FACTORY 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 antibiotics HIT BY US$10.8BN LOSS 27.6 N 1 spread of bird (H5N2) N 1 OF MARKET CAP IN 2014 DUE TO FOOD 11.4 and swine (H1N1) flu in the US SAFETY SCANDAL AT A CHINESE SUPPLIER 7.9 industry 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 animal factory farms 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 ANIMAL WELFARE in animal feeds, SCANDAL LEADS TO 57.1 a major cause of LARGEST MEAT RECALL deforestation [WWF] IN US HISTORY, 28.4 of global GHG AND BANKRUPTCY emissions, more FOR MEAT-PACKER 75.5 14% consumer HALLMARK/WESTLAND than the transport O IN 2012 24.9 N 1 of water in sector* [FAO] drought-stricken DOWN 11.4 INVESTORS IN TYSON [Pacific Institute] FOODS EXPOSED AFTER 7.9 * from livestock 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 cattle and rising hit on profits of California POSSIBLE $500M OF 59.9 [UC Davis] 21% industry due to warming climate $250m dairies due to drought in 2015 REGULAR GOVERNMENT 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 fish 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-business, NEW TREND CREATES A KNOWLEDGE GAP AMONG INVESTORS For example there is evidence that the 2009 H1N1 strain food retailers and restaurants. Over 70% of the world’s farm animals 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 agriculture investments, Cattle feedlots can hold upwards of 100,000 cattle at originated in a US factory farm. Factory farming also A knowledge gap exists within the investment community about any one time – equivalent to almost the entire dairy 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 capital 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 regulation, the impacts of climate change and the longer-term risks that might affect value. comes to their risk management. increasing social concerns over animal welfare and sustainability. 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 bacteria 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 pollution. community. However, in a relatively short period of time concerns for public health, For the latter the example of North Carolina is cited, it has come to dominate global meat production despite which permanently banned new pig 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 food safety. 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 communities. 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 farmers in the next 30 years. has established itself as the predominant mode of the sector’s vulnerability to policy 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’, intensive farming.