ISSUES FOR RESPONSIBLE INVESTORS FEEDING ASIA APR 2011 Editors Benjamin McCarron Lucy Carmody Laura Dodge Researchers Gauri Nafrey Allison Prevatt COMMISSIONED BY Responsible Research is an independent provider of sectoral and thematic Asian environment, Responsible Research is the exclusive partner in Asia for RepRisk®, a web-based tool which social and governance (ESG) research, targeted at global institutional investors. Many of provides insights on environmental and social issues that present financial and reputational these fund managers and asset owners now find that traditional investment banking reports, risks to companies and investment portfolios. The tool enables commercial and investment financial models and public information sources can no longer be relied on to cover all risks bankers, asset managers, and supply chain managers to manage the corresponding risks and to earnings and deliver superior returns. 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For more information, please contact Responsible Research: Email: [email protected] Tel: +65 9386 6664 www.responsibleresearch.com CONTENTS FEEDING ASIA PLEASE CLICK TO ACCESS SECTIONS 5 INTRODUCTION 13 DEMAND DYNAMICS Population growth Hunger and poverty Diet, income and urbanisation Government imperatives Shifting market opportunities 27 SUPPLY PRESSURES Water Climate change impacts Land availability Oil, energy and biofuels Fertilisers Declining fish stocks Crop diseases 67 IMPACTS Environmental impacts Toxicity Deforestation ISSUES FOR Emissions RESPONSIBLE Waste INVESTORS INTRODUCTION Social impacts Access to nutrition Changing diets Obesity and diabetes Food additives Functional and fortified foods Responsible marketing Food safety Labour rights Land rights Treatment of livestock 149 RESPONSES Food price rises Policy responses Solutions 175 ASIAN FOOD COMPANIES: Sustainability, Reputation, Reporting and Governance 198 REFERENCES © Responsible Research 2011 | Issues for Responsible Investors | 4 This report and its contents are the work of Responsible Research Pte Ltd. No reproduction or distribution is permitted without written consent. INTRODUCTION The dramatic food price rallies of 2010, echoing the surges and Climate change adds pressure to strained raw material attendant social unrest of 2008, provide the context for this analysis supply of the challenges of feeding Asia over the coming decades. The issues are inherently complex and interrelated, but can be broadly The inputs required to feed upwardly mobile Asia will come under categorised under the following headings: demand dynamics; supply increasing pressure over the next few decades. The interlinked pressures; impacts (environmental and social) and responses - problems of water, energy and fertiliser supply, as well as price, policy and technology. This report also provides a disclosure productive land availability and the host of challenges presented based assessment of the readiness of Asian corporations operating by climate change, will persist and grow worse. The case study on in the food supply chain to meet the coming challenges. corporate activity in the fertiliser market highlights the seriousness with which multinationals and governments view these issues: Urban Asia switches to resource intensive foods neither BHP Billiton nor Sinochem were given the green light by the Canadian government in their respective attempts to bid for The first consideration is demand. While the growing number of PotashCorp. mouths to feed is clearly a factor, rising incomes and changing diets, generally coinciding with rapid urbanisation, are found to be more significant. Changing food consumption patterns are particularly prevalent among those at lower income levels, where, Case Study: Scramble to secure inputs after a move to the city, extra wages are often spent on meat and dairy products, packaged foods, and vegetable oils. Thus the rapid BHP Billiton’s $38.5 billion hostile takeover bid for Canadian pace of development and urbanisation in Asia will continue to drive PotashCorp, a Canadian fertiliser company, in August 2010, demand, much of which is for qualitatively more resource-intensive highlights the value corporations and countries place on strategic food products. investments in food production inputs. Sinochem, the state-owned Chinese chemicals group, deliberated a competing offer for Potash. This demand places a huge burden on the environment, both in However, a report by the Conference Board of Canada warned terms of the inputs required and the impacts of providing them. It Potash to reject the bid, since China is a major potash importer, also presents an opportunity for the many actors, corporate and and “Sinochem has strong incentives for lower prices and will not otherwise, involved in food supply. be guided by the same market discipline and profit motive as commercial players.”1 Without a positive steer from the Canadian Figure 1: Putting Food on the Table: Key Factors and Players in government, Sinochem did not submit a bid, whilst the BHP Billiton the Food Value Chain bid was subsequently blocked for failing to bring a perceived “net benefit” to Canada. According to Bloomberg this is only the second Raw End user Equipment Farming Manufacture Distribution 2 Materials groups formal block by the Canadian government in 25 years. Water Irrigation Smallholders Processors Wholesalers Households Restaurants, Land Tractors Cooperatives Logistics Wet markets Productive land is a limiting factor, with urbanisation and Hotels degradation both reducing the