outcomes through a range of pathways, returns of the animal factory farm sector. including production and pricing, market access, •• Increased engagement with stakeholders in legal and regulatory and reputation. The manner in countries that are expected to see the highest which ESG issues affect these financial levers can be future growth in animal factory farming. relatively straightforward, such as in the case of short- •• Deepening understanding and raising awareness term events like natural hazards or food scandals. of how investors are engaging with animal factory However, the magnitude and time-scales over which farming and shifting investment to less intensive effects are felt can vary tremendously. Disentangling production systems or plant-based agriculture. the longer-term effects of ESG issues from other drivers of company and investment performance is These activities will also help to build the more challenging. momentum around responsible investment and animal factory farming.

44 | fairr.org fairr.org | 45 Investors that integrate analysis of ESG issues into to take a closer look at the negative impacts of animal CASE STUDY 11: SHARE PRICE TANKS AFTER ANIMAL WELFARE REVELATIONS their investment approach must look across agriculture factory farming and how the industry may potentially and food value chains, particularly as the magnitude of be affected by external changes to the operating financial risks is likely to increase over the long term. environment. These stakeholders can ask challenging Events at SeaWorld in over the last two years $38 Companies directly involved in animal factory farming are questions to help them write laws and regulations, perfectly demonstrate the material impact that poor $34 most exposed to key ESG issues. However, consumer- mobilise support for opposition campaigns, buy management of animal welfare issues can have on $28 facing companies at the end of the value chain – such , develop business strategies and to help investment value. $24 as food retailers and restaurants – are also exposed to inform investment decisions. $20 financial harm. The magnitude of risks to companies SeaWorld in Florida, part-owned by private equity group $16 involved in animal factory farming and industrial Despite increasing interest and momentum, many of Blackstone, has suffered plummeting stock prices and 2014 2015 food production are likely to increase as a result of these questions remain unanswered. A number of attendance figures since the release of independent rising capital costs, the shifting gravity of production steps would help to address these knowledge gaps. documentary Blackfish in 2013, a film cataloguing Representation of SeaWorld share to developing countries with less robust regulation, alleged mistreatment of whales at SeaWorld’s parks. prices drom December 2013 to November 2015. the impacts of climate change and increasing social These include further research that may include: For example, the film claims that the company’s concerns over animal welfare and sustainability. treatment of whales provoked violent behaviour in the •• Research to clearly distinguish between the effects animals, contributing to the deaths of three people. SeaWorld’s shares have There is a need to raise awareness of ESG issues of ESG issues on animal factory farming and related to animal factory farming and the financial traditional (or ‘smaller scale’) production. Between the release of that documentary and the time lost over half of their value risks they present to more investors, and to •• Research which more clearly identifies the of writing (Nov 15) SeaWorld’s shares have lost over half following the release of a companies with links to the sector. Outside of a few specific effects of ESG issues on different types of their value. The company also saw the CEO resign far-sighted institutions there is a general lack of of animal factory farming, such as cattle, poultry at the end of 2014 and has seen attendance at its orca film alleging mistreatment awareness among the wider investment community of and pig production. theme parks in San Diego and San Antonio continue to of animals the short and long-term risks that are inherent to the •• More detailed analysis of the extent to which strong fall. Figures from San Diego authorities showed a 17% continued growth of the animal factory farm industry. ESG management (including high animal welfare drop in attendance at the park in 2014 from 4.5 million standards) in the farming sector could improve long- to 3.7 million161. FAIRR founder Jeremy Coller commented, Finally, there is a clear need for additional research term financial returns. This should include a clear "SeaWorld is not part of the factory farming universe in a number of areas to support the initial exploratory definition of the animal farming universe and how The original Blackfish film is thought to have cost just but I think the harsh financial lessons its investors have findings contained in this report.The bulk of the the performance of these companies would compare $76,000 to produce and originally played in only five learnt since the release of Blackfish shows the dangers evidence for this report has been drawn from to those with poor ESG management. movie theatres yet its financial impact on SeaWorld of not acting to manage animal welfare risks. We live in a) academic, government and industry studies on •• Research to establish practical steps that can best Entertainment continues to be felt. In November 2015, an age where the power of social media and changing short-term events that are well recognised by the retool and improve industry practices so that the investors were warned that full-year profits will fall by consumer behaviour can quickly combine to transform livestock industry; b) pressure group reports, with sector can both help meet the demand for global a further $10m. profitable businesses into value-destroying liabilities. some lacking the perceived rigour of objective, peer meat while exhibiting strong ESG management Smart investors will take note." reviewed research; and c) anecdotal media stories. There has also been regulatory backlash. In October However, there is still a significant knowledge gap with Practical steps to close the knowledge gap can 2015, California authorities banned SeaWorld from respect to the financial implications of ESG issues for also include: attempting to new whales in a planned $100m companies associated with the animal factory farming extension to its whale tanks in San Diego. industry. Suggestions for further research are included •• Increased engagement from investors with animal in the ‘Next Steps’ section below. factory farming stakeholders in countries that are SeaWorld have clearly recognized the long-term expected to see the highest growth in animal factory damage done to their reputation. It has reportedly farming over coming decades, particularly China spent $15m on a TV and social media campaign to 4.3 NEXT STEPS and India. counter negative sentiment and promote the work •• more case studies that demonstrate it does to protect and care for whales and other Greater scrutiny of animal factory farming by a wide how private investors are engaging with animal animals. In November 2015, SeaWorld in San Diego range of stakeholders has highlighted the need factory farming (including shifting investment responded to the ongoing pressure by announcing for further research and engagement on critical towards less intensive production systems or that they would end live killer whale performances ESG issues. Governments, civil society, the public, plant-based alternatives to meat) and the results at the park. companies and financial institutions would all be wise that have been achieved.

46 | fairr.org fairr.org | 47 APPENDIX ENDNOTES

1. According to the American Society for the Prevention of 15. Dairy Co, February 2014, ‘World Milk Production’. Available at (ASPCA) dairyco.org.uk/market-information/supply-production/milk- production/world-milk-production/#.VBFx-fldWVN 2. Union of Concerned Scientists, April 2008, CAFOs Uncovered: [Accessed on 11 September 2014]. The Untold Costs of Confined Animal Feeding Operations. Available at ucsusa.org/assets/documents/food_and_ 16. FAO, October 2009, How to feed the world 2050:High-level expert agriculture/cafos-uncovered-executive-summary.pdf forum. Available at: fao.org/fileadmin/templates/wsfs/docs/ [Accessed on 11 September 2014]. Issues_papers/HLEF2050_Global_Agriculture.pdf [accessed on 10 November 2014]. 3. Pew Commission on Industrial Farm Animal Production, 2008, DEFINITIONS on the number of animals that are confined, how Putting meat on the table. Available at: ncifap.org/_images/ 17. PwC Economics, January 2013, World in 2050: the BRICs and PCIFAPFin.pdf [accessed on 11 November 2014]. beyond: prospects, challenges and opportunities. Available at: wastewater is managed, and whether the operation pwc.com/en_GX/gx/world-2050/assets/pwc-world-in-2050- 4. E. Thom, 1977, The discomfort index. Weatherwise, Animal factory farming – This report does not seek to is a significant contributor of pollutants.164 report-january-2013.pdf [accessed on 10 November 2014]. v12, pp57–61. Available at tandfonline.com/doi/ define animal factory farming using specific criteria or abs/10.1080/00431672.1959.9926960?journalCode=vwws 18. FAO, October 2009, How to feed the world 2050:High-level expert thresholds. Instead, it considers animal factory farming In the European Union (EU), ‘intensive’ is defined as 20#.VAgnd2M3c0E [Accessed 4 September 2014]. forum. Available at: fao.org/fileadmin/templates/wsfs/docs/ Issues_papers/HLEF2050_Global_Agriculture.pdf to be operations which exhibit certain characteristics an operation which may rear, or be designed to rear, 5. I. , M. Shanklin & H. Johnson, 1964, Dairy shelter [accessed on 10 November 2014]. that differentiate it from traditional, non-intensive 40,000 poultry, 2,500 production pigs (over 30kg), or based on milk production decline as affected by temperature and humidity. American Society of Agricultural and Biological 19. World Health Organization, 2014, Global Health Observatory: 165 livestock production. These are: 750 sows. The EU recognises that “intensive farming Engineers, v7, pp329–331. Available at elibrary.asabe.org/ Urban population growth. Available at: who.int/gho/urban_ is likely to result in worse conditions for the animals abstract.asp?aid=40772&t=2&redir=&redirType= health/situation_trends/urban_population_growth_text/en/ •• The large scale of the operations in terms of than low intensity, ‘natural’ or ”.165 [Accessed 4 September 2014]. [accessed on 10 November 2014]. animal stock numbers; The Canadian province of Saskatchewan defines an 6. Compassion in World Farming, No date, Strategic Plan 20. FAO, No date, ‘Livestock and the environment’. Available at 2013–2017, For Kinder, Fairer Farming Worldwide. Available at fao.org/livestock-environment/en/ [Accessed on 13 August 2014]. •• Confinement that undermines the five ‘intensive livestock operation’ as one where the space ciwf.org.uk/media/3640540/ciwf_strategic_plan_20132017.pdf 21. Kearney, J., 2010, Food consumption trends and drivers. animal welfare freedoms;162 per animal unit, in which livestock is confined, is less [Accessed on 11 September 2014]. Philosophical Transactions of The Royal Society: Biological 2 166 •• Management and husbandry practices which may than 370m . 7. dairy.ahdb.org.uk/resources-library/market-information/ Sciences, Vol.365 (1554), pp.2793–2807. Available at compromise the health and safety of workers, farming-data/eu-cow-numbers/#.VYQvBVoeXdk rstb.royalsocietypublishing.org/content/365/1554/2793.full [Accessed on 13 August 2014]. surrounding communities and the environment; The US-based Pew Commission on Industrial 8. FAO, No date, FAOSTAT – Production – Livestock Primary. •• Highly mechanised production methods, such as Farm Animal Production has developed a more all- Available at faostat3.fao.org/faostat-gateway/go/to/home/E 22. Kearney, J., 2010, Food consumption trends and drivers. [Accessed on 13 August 2014]. Philosophical Transactions of The Royal Society: Biological the use of hardware and automation for tasks such encompassing term, Industrial Farm Animal Production Sciences, Vol.365 (1554), pp.2793–2807. Available at 9. Food and Agriculture Organisation of the (FAO), as feeding and cleaning. (IFAP). This refers to highly intensive production practices rstb.royalsocietypublishing.org/content/365/1554/2793.full 2005, Animal welfare and the intensification of animal production 168 [Accessed on 13 August 2014]. regardless of the size of the facility. IFAP “encompasses – An alternative interpretation. FAO Readings in Ethics 2. There is no universally agreed definition of ‘animal all aspects of breeding, feeding, raising and processing Available at fao.org/docrep/009/a0158e/a0158e00.htm#Contents 23. Packaged Facts, April 2013, Meat and poultry trends in the US. factory farming’. The term has been used mainly by animals or their products for human consumption”, [Accessed on 13 August 2014]. Available at: packagedfacts.com/Meat-Poultry-Trends-7494416/ [accessed on 10 November 2014]. NGOs or pressure groups to refer to livestock with a focus on a small number of species. 10. De Haan, C. et al., (1997) Livestock and the environment: finding a balance. Available at: fao.org/docrep/x5303e/x5303e00. 24. Union of Concerned Scientists, April 2008, CAFOs Uncovered production systems that demonstrate the above htm [accessed on 11 September 2014]. Cited in Matheny, – The Untold Costs of Confined Animal Feeding Operations. characteristics. Alternative terms include ‘industrial Animal factory farming can also be differentiated G. & Leahy, C., 2007, Farm-animal welfare, legislation and Available at ucsusa.org/assets/documents/food_and_ livestock production’ and ‘intensive animal farming’. from traditional or conventional farming, although trade. 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FAO, No date, FAOSTAT – Production – Livestock Primary. [Accessed on 11 September 2014]. and external interests to describe animal factory inputs, raise a range of animal and treat Available at faostat3.fao.org/faostat-gateway/go/to/home/E farming. The term originates from the United States animals more humanely. [Accessed on 13 August 2014]. 26. Union of Concerned Scientists, April 2008, CAFOs Uncovered: The Untold Costs of Confined Animal Feeding Operations. Environmental Protection Agency which defines 13. FAO, 2014, Data – Live Animals (Number of heads by country). Available at ucsusa.org/assets/documents/food_and_agriculture/ Available at faostat3.fao.org/faostat-gateway/go/to/browse/Q/QA/E CAFOs as farm operations that exhibit particular This report focuses on primary livestock species cafos-uncovered-executive-summary.pdf [Accessed on 8 September 2014]. characteristics. These include the confinement of associated with animal factory farming: cattle, poultry [Accessed on 11 September 2014]. 14. Institute for Agriculture and Trade Policy, February 2014, China’s animals for at least 45 days per year, and the absence and pigs. Globally, however, there are a large number Dairy Dilemma – The Evolution and Future Trends pf China’s of grass or other vegetation from the confinement area of livestock species, including , ducks, and Dairy Industry, Global Meat Complex: The China Series. Available during the normal growing season.163 In the US, CAFOs buffalo that are raised in conditions consistent with at iatp.org/documents/china%E2%80%99s-dairy-dilemma-the- evolution-and-future-trends-of-china%E2%80%99s-dairy-industry can be classed as large, medium or small, depending the characteristics of factory farming. [Accessed on 13 August 2014].

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54 | fairr.org fairr.org | 55 ABOUT US

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ACKNOWLEDGEMENTS CONTACT The research for this report was conducted by Alan Briefel James Allan and his team at Verisk Maplecroft. Executive Director, FAIRR Initiative We would also like to thank all those who T: +44 7770 681333 reviewed the report including individuals from E: [email protected] Compassion in World Farming, ShareAction, Ownership Capital, Farm Forward and Rosie Wardle Humane Society, US. Many thanks also to FAIRR Initiative ESG Communications for their work on refining T: +44 7525 434162 and designing the report. E: [email protected]

56 | fairr.org Research by Help us close the knowledge gap. Join FAIRR, at: fairr.org Follow us: @FAIRRinitiative