FACTORY FARMING

EXECUTIVE SUMMARY > Ignoring ESG issues associated with animal factory farming leaves investors exposed to significant material risks. Animal factory farming has not historically received meaningful attention from the responsible investment community. However, in a relatively short period of time it has come to dominate global meat production despite wider risks over its potential impacts on areas such as public health, the environment and food safety. The available literature studied for this report shows that these risks are material for mainstream investors, especially those with significant exposure to the agricultural and food value chains. > Animal factory farming is a new phenomenon that has established itself as the predominant mode of livestock production. Over the past half century drivers such as population growth, rising incomes and urbanisation have driven a sharp increase in meat consumption and a shift towards factory farming as the way to meet demand. An estimated 70% of farmed animals are now raised in this system, including 99% of US farm animals 1 . Now many Asian countries have started to industrialise their animal farming systems at pace and scale. > A knowledge gap exists about animal factory farming risks among investors. This report analysed several economic, academic and NGO studies to understand whether there was financial vulnerability for long-term investors due to the rise of intensive farming. Most of these studies focused on While industrial farm animal production has benefits, it brings with it growing concerns for public health, the environment, animal welfare, and impacts on rural communities. 3 Pew Commission on Industrial Farm Animal Production (US) the sector’s vulnerability to policy and regulation and we believe that this report is the first study to reveal unpriced risks from the impacts of wider environmental, social and governance issues on animal factory farms. > Animal factory farms are vulnerable to at least 28 ESG issues that may damage their financial performance and returns. This diverse range of 28 issues are split into ‘environmental’, ‘social’ and ‘governance’ risks. The links between ESG issues and financial outcomes can be complex and difficult to assess, but nevertheless a hard line can often be drawn between issues such as droughts or food contamination and financial performance. This report has developed a framework to link ESG issues with four key financial levers: ‘production and price’, ‘market access’, ‘reputation’ and ‘legal and regulatory’. The key risks are: •• Environmental – These are the most quantifiable of the three (ESG) areas and include issues such as climate change, water scarcity and water pollution. For the latter the example of North Carolina is cited, which permanently banned new pig factory farms in 2007 to protect water courses and prevent pollution. Reports indicate that if the industry was forced to meet the costs of its pollution, this could equate to billions of dollars 2 . The chapter also cites the large contribution of the livestock sector to climate change (14.5% of all man-made GHGs) and shows how the costs of ‘heat stress’ could significantly harm cattle farmers in the next 30 years. •• Social – The report concludes that there is a tremendous amount of financial value potentially at risk as a result of social issues. These include health impacts from the overuse of antibiotics in factory farms, pandemic risk and reputational damage to companies due to changing consumer attitudes. For example, it describes how the 2015 outbreak of bird flu in the US, thought to have been catalyzed by factory farms, caused over $3.3bn of economic costs. The example of Yum! and McDonalds losing US$10.8bn of combined market capitalisation after a food safety scandal in a Chinese supplier is also explored. THAI AGRIBUSINESS 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