FACTORY FARMING
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<strong>FACTORY</strong> <strong>FARMING</strong>:<br />
ASSESSING INVESTMENT RISKS<br />
2016 report<br />
Find out more, or join us, at: fairr.org<br />
Follow us: @FAIRRinitiative
<strong>FACTORY</strong> <strong>FARMING</strong>:<br />
KILLER STATS INVESTORS<br />
CAN’T IGNORE<br />
1 NO<br />
reason for rapid<br />
spread of bird (H5N2)<br />
and swine (H1N1) flu<br />
N O 1<br />
user of<br />
antibiotics<br />
in the US<br />
DOWN<br />
INVESTORS IN<br />
MCDONALDS AND KFC<br />
HIT BY US$10.8BN LOSS<br />
OF MARKET CAP IN<br />
2014 DUE TO FOOD<br />
SAFETY SCANDAL AT A<br />
CHINESE SUPPLIER<br />
52.3<br />
27.6<br />
11.4<br />
7.9<br />
$3.3bn<br />
industry losses due to US bird<br />
flu outbreak in 2015 [FarmEcon]<br />
80% in animal factory farms [CDC]<br />
of all antibiotics in the US now used<br />
85%<br />
UP<br />
ALTERNATIVE<br />
FOOD TECH COMPANY<br />
HAMPTON CREEK SET TO<br />
BE FASTEST GROWING<br />
FOOD COMPANY IN<br />
HISTORY, BENEFITING<br />
FROM IMPACT OF 2015<br />
US BIRD FLU CRISIS<br />
88.2<br />
65.3<br />
59.9<br />
12.7<br />
66.2<br />
14%<br />
21%<br />
of global GHG<br />
emissions, more<br />
than the transport<br />
sector* [FAO]<br />
*from livestock sector as a whole, with factory<br />
farming as key component<br />
rise in 'heat stress' days set to hit cattle<br />
industry due to warming climate<br />
1<br />
O<br />
N<br />
of all soya<br />
globally is used<br />
in animal feeds,<br />
a major cause of<br />
deforestation [WWF]<br />
consumer<br />
of water in<br />
drought-stricken<br />
[Pacific Institute]<br />
California<br />
and rising hit on profits of California<br />
[UC Davis]<br />
$250m dairies due to drought in 2015<br />
DOWN<br />
ANIMAL WELFARE<br />
SCANDAL LEADS TO<br />
LARGEST MEAT RECALL<br />
IN US HISTORY,<br />
AND BANKRUPTCY<br />
FOR MEAT-PACKER<br />
HALLMARK/WESTLAND<br />
IN 2012<br />
DOWN<br />
INVESTORS IN TYSON<br />
FOODS EXPOSED AFTER<br />
COMPANY REVEALS<br />
ENVIRONMENTAL<br />
VIOLATIONS.<br />
POSSIBLE $500M OF<br />
REGULAR GOVERNMENT<br />
CONTRACTS AT RISK<br />
39.4<br />
57.1<br />
28.4<br />
75.5<br />
24.9<br />
11.4<br />
7.9<br />
88.2<br />
59.9<br />
12.7<br />
fairr.org<br />
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KEY FINDINGS<br />
AND IMPLICATIONS<br />
FOR INVESTORS<br />
FOREWORD<br />
Animal factory farming is exposed to at least 28 environmental, social<br />
and governance (ESG) issues that could significantly damage financial<br />
value over the short or long-term. Many of these risks are currently<br />
hidden from investors.<br />
All 28 issues can potentially affect the financial performance of<br />
companies across the food value chain. Including large agri-business,<br />
food retailers and restaurants.<br />
A knowledge gap exists within the investment community about<br />
managing these risks and opportunities. Even among those<br />
investors who are integrating ESG issues into their investment<br />
decision-making processes.<br />
The window of opportunity for investors to act is finite and shrinking.<br />
The magnitude of risks generated by animal factory farming is set to increase<br />
through rising capital costs, the shifting gravity of production to developing<br />
countries with less robust regulation, the impacts of climate change and<br />
increasing social concerns over animal welfare and sustainability.<br />
Investors should undertake additional research in a number of areas to<br />
support the initial exploratory findings contained in this report. If they are<br />
to close the knowledge gap and protect long-term value creation.<br />
This report explores the industrialisation of the<br />
world’s meat and fish production, a relatively recent<br />
trend, and assesses the potential risks that a range<br />
of environmental, social and governance (ESG) issues<br />
present to that model. Looking at the industry through an<br />
ESG lens produces alarming results that should raise a<br />
red flag to mainstream investors across the world. This is<br />
the first study to undertake this important analysis.<br />
NEW TREND CREATES A KNOWLEDGE<br />
GAP AMONG INVESTORS<br />
Over 70% of the world’s farm animals are now factory<br />
farmed, including an estimated 99% of US farm animals.<br />
Cattle feedlots can hold upwards of 100,000 cattle at<br />
any one time – equivalent to almost the entire dairy cow<br />
population of Greece in one farm. This industrialisation<br />
of meat and fish production is currently set to continue<br />
at pace as prosperity in emerging economies rises.<br />
Our research reveals the many investment risks that need<br />
to be considered if this trend continues. Most obvious are<br />
the short-term risks such as the threat of a reputational or<br />
regulatory backlash against any investee company involved<br />
in factory farming and shown to have poor ESG (including<br />
animal welfare) standards. However this report also digs<br />
deeper and explores, perhaps for the first time, some of<br />
the longer-term risks that might affect value.<br />
It identifies 28 ESG issues which can have a negative<br />
financial impact on companies connected with animal<br />
factory farm-related investments. These range from food<br />
safety scandals to environmental fines and the industry’s<br />
reliance on government subsidies, and affect companies<br />
right through the value chain. One particularly worrying<br />
issue is the overuse of antibiotics. Around 80% of all<br />
antibiotics produced in the US are now used on farm<br />
animals and there is a real risk of drug resistant bacteria<br />
developing as a result of this. In addition, factory farms also<br />
provide ideal conditions for viruses to develop and spread.<br />
Increasingly, major investors<br />
are paying attention to<br />
factory farming’s risk and<br />
incorporating them into<br />
their decisions<br />
For example there is evidence that the 2009 H1N1 strain<br />
of swine flu, which killed over 150,000 people and wiped<br />
billions off the value of many agriculture investments,<br />
originated in a US factory farm. Factory farming also<br />
catalysed the spread of H5N2 bird flu in the US this year,<br />
estimated to have cost £3bn to the wider economy.<br />
Increasingly, food companies and consumers are starting<br />
to see these risks and now some major investors and asset<br />
managers the world over are paying attention to factory<br />
farming’s risk and incorporating them into their decisions.<br />
But there's still a long way to go. Even many of the<br />
investors publicly committed to taking ESG issues into<br />
account as signatories of the UN-supported Principles<br />
of Responsible Investment overlook this issue when it<br />
comes to their risk management.<br />
PROTECTING LIVESTOCK,<br />
PROTECTING VALUE<br />
This report does not have all the answers, but it does<br />
highlight a knowledge gap which I urge the investment<br />
community to address. That would not only create a<br />
more sustainable farming industry but would also give<br />
investors the information they need to help safeguard<br />
long-term value.<br />
Jeremy Coller<br />
Founder, FAIRR Initiative<br />
Research by Verisk Maplecroft<br />
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EXECUTIVE SUMMARY<br />
> Ignoring ESG issues associated with animal<br />
factory farming leaves investors exposed to<br />
significant material risks.<br />
Animal factory farming has not historically received<br />
meaningful attention from the responsible investment<br />
community. However, in a relatively short period of time<br />
it has come to dominate global meat production despite<br />
wider risks over its potential impacts on areas such<br />
as public health, the environment and food safety.<br />
The available literature studied for this report shows<br />
that these risks are material for mainstream investors,<br />
especially those with significant exposure to the<br />
agricultural and food value chains.<br />
> Animal factory farming is a new phenomenon that<br />
has established itself as the predominant mode of<br />
livestock production.<br />
Over the past half century drivers such as population<br />
growth, rising incomes and urbanisation have driven<br />
a sharp increase in meat consumption and a shift<br />
towards factory farming as the way to meet demand.<br />
An estimated 70% of farmed animals are now raised<br />
in this system, including 99% of US farm animals 1 .<br />
Now many Asian countries have started to industrialise<br />
their animal farming systems at pace and scale.<br />
> A knowledge gap exists about animal<br />
factory farming risks among investors.<br />
This report analysed several economic, academic and<br />
NGO studies to understand whether there was financial<br />
vulnerability for long-term investors due to the rise of<br />
intensive farming. Most of these studies focused on<br />
While industrial farm animal<br />
production has benefits,<br />
it brings with it growing<br />
concerns for public health,<br />
the environment, animal<br />
welfare, and impacts on<br />
rural communities. 3<br />
Pew Commission on Industrial Farm<br />
Animal Production (US)<br />
the sector’s vulnerability to policy and regulation and<br />
we believe that this report is the first study to reveal<br />
unpriced risks from the impacts of wider environmental,<br />
social and governance issues on animal factory farms.<br />
> Animal factory farms are vulnerable to at least<br />
28 ESG issues that may damage their financial<br />
performance and returns.<br />
This diverse range of 28 issues are split into<br />
‘environmental’, ‘social’ and ‘governance’ risks.<br />
The links between ESG issues and financial outcomes<br />
can be complex and difficult to assess, but nevertheless<br />
a hard line can often be drawn between issues such as<br />
droughts or food contamination and financial performance.<br />
This report has developed a framework to link ESG issues<br />
with four key financial levers: ‘production and price’,<br />
‘market access’, ‘reputation’ and ‘legal and regulatory’.<br />
The key risks are:<br />
••<br />
Environmental – These are the most quantifiable<br />
of the three (ESG) areas and include issues such as<br />
climate change, water scarcity and water pollution.<br />
For the latter the example of North Carolina is cited,<br />
which permanently banned new pig factory farms in<br />
2007 to protect water courses and prevent pollution.<br />
Reports indicate that if the industry was forced to<br />
meet the costs of its pollution, this could equate to<br />
billions of dollars 2 . The chapter also cites the large<br />
contribution of the livestock sector to climate change<br />
(14.5% of all man-made GHGs) and shows how the<br />
costs of ‘heat stress’ could significantly harm cattle<br />
farmers in the next 30 years.<br />
••<br />
Social – The report concludes that there is a<br />
tremendous amount of financial value potentially<br />
at risk as a result of social issues. These include<br />
health impacts from the overuse of antibiotics<br />
in factory farms, pandemic risk and reputational<br />
damage to companies due to changing consumer<br />
attitudes. For example, it describes how the 2015<br />
outbreak of bird flu in the US, thought to have<br />
been catalyzed by factory farms, caused over<br />
$3.3bn of economic costs. The example of Yum!<br />
and McDonalds losing US$10.8bn of combined<br />
market capitalisation after a food safety scandal<br />
in a Chinese supplier is also explored.<br />
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)<br />
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INVESTORS<br />
••<br />
Governance: There are four broad governance<br />
> A toe in the water.<br />
ANIMAL <strong>FACTORY</strong> FARMS<br />
issues that impact the animal factory farming<br />
This report aims to broaden the current<br />
industry, with potential changes to subsidy support<br />
understanding of risk linked to investment in<br />
from governments presenting the most significant<br />
animal factory farming, but it is clear that further<br />
financial risk. For example, one study argues that<br />
in-depth research and engagement between<br />
the success of the animal factory farming model<br />
investors and the industry would help close the<br />
is due largely to subsidy support, including almost<br />
knowledge gap that exists. Ideas for further research<br />
US$4bn that the US industry receives in benefits<br />
and other practical steps are offered in the last<br />
annually from subsidised grain. Shifting production<br />
chapter of this report.<br />
to developing countries also raises concerns for<br />
investors due to less robust corporate governance<br />
in these countries.<br />
> Some leading investors have already started<br />
to integrate animal factory farming risks into<br />
investment processes.<br />
Historically, investors have been largely unaware of<br />
investor risks in this area. However in recent years<br />
some parts of the financial community have taken<br />
steps to improve their understanding. Some investors<br />
have begun to consider it in both their investment<br />
analysis and active ownership processes. This includes<br />
development financial institutions such as the IFC and<br />
EBRD as well as several mainstream investors such as<br />
PGGM, BNP Paribas and Aviva Investors. In this report<br />
we provide a list of available resources that investors<br />
are currently using to integrate animal welfare practices<br />
and highlight the Business Benchmark on Farm Animal<br />
Welfare (BBFAW) – an independent benchmark that<br />
ranks how the world’s leading food companies<br />
are managing and reporting their farm animal<br />
welfare practices.<br />
Intensive farming practices<br />
raise material, health,<br />
environmental and<br />
operational risks that<br />
investment organisations<br />
cannot afford to ignore.<br />
Given that they also rely<br />
heavily on government<br />
subsidies the model does<br />
not look like a sustainable<br />
one for long-term investors<br />
and they should take action<br />
to manage the risks.<br />
Alan Briefel, Executive Director, FAIRR<br />
13 ENVIRONMENTAL ISSUES<br />
Disease outbreaks | GHGs<br />
Deforestation & biodiversity loss<br />
Natural hazards | Climate change<br />
Water pollution | Water scarcity<br />
Resource scarcity<br />
Poor animal welfare | Waste<br />
High water use | Air pollution<br />
Soil degradation<br />
CASE STUDY: A warming<br />
climate is set to make factory<br />
farming less financially viable.<br />
E.g. increasing cattle ‘heat<br />
stress days’ by 21% by 2045.<br />
The US dairy industry already<br />
loses US$897m/year from heat<br />
stress on cattle.<br />
11 SOCIAL ISSUES<br />
Excessive antibiotics | Infectious<br />
diseases | Social backlash<br />
Changing consumers | Poor<br />
working conditions | Human<br />
rights | Shrinking labour pool<br />
Community health impacts<br />
Loss of rural jobs | Land rights<br />
Social licence to operate<br />
CASE STUDY: The dense<br />
concentration of animals in<br />
factory farms may lead to major<br />
health issues. E.g. in 2009 swine<br />
flu caused the MSCI US Agri &<br />
and Food Index to plunge 1.5%;<br />
Smithfield Foods lost 12%. Over<br />
150,000 people died from the virus.<br />
4 GOVERNANCE ISSUES<br />
Policy changes<br />
Weak oversight<br />
Corporate governance<br />
Sustainability disclosure<br />
CASE STUDY: Animal factory<br />
farming is highly vulnerable<br />
to changes in its commercial<br />
context. For example, ESG<br />
factors may threaten subsidy<br />
support such as the US$4bn of<br />
benefits the US industry receives<br />
annually from subsidised grain.<br />
TYSON FOODS’ $500M GOVERNMENT CONTRACTS AT RISK DUE TO RELEASE OF TOXIC CHEMICALS TESCO DOWN 13.7% DUE TO POOR CHICKEN WELFARE EXPOSEÉ (2008)<br />
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REPORT PURPOSE AND METHODOLOGY<br />
CONTENTS<br />
This report aims to provide investors with a better<br />
understanding of the short- and long-term financial<br />
impacts of ESG issues on companies directly involved<br />
in animal factory farming and indirectly linked via the<br />
value chain. The specific objectives are to:<br />
The case studies on the financial impacts of ESG issues<br />
on food sector companies and bovine heat stress were<br />
developed through original research. The financial<br />
analysis of company performance was undertaken<br />
through the use of proprietary datasets and open source<br />
Key findings 2<br />
Foreword from FAIRR Founder 3<br />
EXECUTIVE SUMMARY 4<br />
CHAPTER 4: IMPLICATIONS AND<br />
NEXT STEPS 45<br />
4.1 Overview 45<br />
4.2 Implications of the findings for investors 45<br />
••<br />
Identify the key ESG issues that are relevant to<br />
animal factory farming;<br />
••<br />
Establish empirical evidence of the short- and<br />
long-term financial impacts of ESG issues on<br />
information on stock prices. Bovine heat stress was<br />
quantified by calculating the annual average Heat Stress<br />
Days in a current (1981-2000) and future (2026-2045)<br />
climate. This was achieved by adjusting Maplecroft’s<br />
proprietary Country Risk Indices – specifically Heat<br />
CHAPTER 1: CONTEXT – PUTTING ALL<br />
OUR EGGS IN ONE BASKET 10<br />
1.1 Overview 10<br />
4.3 Next steps 46<br />
APPENDIX 48<br />
animal factory farming;<br />
••<br />
Help investors to understand the key issues and<br />
highlight where knowledge gaps exist;<br />
Stress (current climate) and Heat Stress (future climate)<br />
2015 indices – by a common measure of heat stress, the<br />
temperature-humidity index (THI):<br />
1.2 The development and geographical<br />
expansion of animal factory farming 11<br />
LIST OF FIGURES AND TABLES<br />
Figure 1: A new phenomenon. Graph shows the rapid<br />
••<br />
Identify activities that could be undertaken by<br />
1.3 Limited information has created a<br />
increase in the global production of main livestock species<br />
interested stakeholders in the financial community<br />
THI = T – [0.55 – (0.55 x RH/100)] x (T – 58), where T is<br />
dangerous knowledge gap for investors 12<br />
compared to human population growth (1963–2013).<br />
to protect investors against the risk present in<br />
animal factory farming-related investments.<br />
We hope investors can use this report practically as<br />
the dry-bulb temperature and RH is relative humidity. 4, 5<br />
CHAPTER 2: 28 ESG ISSUES AND<br />
THEIR IMPACTS 15<br />
Figure 2: ESG issues as drivers of financial performance<br />
within the context of animal factory farming.<br />
Figure 3: Future heat stress and impacts on key cattle<br />
part of their strategic decision-making and day-to-<br />
2.1 Overview 15<br />
producing countries<br />
day operations, or to help develop lending policies or<br />
guidelines that incorporate animal factory farming<br />
criteria. The evidence and leading practice case studies<br />
2.2 From pandemics to pollution, a wide range<br />
of ESG issues affect key financial levers 15<br />
Figure 4: Financial impact of food safety scandal to<br />
fast-food chains in 2014<br />
can also provide support for shareholder activism,<br />
2.3 Environmental issues and impacts 17<br />
Figure 5: US pork producers see share prices plummet<br />
such as pressuring companies to establish better<br />
management systems or eliminate risky practices.<br />
Methodology and structure<br />
2.4 Social issues and impacts 24<br />
2.5 Governance issues and impacts 32<br />
following swine flu outbreak, Apr 2009<br />
Figure 6: Major Asian poultry firms see share price<br />
declines during avian influenza outbreak, 2013<br />
This ESG analytics and research in this report were<br />
produced by Verisk Maplecroft with the aim of identifying<br />
current and emerging ESG risks that are relevant to<br />
animal factory farming. This review drew on a wide<br />
number of sources including academic journals, industry<br />
CHAPTER 3: INTEGRATING ANIMAL<br />
<strong>FACTORY</strong> <strong>FARMING</strong> RISKS INTO<br />
INVESTMENT PROCESSES 35<br />
3.1 Overview 35<br />
Table 1: ESG issues that may have an adverse impact<br />
on financial performance and returns from animal<br />
factory farming<br />
Table 2: Key environmental issues<br />
and government publications, company documentation,<br />
NGO reports and studies and media reports.<br />
3.2 Investing in food and agriculture 35<br />
3.3 Integrating animal factory farming risks<br />
Table 3: Key social issues<br />
Table 4: Key governance issues<br />
into investment processes 36<br />
Table 5: Integrating ESG issues into equity research<br />
3.4 Integrating farm animal welfare<br />
opportunities into investment decisions 42<br />
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CHAPTER 1:<br />
CONTEXT – PUTTING ALL OUR<br />
EGGS IN ONE BASKET<br />
1.1 OVERVIEW<br />
Over past decades, traditional livestock farming<br />
has been largely replaced by highly industrial<br />
production systems, or animal factory farms.<br />
An estimated 70% of animals farmed for food<br />
globally are raised within a factory farming system. 6<br />
Large poultry farms can contain more than<br />
500,000 broiler chickens, pig farms can contain<br />
more than 10,000 hogs, and cattle feedlots can<br />
hold upwards of 100,000 cattle at any one time<br />
(that is almost the entire dairy cow population of<br />
Greece in one farm 7 ).<br />
1963<br />
Animals<br />
1973<br />
Humans<br />
1983<br />
Animal factory farming as a production process<br />
originated in the United States and has since been<br />
replicated in other Western nations. More recently,<br />
animal factory farming is becoming established in<br />
new geographies, including South Asia (India),<br />
East Asia (China), sub-Saharan Africa and South<br />
America. In this context, it is more important than<br />
ever that investors understand the potential risks<br />
associated with investment in animal factory farming<br />
and related industries.<br />
FIGURE 1: A new phenomenon. Graph shows the rapid increase in the global production of main livestock<br />
species (cattle, pigs, sheep and goats, and poultry) compared to human population growth (1963–2013).<br />
1993<br />
2003<br />
2013<br />
PROJECTED<br />
2021<br />
25<br />
20<br />
15<br />
10<br />
5<br />
0<br />
NUMBER OF ANIMALS/HUMANS (BILLION)<br />
Source: FAO<br />
1.2 THE DEVELOPMENT AND<br />
GEOGRAPHICAL EXPANSION<br />
OF ANIMAL <strong>FACTORY</strong> <strong>FARMING</strong><br />
Over the past half century, the increase in global<br />
agricultural output has been achieved largely<br />
through the intensification of production. The global<br />
human population increased from 3.2 billion in 1963<br />
to just over 7 billion in 2014. To meet rising demand,<br />
world food production has also grown dramatically.<br />
Increasing yields, cropping intensity and land use have<br />
driven crop production. Greater fisheries catches as well<br />
as the expansion of aquaculture have meant that world<br />
fisheries production has also increased with the aim of<br />
meeting the growing demand for food.<br />
At the same time, population growth, rising incomes<br />
and urbanisation (particularly in developing nations)<br />
have resulted in a sharp increase in the demand for<br />
meat and fish. There were approximately 7 billion<br />
cattle, pigs, sheep, goats and poultry in 1963. 8 By 2013,<br />
their numbers had risen to more than 25 billion, with<br />
the majority contained in factory farms. The rise in<br />
production of key livestock species alongside<br />
population growth is illustrated in Figure 1.<br />
The shift towards factory farming as the predominant<br />
mode of livestock production began in the United States<br />
and other industrialised countries. Animal factory<br />
farming began to emerge in industrialised countries<br />
following the Second World War. 9 This process entailed<br />
a shift in animal production systems from smaller scale,<br />
mixed species systems to large-scale, intensively<br />
farmed and highly mechanised systems, focusing primarily<br />
on a single species. There was also a marked shift in the<br />
structure of the industry, with fewer and fewer farms<br />
producing increasing numbers of animals. As part of this<br />
consolidation, corporations assumed a more dominant<br />
role, with many livestock farmers functioning under the<br />
control of larger companies. By 1997, half of the world’s<br />
beef, and more than half of the world’s pork, poultry<br />
and eggs, were produced by animal factory farms (or<br />
‘concentrated animal feeding operations – CAFOs’). 10<br />
Future growth in meat production and animal factory<br />
farming is expected to be driven by developing countries.<br />
Thus far, developed countries have accounted for the<br />
majority of intensively farmed livestock systems. However,<br />
production in many of these countries is now beginning<br />
to stagnate. For example, while major producers such as<br />
Brazil, Argentina and Russia demonstrated rapid growth in<br />
meat production over the past decade, this is not expected to<br />
continue. Many key meat-producing countries and regions<br />
will be unable to satisfy rising global demand. This is due<br />
to a number of reasons, including: constraints on natural<br />
resources, competition from crops for land and water, and<br />
inadequate investment in supportive infrastructure. 11<br />
By comparison, intensive animal farming is increasing<br />
rapidly in emerging markets. Meat production in the least<br />
developed countries doubled over the two decades prior to<br />
2012. 12 Although this growth is likely to continue based on<br />
current trends, there may be an increasing differentiation<br />
in these markets between conventional industrial farming<br />
(which we argue represent high-risk investments), more<br />
medium-risk factory farms that take animal welfare issues<br />
into account and non-industrial farming. In this context<br />
providers of plant-based protein alternatives to meat also<br />
appear as a strong growth opportunity.<br />
Many Asian countries have already started to<br />
industrialise their animal farming systems, with<br />
the pace and scale of change most visible in China.<br />
Many Asian governments are encouraging a shift from<br />
small-scale, subsistence and non-intensive farming<br />
towards more intensive farming systems. While animal<br />
stocks in developed countries have been largely stable<br />
over a 40-year period from 1963 to 2013, there has been<br />
significant growth in countries such as China, Vietnam<br />
and Indonesia. China is a strong supporter of the<br />
industrial production model and this is reflected in the<br />
tremendous growth in livestock produced in the country.<br />
Growing Chinese livestock<br />
Between 1993 and 2013:<br />
••<br />
Head of cattle increased from 80 million to<br />
114 million in 2013, an increase of 43%.<br />
••<br />
The number of pigs increased from 367 million<br />
to 482 million, or 31%.<br />
••<br />
Chicken numbers increased from 2.7 billion to<br />
5.5 billion, or 104%. 13<br />
China has become the world’s largest producer<br />
and consumer of pork, the second largest producer<br />
of poultry 14 and the world’s third largest milk<br />
producing nation. 15 fairr.org | 11<br />
10 | fairr.org
FUTURE PROJECTIONS<br />
Population growth, affluence and urbanisation will<br />
continue to shape consumer preferences and drive<br />
demand for meat or similar proteins. Key demographic<br />
and socio-economic drivers include:<br />
••<br />
World population is expected to grow by a third<br />
between 2014 and 2050, rising from 7 billion to<br />
9.1 billion. 16 The vast majority of this growth will<br />
occur in developing countries.<br />
••<br />
Per capita incomes are projected to be a multiple<br />
of today’s levels, with some emerging economies<br />
catching up to developed nations in per capita terms. 17<br />
••<br />
Urbanisation processes will accelerate, resulting in<br />
70% of world population living in cities by 2050<br />
18, 19<br />
(up from 54% in 2014).<br />
The global demand for animal protein is expected to<br />
increase 70% by 2050, 20 largely as a result of increasing<br />
affluence. This has already been observed in China, where<br />
a fourfold increase in per capita income following economic<br />
reforms in the 1970s coincided with a 30% increase in<br />
average meat consumption per person (between 1978<br />
and 1997). 21 However the future trend towards increased<br />
meat consumption is far from a certainty. Growth in meat<br />
consumption has started to falter in some developed<br />
countries, suggesting that evolving consumer preferences<br />
could re-shape future meat demand. There is a slowly<br />
growing trend in countries such as the US and the UK<br />
towards more plant-based or ‘flexitarian’ diets, with meat<br />
playing a less important role in meal planning. This has<br />
arisen out of an increased awareness of health, animal<br />
welfare and environmental sustainability issues, and<br />
awareness and availability of plant-based proteins as an<br />
alternative. Since the 1980s, for example, the consumption<br />
of red meat has declined in the UK. 22 This has been partly<br />
attributed to a number of food-related health scares,<br />
including the 2013 horsemeat scandal. Meat consumption in<br />
the US has also been declining for almost a decade, largely<br />
because of health concerns and economic constraints. 23<br />
WHO's classification of processed meat as carcinogenic in<br />
late 2015 is likely to encourage a further decrease in red<br />
meat consumption in these markets.<br />
Food technology companies such as Hampton Creek<br />
(see page 43) Impossible Foods and Beyond Meat are<br />
also emerging which in the coming years may offer<br />
protein-dense plant-based foods that consumers select<br />
as alternatives to meat, taking market share from animal<br />
protein sources and reducing global meat demand.<br />
1.3 LIMITED INFORMATION HAS<br />
CREATED A DANGEROUS<br />
KNOWLEDGE GAP FOR INVESTORS<br />
Several economic studies have focused on the<br />
financial vulnerability of animal factory farming<br />
to changes in policy and regulation, suggesting<br />
significant unpriced risks within the sector.<br />
NGO reports and academic research argue that the<br />
success of the animal factory farming model is due<br />
largely to subsidy support received either via direct or<br />
indirect channels. One landmark study provides detailed<br />
analysis of subsidy support received by the industry<br />
in the US, including almost US$4 billion that CAFOs<br />
receive in benefit annually from subsidised grain. 24<br />
The industry also receives public support in the form<br />
of funding to help prevent pollution from farms<br />
(US$125 million in 2007) and publicly-met remediation<br />
costs for cleaning up the land under hog and dairy<br />
CAFOs (US$56 million just in Kansas). 25 Reports indicate<br />
that if the industry was forced to meet the costs of its<br />
pollution, this could equate to billions of dollars. 26<br />
Several economic studies<br />
have focused on the financial<br />
vulnerability of animal factory<br />
farming to changes in policy<br />
and regulation, suggesting<br />
significant unpriced risks<br />
within the sector.<br />
The strongest links between the impacts of<br />
ESG issues on financial performance related to<br />
animal factory farming are drawn from short-term<br />
and anecdotal reports. There are numerous examples<br />
of reports describing the numbers of livestock culled<br />
across different geographical areas as a result of<br />
drought and rising feed costs on the livestock. 27<br />
Often this is translated into economic costs at<br />
the national or regional level. 28 Studies have also<br />
downscaled the impacts of widely experienced events<br />
to the producer level. For example, drought in 2012<br />
led to a US$155,000 increase in feed costs for broiler<br />
farms in Georgia. 29 Livestock-related disease outbreaks<br />
also focus attention on the impacts on key producers<br />
or regions. During the 2009 swine flu outbreak,<br />
Tyson Foods reported a drop in its domestic pork sales,<br />
while industry analysts downgraded stock and lowered<br />
annual earnings for both Tyson Foods and Smithfield<br />
Foods. 30 Meanwhile, hog producers in Indiana were<br />
estimated to have lost US$20 a head at the peak of the<br />
outbreak. 31 There is less information available regarding<br />
the financial impact of reduced stocks on the sector or<br />
on individual farms, although fines for environmental<br />
or labour law infractions are commonly available.<br />
However, there is limited information available which<br />
measures and quantifies the materiality of broader<br />
ESG issues in relation to animal factory farming.<br />
There is a growing body of academic research examining the<br />
relationship between ESG issues and financial performance –<br />
the majority of this research highlights a positive relationship<br />
between ESG issues and performance. 32 However, the<br />
impacts of ESG issues can vary across sectors, meaning that<br />
investors need detailed information relating to the specific<br />
sector, country, or asset class, etc. that they are interested in.<br />
CATEGORY<br />
Environmental<br />
Social<br />
Governance<br />
KEY ISSUES<br />
There is little within the investment literature that<br />
is targeted specifically at animal factory farming.<br />
This contrasts with much greater focus on other<br />
sectors that present severe environmental or<br />
social challenges. These sectors include: clothing and<br />
apparel due to the association with poor working conditions;<br />
oil and gas because of the contribution to climate change;<br />
and the mining industry because of its association with<br />
human rights abuses and exposure to water scarcity.<br />
This report aims to take a first step to broadening the<br />
current understanding of risk linked to investment in<br />
animal factory farming, by identifying and expanding<br />
on the ESG issues which affect the sector. These issues<br />
are listed in Table 1 and discussed in more detail in the<br />
following section.<br />
…a rough estimate of the<br />
total cost of cleaning up<br />
the soil under U.S. hog and<br />
dairy CAFOs could approach<br />
US$4.1 billion. 33<br />
Union of Concerned Scientists<br />
TABLE 1: ESG issues that may have an adverse impact on financial performance and returns from<br />
animal factory farming<br />
Disease outbreaks, GHG emissions, deforestation and biodiversity loss, natural hazards,<br />
climate change, water pollution, water scarcity, resource scarcity, poor animal welfare,<br />
waste generation, high water use, air pollution, soil degradation and desertification.<br />
Excessive antibiotic use, spread of infectious diseases/global health pandemics, social<br />
backlash, changing consumer preferences, poor working conditions, human rights violations,<br />
labour availability and productivity, health impacts on surrounding communities, loss of rural<br />
livelihoods, land rights violations, social licence to operate compromised.<br />
Policy changes (e.g. removal of government subsidies, changes to policy, trade restrictions),<br />
weak regulatory oversight, sustainability disclosure, corporate governance.<br />
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CASE STUDY 1: MARKETS INFECTED BY 2015 AVIAN FLU OUTBREAK<br />
CHAPTER 2:<br />
28 ESG ISSUES AND THEIR IMPACTS<br />
The virus was thought<br />
to have spread further<br />
and faster than any<br />
other historical outbreak<br />
because of the role of<br />
factory farms in modern<br />
farming<br />
2.1 OVERVIEW<br />
There is growing evidence that ESG issues can<br />
impact the performance of companies connected to<br />
animal factory farming across the agriculture and food<br />
value chain. The most visible financial impacts come<br />
from short-term events, but the financial performance<br />
of companies linked to animal factory farming is also<br />
contingent on longer-term environmental, social and<br />
regulatory trends and the ability for companies to<br />
2.2 FROM PANDEMICS TO POLLUTION,<br />
ESG ISSUES THAT AFFECT KEY<br />
FINANCIAL LEVERS<br />
A range of diverse ESG issues have previously<br />
resulted in financial harm to animal factory<br />
farming-related investments, or have the potential<br />
to do so. However, the links between ESG issues and<br />
financial outcomes are complex and difficult to assess<br />
– identifying material issues remains more of an art<br />
successfully anticipate and navigate these changes.<br />
than a science. Nevertheless, a hard line can often be<br />
In the first half of 2015 the US suffered the worst<br />
Financial costs<br />
This section highlights these key changes, pointing<br />
drawn between some short-term issues and financial<br />
outbreak on record of the deadly H5N2 strain of avian<br />
The financial implications of H5N2 have been<br />
towards issues that responsible investors may wish<br />
performance, such as in the case of droughts or food<br />
influenza. At the time of writing it had led to nearly<br />
staggering. The value of the dead birds alone has<br />
to incorporate into their investment approaches.<br />
contamination scares.<br />
50 million hens and other poultry being destroyed,<br />
been estimated at over $190 million, with US<br />
and America’s $6 billion poultry exports, suffering<br />
taxpayers asked to foot the bill of 'restocking' the<br />
The animal factory farming industry can cause<br />
In other cases, it is challenging to separate the impacts<br />
dramatic falls of around 14% and rising 34 .<br />
birds. 40 countries placed bans on all US poultry<br />
significant negative environmental and social impacts,<br />
of ESG issues from other drivers of long-term value.<br />
and many food companies including Hormel and<br />
and it is also highly vulnerable to wider ESG trends,<br />
This includes the costs to companies in dealing with<br />
The virus was thought to have spread further and<br />
Post Holdings issued profit warnings following<br />
such as resource scarcity, consumer preferences and<br />
community opposition to new developments or the<br />
faster than any other historical outbreak because of<br />
declining sales due to limited supplies and lost<br />
regulatory changes. These risks place animal factory<br />
effects on investor confidence inspired by robust<br />
the role of factory farms in modern farming.<br />
revenue from market closures.<br />
farming alongside other high impact sectors such as<br />
sustainability disclosure. Finally, ESG risks may<br />
oil and gas, mining and clothing & apparel as sectors<br />
actually counteract one another. For example, a<br />
The crowded and confined conditions of factory<br />
In Iowa, the largest egg producing state, egg<br />
that require diligent monitoring and management.<br />
concern with animal welfare would emphasise<br />
farm poultry sheds create a disease incubator,<br />
production dropped 21%. This contributed to<br />
reducing the intensity of production but potentially<br />
meaning that when the virus got in it quickly<br />
skyrocketing egg prices between January and<br />
increase environmental impacts on a per animal basis.<br />
spread. Coupled with the large flock sizes of up<br />
June which infected stocks such as food makers<br />
to five million birds in a concentrated space –<br />
like Unilever, food distributors such as Sysco, and<br />
This section provides responsible investors with a<br />
an outbreak of bird flu in one hen house means<br />
fast food firms including McDonald’s whose costs<br />
better understanding of the relationships between key<br />
you have to cull the chickens in the neighbouring<br />
all soared.<br />
ESG issues and their financial outcomes. A framework<br />
hen houses too.<br />
has been developed to link ESG issues with four key<br />
The cost of H5N2 to the wider economy has been<br />
drivers of financial outcomes (referred to here as<br />
There are less than 200 commercial egg farms in<br />
estimated to be over $3bn.<br />
‘financial levers’): production and price; market access;<br />
existence in the US today, compared to over 10,000<br />
reputation; and legal and regulatory. This framework is<br />
forty years ago 35 .<br />
The US egg shortage also created new markets<br />
shown in Figure 2.<br />
for companies like Hampton Creek whose egg free<br />
Despite significant biosecurity measures in place,<br />
products became highly sought after as the outbreak<br />
H5N2 was able to penetrate the defences on a large<br />
continued and led to it being christened the fastest<br />
number of factory farms.<br />
growing food-company in history. (See case study 9).<br />
14 | fairr.org fairr.org | 15
FINANCIAL<br />
IMPACTS<br />
FINANCIAL<br />
LEVERS<br />
PRODUCTION &<br />
PRICING<br />
PROFITABILITY & INVESTMENT RETURNS<br />
Animal factory farming, wider food value chain (e.g. food retailers, restaurants)<br />
MARKET ACCESS<br />
REPUTATION<br />
LEGAL &<br />
REGULATORY<br />
Definitions<br />
Relationship between ESG issues and their impacts on financial outcome.<br />
••<br />
Production and price: refers to the impacts on production, which are determined largely by weather<br />
conditions and disease. Price risk refers to changes in the prices of inputs and outputs and is generally<br />
external to production processes.<br />
••<br />
Market access: refers to the ability of producers to sell to different markets, including national markets<br />
and specific customers (such as government bodies and private sector firms).<br />
••<br />
Reputation: refers to the damage done to a company’s reputation or brand.<br />
••<br />
Legal and regulatory: refers to the financial impact that may arise from changes in laws and<br />
regulations or from violations of existing laws and regulations.<br />
KEY<br />
ISSUES<br />
RISK<br />
CATEGORIES<br />
Animal welfare<br />
Disease outbreaks<br />
Resource scarcity<br />
Natural hazards &<br />
weather<br />
Climate change<br />
Social license to<br />
operate<br />
Global health<br />
pandemics<br />
Policy changes<br />
Disease outbreaks<br />
Animal welfare<br />
Global health<br />
pandemics<br />
Changing<br />
consumer<br />
preferences<br />
Policy changes<br />
Disease outbreaks<br />
Water pollution<br />
Animal welfare<br />
Community impacts<br />
(health, pollution,<br />
livelihoods)<br />
Labour violations<br />
Weak regulatory<br />
oversight<br />
Sustainability<br />
disclosure<br />
Corporate<br />
governance<br />
Environmental<br />
regulations<br />
Animal welfare<br />
Antibiotic use<br />
Local health<br />
impacts<br />
Global health<br />
pandemics<br />
Social license to<br />
operate<br />
Policy changes<br />
Weak regulatory<br />
oversight<br />
ENVIRONMENTAL SOCIAL GOVERNANCE<br />
FIGURE 2: ESG issues as drivers of financial performance within the context of animal factory farming.<br />
2.3 ENVIRONMENTAL<br />
ISSUES AND IMPACTS<br />
13 environmental issues impact the animal factory<br />
farming industry<br />
Environmental issues are the most quantifiably<br />
material of ESG issues<br />
Legal and regulatory impacts are the most<br />
common ‘E’ issue<br />
Long term production risks due to environmental<br />
factors are likely to be highly material<br />
ENVIRONMENTAL ISSUES CAN IMPACT ALL<br />
FOUR FINANCIAL LEVERS: PRODUCTION AND<br />
PRICING, MARKET ACCESS, REPUTATION<br />
AND LEGAL & REGULATORY<br />
The animal factory farming industry can cause<br />
environmental harm but it can also be negatively<br />
affected by environmental factors. Firstly, animal<br />
factory farming can cause significant damage to the<br />
local and global environment, through for example,<br />
water pollution, greenhouse gas emissions and<br />
deforestation – the latter either directly through land<br />
conversion for farms or indirectly through the clearing<br />
of land for feed production. These characteristics are<br />
key drivers of legal and regulatory risks for the industry.<br />
Secondly, animal factory farming is highly vulnerable to<br />
harm caused by environmental factors. Individual farms,<br />
companies and the industry as a whole can suffer as a<br />
result of natural hazards, adverse weather conditions,<br />
animal disease, resource scarcity (including access to<br />
water and land) and climate change. These types of<br />
events have a strong bearing on changes to production<br />
and the price of inputs and outputs, particularly feed.<br />
In contrast, conventional, pasture-based livestock<br />
operations are less reliant on imported feed.<br />
LEGAL AND REGULATORY ISSUES ARE<br />
KEY DRIVERS OF FINANCIAL RISK<br />
Legal and regulatory impacts are the most frequent<br />
consequence of environmental issues, associated with<br />
11 out of the 13 identified issues. With respect to legal<br />
and regulatory levers, there are numerous examples of<br />
farms being penalised for violations of environmental laws.<br />
For example, following a 500,000-gallon manure spill in<br />
2008, the 1,000-cow dairy operation at Teabow Farms,<br />
Maryland, was forced to reimburse the town of Walkersville<br />
and Frederick County for providing emergency water<br />
supplies, testing and other costs. 37<br />
Given the significant harm to the environment caused<br />
by animal factory farming (e.g. water pollution), the<br />
industry as a whole is highly regulated in developed and<br />
developing countries. Therefore, violations of national<br />
environmental laws and regulations can result in heavy<br />
fines and other types of penalties. For example, in 1997<br />
US-based pork producer Smithfield Foods was fined<br />
US$12.6 million for violating the Clean Water Act.<br />
THE INDUSTRY IS HIGHLY VULNERABLE<br />
TO THE COMBINATION OF INCREASINGLY<br />
DEMANDING ANIMAL WELFARE STANDARDS<br />
AND THE GROWING BODY OF STRINGENT<br />
ENVIRONMENTAL LAWS.<br />
There is a clear trend towards the introduction of more<br />
stringent environmental regulations in both developed<br />
and developing countries. This is occurring alongside<br />
16 | fairr.org fairr.org | 17
TABLE 2: Key environmental issues<br />
ISSUES<br />
Production<br />
IMPACT ON<br />
FINANCIAL LEVERS<br />
& price Market Reputation<br />
Legal &<br />
Regulatory<br />
EXTENT OF<br />
IMPACTS<br />
Magnitude<br />
(systemic,<br />
widespread,<br />
isolated)<br />
Timescale<br />
Disease outbreak a a a a S<br />
Greenhouse gas (GHG) emissions a a L<br />
Deforestation and biodiversity loss a a a S–L<br />
Natural hazards (e.g.<br />
heatwaves, drought, flooding)<br />
and weather conditions<br />
a<br />
Climate change a L<br />
Water pollution a a S–M<br />
Water scarcity a a M–L<br />
Resource scarcity/competition for<br />
resources (e.g. land, feed inputs)<br />
a a a M–L<br />
Poor animal welfare a a a S<br />
Waste generation a a S<br />
High water use a S–M<br />
Air pollution a a S<br />
Soil degradation and<br />
desertification<br />
Definitions<br />
Magnitude<br />
a<br />
Describes the extent of impacts from ESG issues in terms of geographical spread and diffusion across the value chain:<br />
Systemic: impacts affecting a high proportion of operations across a large and potentially non-continuous area<br />
Widespread: impacts affecting a high proportion of operations within a particular region or country<br />
Isolated: localised impacts to individual operations or a small number of physically proximate operations.<br />
Time-scale<br />
Refers to the general time horizon in which financial impacts may be experienced:<br />
Short-term (S) = evidence of significant impacts currently being experienced or may be measurable for up to two years<br />
Medium-term (M) = significant impacts may be measurable over two years up to five years<br />
Long-term (L) = significant impacts may be measurable over a period greater than five years<br />
Uncertain = significant impacts may be measurable over an uncertain time period<br />
S<br />
M<br />
the introduction of higher animal welfare standards.<br />
More stringent environmental laws would effectively<br />
force companies to ‘internalise’ costs that have previously<br />
been borne by society, undermining profitability.<br />
Regulators are unlikely to rapidly introduce measures<br />
that would cause dramatic economic harm to the<br />
industry, particularly in locations where it is a key<br />
provider of jobs and tax revenue – over time however,<br />
such changes could erode margins within the sector.<br />
The following examples illustrate some of the sector’s<br />
key vulnerabilities to more stringent environmental laws:<br />
••<br />
Greenhouse gas emissions: The livestock sector<br />
as a whole is responsible for 14.5% of man-made<br />
greenhouse gas emissions, 38 exposing the sector<br />
to regulatory and social pressure to reduce its<br />
contribution to climate change and potentially<br />
imposing costs on producers.<br />
••<br />
Water pollution: The geographic concentration<br />
of animal factory farming can lead to serious<br />
contamination of water resources. Environmental<br />
degradation caused by the substantial growth of<br />
industrial hog production led the state of North<br />
Carolina to permanently ban new hog CAFOs,<br />
while simultaneously introducing more stringent<br />
environmental regulations to protect water courses.<br />
••<br />
Farm animal welfare: the European Union has<br />
introduced the most stringent legislation on this<br />
issue. A 2010 report found that European “animal<br />
welfare policies increase the costs of businesses<br />
in farming” and that more demanding farm animal<br />
welfare standards than in international competitors<br />
“means that there is the potential for negative<br />
impacts in the future.” 39<br />
PRODUCTION AND PRICING AFFECTED<br />
BY SHORT AND LONG TERM<br />
ENVIRONMENTAL ISSUES<br />
Short-term production risks are highlighted by the<br />
vulnerability of animal factory farming to natural<br />
hazards (which are likely to increase in frequency<br />
due to climate change) and regulatory responses<br />
to disease outbreaks. There are at least eight<br />
environmental issues with the potential to affect<br />
productivity at the farm level, thereby reducing<br />
financial performance at the facility and company level.<br />
Natural hazards, particularly droughts and<br />
heatwaves, have led to substantial financial impacts<br />
by affecting production. These types of events can<br />
be experienced by actors across large geographical<br />
areas. For example:<br />
••<br />
Annual losses for the US dairy industry as a result of<br />
heat stress have been calculated at US$897 million,<br />
or almost US$100 per cow 40 (see case study 2).<br />
••<br />
In 1999, Hurricane Floyd hit North Carolina causing<br />
extensive flooding and damage to local farms. As a<br />
major livestock-producing region, a large number of<br />
livestock were lost, including more than two million<br />
chickens, 1,180 cattle, 28,000 pigs and 752,970<br />
turkeys. 41 The estimated cost of the damage was<br />
over US$13 million.<br />
In addition to the immediate impacts on animal<br />
factory farms, natural hazards can affect input and<br />
output pricing throughout the meat value chain.<br />
Extreme cold weather, for example, can result in<br />
slower weight gains and affect livestock movement,<br />
contributing to severe escalations in the price<br />
of beef. 42 Drought, on the other hand, combined with<br />
high feed costs, can prompt unplanned sales by<br />
farmers, temporarily reducing prices due to the<br />
sudden increase in meat supply. 43 Price volatility<br />
for feed and meat presents challenges for actors<br />
across the value chain.<br />
The impact of emerging<br />
diseases and accelerating<br />
climate change means that<br />
livestock sector-related<br />
investments need to tackle<br />
an ever evolving set of<br />
production, pest and<br />
disease problems –<br />
often in rapidly declining<br />
environmental conditions. 47<br />
Global Agenda for Sustainable Livestock<br />
18 | fairr.org fairr.org | 19
Regulatory responses to threats posed by disease<br />
outbreaks can also lead to sudden and severe<br />
consequences. For example, in April 2014, Japanese<br />
officials ordered a farm owner to cull more than 100,000<br />
chickens following tests which confirmed the presence of<br />
avian influenza in Kumamoto prefecture, southern Japan. 42<br />
The authorities also restricted shipment of around 400,000<br />
chickens in the prefecture. 45 In the previous outbreak in<br />
2010–2011, nearly two million chickens were culled across<br />
nine prefectures. 46 Similarly, an outbreak of PEDv (Porcine<br />
Epidemic Diarrhoea Virus) caused severe economic<br />
damage to US pig farmers in 2013 with large numbers of<br />
hogs culled and restrictions placed on sales and transport.<br />
Medium- to long-term production risks (such as<br />
resource scarcity and climate change) are more likely to<br />
have gradual financial impacts. Increasing competition<br />
for scarce resources is recognised as a threat to animal<br />
factory farming. According to the OECD and the FAO,<br />
competition for land and water will limit the increase<br />
in meat production in many regions and countries. 48 In<br />
addition, by concentrating meat production into fewer and<br />
larger facilities, the industry becomes more reliant on feed<br />
grain inputs due to the reduced role played by pasture-fed<br />
production. This trend increases the financial risks to the<br />
sector stemming from high and volatile feed grain costs.<br />
[Meat] supply response may<br />
be limited in many countries<br />
and regions by constraints<br />
on natural resources [and]<br />
competition for land and water<br />
from alternative crops... 49<br />
OECD-FAO<br />
Animal factory farming has already been affected by<br />
extreme weather events that were consistent with the<br />
predictions of climate change. For example, record heat and<br />
drought across much of Australia in 2014 led to the deaths<br />
of thousands of cattle and forced farmers to send cattle to<br />
slaughter. According to media reports, some farmers claimed<br />
that without significant rains their operations would be<br />
worthless and they would need to abandon their properties. 50<br />
Similarly, severe drought in California forced many farmers<br />
to sell all or some of their cattle in 2014 due to increased<br />
costs and competition for feed. As of September 2014, the<br />
US Department of Agriculture indicated that 83% of cattle in<br />
California were located in areas of “exceptional drought”. 51<br />
The economic impacts of future heat stress on livestock<br />
are likely to be severe, with intensively raised animals<br />
facing unique vulnerabilities. Discounting the costs of<br />
adaptation and extreme weather events, by 2080 the costs<br />
to the UK livestock industry as a result of heat stress has<br />
been estimated at £5.8 million in production losses and<br />
£34 million in mortality losses. 52 The impacts on animal<br />
factory farming are likely to increase over the next few<br />
decades but do not appear to be fully appreciated by the<br />
industry (see Case study 2).<br />
REPUTATIONAL RISKS AFFECT FINANCIAL<br />
OUTCOMES AT COMPANY AND INDUSTRY SCALE<br />
Environmental issues are a key driver of reputational risks,<br />
but the financial consequences of these risks are difficult<br />
to assess. Reputational risks can arise from both operational<br />
and strategic issues. Poor animal welfare, disease outbreaks,<br />
or incidents leading to severe water pollution are often due to<br />
breakdowns in management controls. In contrast, conflicts<br />
over land, water, and deforestation caused by the growing<br />
of feed grain are strategic issues that must be addressed by<br />
the entire industry (alongside other key stakeholders such as<br />
government and civil society).<br />
Nevertheless, the reputational risks arising from both<br />
company-specific and industry-wide issues can produce<br />
negative consequences for companies. These reputational<br />
consequences include restricted access to credit and<br />
markets, constrained ability to operate and expand, and the<br />
loss of suppliers or customers. For example, in January<br />
2008, celebrity chef Hugh Fearnley-Whittingstall targeted<br />
global food retailer Tesco over its alleged stocking of<br />
intensively reared chickens. Through a nationally televised<br />
show in the UK, Fearnley-Whittingstall contended that<br />
the broiler chickens sold by Tesco failed to meet the Farm<br />
Animal Welfare Council’s ‘Five Freedoms’ standard that the<br />
company had adopted as its animal welfare policy. The airing<br />
of the series coincided with a 13.7% fall in the company’s<br />
share price between 2nd and 15th January of that year.<br />
In another case, in August 2014 the US-based chicken,<br />
beef and pork processor Tyson Foods announced in a<br />
Securities and Exchange Commission (SEC) filing that it was<br />
being sued by the State of Missouri as a result of alleged<br />
environmental violations. In addition, the US Environmental<br />
Protection Agency (EPA) had launched a criminal<br />
investigation against the company. 53 Both these actions<br />
followed the discharge of a feed supplement into a local<br />
waterway in May 2014, which resulted in the death of a large<br />
number of fish as well as odour problems. In addition to<br />
direct financial penalties (fines and compensation), criminal<br />
charges may result in “government contract suspension and<br />
debarment”. 54 Tyson Foods has reportedly received<br />
US$4.7 billion from US government contracts since 2000,<br />
with current contracts worth an estimated US$500 million.<br />
The economic cost of heat stress can be significant. In the<br />
US alone, heat stress is estimated to cost the dairy and beef<br />
industry as much as US$897 million and US$369 million per<br />
annum, respectively. 56 For dairy cattle, this figure translates<br />
to an annual average of US$100 per cow. 57 However, future<br />
climate change will alter regional temperature regimes in<br />
many parts of the world. The latest Intergovernmental Panel<br />
on Climate Change (IPCC) report, released in 2013, identifies<br />
that future increases in heat stress are a significant threat to<br />
the health of animals and humans alike. 58<br />
Companies involved in animal factory farming can<br />
benefit from a better understanding of future heat<br />
stress risks. Investors can also use information<br />
such as this to develop a greater appreciation for the<br />
potential extent and frequency of losses from heat<br />
stress, and how this can impact financial performance.<br />
Intensively farmed cows more vulnerable to heat stress<br />
Cattle are very sensitive to heat stress, which can have<br />
adverse physiological effects, resulting in decreased<br />
milk yield, breeding inefficiency, slower weight gain and<br />
general poor health. Heat stress symptoms occur when<br />
the cow is unable to regulate its body temperature. Severe<br />
heat stress can cause cattle to become uncoordinated<br />
and weak, and can result, ultimately, in death.<br />
Although all cattle are vulnerable to heat stress, feedlot<br />
cattle are typically more at risk than pastured cattle. 59<br />
Even as factory farming bears<br />
significant responsibility<br />
for planetary warming, it<br />
also numbers among the<br />
industries that will feel the<br />
impact of climate change<br />
most keenly. 55<br />
Animals & Society Institute<br />
CASE STUDY 2: <strong>FACTORY</strong>-FARMED CATTLE FEEL THE HEAT FROM CLIMATE CHANGE<br />
In part this is because pastured cattle are able to seek<br />
shade, water and air movement to help keep cool.<br />
In contrast, radiant heat is increased for feedlot cattle from<br />
the dirt or concrete surfaces on which they are housed.<br />
There are concerns within the industry that insufficient<br />
attention has been paid to the future impacts of climate<br />
change on the industry, particularly as temperatures<br />
become warmer and more unpredictable, and less hardy<br />
species of cattle are being introduced to food chains. 60<br />
New data reveals extent of global heat stress change<br />
The current and future exposure of cattle to heat<br />
stress has been assessed using the most up-to-date<br />
climate model data. This analysis reveals the extent<br />
of heat stress impacts as a result of climate change<br />
at the global, national and subnational level:<br />
••<br />
By 2045, each cow globally will experience on average 29<br />
more Heat Stress Days per year than they do at present.<br />
••<br />
Across all 247 countries, the number of days on<br />
which Temperature Humidity Index (THI) exceeds<br />
72F (i.e. a Heat Stress Day) will increase from 49%<br />
to 58% by 2045, equating to an increase of 33 Heat<br />
Stress Days per year.<br />
••<br />
The top 10 countries with the greatest head of cattle<br />
account for 59% of the global total. On average,<br />
these countries currently experience 160 Heat Stress<br />
Days per year – a number which is set to rise to<br />
more than 193 by 2045, representing a 21% increase.<br />
20 | fairr.org fairr.org | 21
1<br />
TEXAS, USA<br />
Head of Cattle = 1,190,000<br />
Increase in Heat Stress Days per year =<br />
32 (from 148 to 180)<br />
Cattle in Texas currently experience Heat Stress<br />
!<br />
3<br />
Days 41% of the time, rising to 49% by 2045.<br />
Assuming the relationship between the loss<br />
and heat stress is static, this increase in the<br />
number of heat stress days per year (from 148<br />
1<br />
to 180 days) translates into a 25% increase in<br />
economic losses.<br />
2<br />
ETHIOPIA<br />
2<br />
Head of Cattle = 53,990,061<br />
Increase in Heat Stress Days per year =<br />
76 (from 248 and 324)<br />
4<br />
The projected increase in the number of<br />
Heat Stress Days (76 per year) is the greatest<br />
5<br />
of any country in the 100 countries with<br />
greatest head of cattle. This means that cattle<br />
in Ethiopia will face heat stress conditions on<br />
9 days out of 10 by 2045.<br />
3<br />
4<br />
5<br />
UNITED KINGDOM<br />
Head of Cattle = 9,900,000<br />
Increase in Heat Stress Days per year =<br />
3 (from 1 to 4)<br />
MATO GROSSO, BRAZIL<br />
Head of Cattle = 28,427,059<br />
Increase in Heat Stress Days per year =<br />
23 (from 320 to 344)<br />
QUEENSLAND , AUSTRALIA<br />
Head of Cattle = 12,800,000<br />
HEAT STRESS DAYS PER YEAR<br />
(2026–2045)*<br />
331–365<br />
301–330<br />
271–300<br />
241–270<br />
211–240<br />
181–210<br />
151–180<br />
Top ten cattle producing countries<br />
by head of cattle, 2013<br />
121–150<br />
91–120<br />
61–90<br />
31–60<br />
< 31<br />
No data<br />
!<br />
!<br />
!<br />
!<br />
DAYS INCREASE<br />
IN HEAT STRESS<br />
101–120<br />
81–100<br />
61–80<br />
41–60<br />
21–40<br />
2.4 SOCIAL ISSUES<br />
AND IMPACTS<br />
11 social issues impact the animal factory<br />
farming industry.<br />
Health impacts from antibiotic misuse and pandemic<br />
risk show high potential for material impacts.<br />
Social issues are challenging to measure but put large<br />
amounts of financial value at risk.<br />
Reputational damage due to changing<br />
consumer attitudes present both short-term<br />
and long-term risk.<br />
SOCIAL ISSUES ARE A KEY DRIVER OF<br />
FINANCIAL OUTCOMES BUT CHALLENGING<br />
TO IDENTIFY AND MEASURE<br />
There is a tremendous amount of financial value<br />
potentially at risk as a result of social issues.<br />
However, it is difficult for companies involved in<br />
animal factory farming or linked to the wider value<br />
chain to fully grasp the implications as the relationship<br />
between social issues and financial outcomes can be<br />
unclear. There is also less of an emphasis on social<br />
issues within the available literature. Therefore, the<br />
emergence and extent of costs due to social issues is<br />
often hard to predict, fully recognise and account for;<br />
costs can also unfold over a long period of time. Each of<br />
the social issues identified in Table 3: Key social issues,<br />
apart from one (labour availability and productivity),<br />
includes a significant reputational component.<br />
This alone creates additional challenges in<br />
specifying the financial impact.<br />
REPUTATIONAL AND MARKET<br />
CHALLENGES ARE AMPLIFIED BY<br />
STRENGTHENING SOCIAL ATTITUDES<br />
Changing consumer preferences around animal<br />
welfare standards present longer-term risks and<br />
opportunities for investment in animal factory<br />
farming. US surveys have found that 95% of<br />
consumers want farm animals to be treated well 61 and<br />
more than 80% of people feel it is important that the<br />
chickens they eat are raised humanely. 62 In the UK, a<br />
2012 report published by the RSPCA’s Freedom Food<br />
farm assurance scheme found that for 48% of Britons<br />
animal welfare is either ‘extremely’ or ‘very’ important’<br />
to them when choosing food. 63 This confirms multiple<br />
surveys indicating that UK and European citizens<br />
would like to see an improvement in the welfare of<br />
farmed animals. 64 Companies failing to respond to<br />
shifts in public perceptions risk missing out on market<br />
opportunities. In contrast, companies may be able<br />
to future-proof their investments by recognising the<br />
importance of farm animal welfare and associated<br />
issues such as sustainability.<br />
Increasing public concern over farm animal<br />
welfare and associated food safety standards<br />
heightens reputational risks to companies and<br />
therefore potential financial impacts. The food<br />
sector as a whole is sensitive to changing public<br />
sentiment as regards animal welfare issues.<br />
For example, research by academics at Kansas State<br />
University found that that media coverage of animal<br />
welfare issues in the US reduced pork and poultry<br />
demand over the study period. 65 Mounting public<br />
concern related to these issues also means that it<br />
is more likely that companies will face scrutiny from<br />
pressure groups and the media. There are multiple<br />
examples from Europe, North America and Asia where<br />
companies have been targeted because of their links<br />
with industrial meat production:<br />
••<br />
In July 2014, an undercover investigation by<br />
the Guardian newspaper revealed multiple<br />
alleged hygiene failings in the UK poultry industry. 66<br />
The report led to questions over the auditing systems<br />
used by leading supermarkets to ensure good<br />
hygiene standards and prompted several of them<br />
to launch emergency investigations into their<br />
chicken suppliers.<br />
••<br />
In July 2014, an undercover TV investigation revealed<br />
that a Shanghai meat factory was selling out-of-date<br />
chicken and beef to a number of US fast food chains,<br />
including McDonald’s and Yum Brands, which owns<br />
KFC and Pizza Hut. Although the chains immediately<br />
stopped using the supplier, both experienced drops<br />
in their share prices.<br />
••<br />
In 2008, evidence of animal cruelty and health concerns<br />
were brought against Californian-based Hallmark/<br />
Westland Meat Packing Company, prompting the US<br />
Department of Agriculture to recall over 140 million<br />
pounds of beef (the largest beef recall in US history).<br />
A US$500 million court judgement was also made<br />
against the company, and it went bankrupt in 2012.<br />
Companies implicated in poor animal welfare<br />
scandals may face severe reputational damage<br />
and consumer boycotts. Clients may also cancel<br />
contracts or avoid purchasing from companies that<br />
have been linked to these practices. Corporate<br />
approaches to farm animal welfare are seen<br />
increasingly by investors as an indicator of how<br />
companies respond to shifting social attitudes and<br />
consumer preferences, and can also reveal how well<br />
they are positioned to manage risks embedded within<br />
their supply chains.<br />
TABLE 3: Key social issues<br />
ISSUES<br />
Production<br />
& price<br />
IMPACT ON<br />
FINANCIAL LEVERS<br />
Market<br />
access<br />
Reputation<br />
Legal &<br />
Regulatory<br />
EXTENT OF<br />
IMPACTS<br />
Magnitude<br />
(systemic,<br />
widespread,<br />
isolated)<br />
Timescale<br />
Excessive antibiotic use a a a L<br />
Spread of infectious diseases/<br />
global health pandemics<br />
Social backlash against poor<br />
animal welfare standards<br />
a a a a S<br />
a a a S<br />
Changing consumer preferences a a M–L<br />
Poor working conditions a a S<br />
Human rights violations a a S<br />
Labour availability and<br />
productivity<br />
Health impacts on surrounding<br />
communities<br />
a a M–L<br />
a a M–L<br />
Loss of rural livelihoods a U<br />
Land rights violations a a U<br />
Social licence to operate<br />
compromised due to opposition<br />
to new development<br />
For definitions and colour key, refer to Table 2 on page 18.<br />
We believe there are also<br />
a number of potential<br />
headline risks that could<br />
tarnish the image of<br />
restaurant companies,<br />
including concerns over<br />
animal cruelty… 70<br />
Citigroup Global Markets<br />
a a S–M<br />
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On 20 July 2014, a major food safety scandal in China<br />
broke in the local and international media. Following<br />
a television investigation, Chinese authorities accused<br />
Shanghai Husi Food Co. (owned by US-based<br />
OSI Group) of intentionally selling meat beyond its<br />
shelf life. The food manufacturer had been supplying<br />
fast-food chain restaurants in China and Japan,<br />
including Yum! Brands, McDonald’s and Starbucks.<br />
In the aftermath of the news, buyers quickly cancelled<br />
their orders from the Shanghai supplier and in some<br />
cases the OSI Group as a whole. Within days the<br />
OSI Group had also withdrawn all implicated products<br />
from the marketplace. Despite this, the negative<br />
news coverage rapidly hit fast-food sales in China,<br />
prompting a decline in the full-year earnings of fastfood<br />
restaurants as well as a drop in share prices.<br />
Referring to the Shanghai incident in its August<br />
quarterly report, McDonald’s issued a warning that “As a<br />
result of the China supplier issue, the Company’s global<br />
comparable sales forecast for 2014 is now at risk.” 67<br />
In a financial report released just days after the incident<br />
broke, Yum! Brands stated that “The result has been<br />
a significant, negative impact to same-store sales at<br />
both KFC and Pizza Hut in China over the past 10 days…<br />
SHARE PRICE<br />
CASE STUDY 3: EXPIRED MEAT SCANDAL CONSUMES VALUE<br />
OF FAST-FOOD COMPANIES ALONG SUPPLY CHAIN<br />
130<br />
125<br />
120<br />
115<br />
110<br />
105<br />
100<br />
95<br />
90<br />
85<br />
80<br />
May<br />
20 July 2014: Major food safety<br />
scandal breaks, implicating<br />
several US fast food chains<br />
Jun<br />
Jul<br />
it is too early to know how quickly sales will rebound<br />
in China and the corresponding full-year financial<br />
impact to Yum! Brands. However, if the significant sales<br />
impact is sustained, it will have a material effect on<br />
full-year earnings per share.” 68 In its October quarterly<br />
report, Yum! said that “since July 21st, China Division<br />
has experienced a significant, negative impact to sales<br />
and profits at both KFC and Pizza Hut. While sales are<br />
rebounding, same-store sales continue to be negative.” 69<br />
Financial analysis for July to October (see Figure 4)<br />
shows that the fall in sales had a substantial impact<br />
on the company share prices of Yum! and McDonald’s.<br />
The companies recorded a fall in share price of 8.29%<br />
and 7.4%, and a drop in equity of US$3.6 billion and<br />
US$7.2 billion, respectively, between 18th July and<br />
20th October 2014.<br />
By November 2014, the value of Yum! and McDonald’s<br />
share prices and equity had risen again, although<br />
they still remained lower than that recorded before<br />
the scandal broke. Comparably, Starbucks, who were<br />
less visibly associated with Shanghai Husi Food Co.,<br />
reported a less significant drop in equity of US$2.4 billion<br />
between 18th July and 20th October 2014. Furthermore,<br />
by November 2014, Starbuck’s equity value had risen to<br />
levels almost matching that prior to the scandal breaking.<br />
18 July–20 October: Yum! Brands share price<br />
falls 8.29%, McDonald's share price falls 7.4%<br />
DATE (2014)<br />
FIGURE 4: Financial impact of food safety scandal to fast-food chains in 2014<br />
Aug<br />
Sep<br />
Oct<br />
McDonalds<br />
YUM! Brands<br />
Starbucks<br />
Source: Bloomberg<br />
In the case of animal<br />
welfare, failure to keep pace<br />
with changing consumer<br />
expectations and market<br />
opportunities could put<br />
companies and their investors<br />
at a competitive disadvantage<br />
in an increasingly global<br />
marketplace. 71<br />
International Finance Corporation<br />
HEALTH IMPACTS, PARTICULARLY<br />
FROM ANTIBIOTIC USE AND POTENTIAL<br />
PANDEMICS, POSE SECTOR-WIDE<br />
REPUTATIONAL AND REGULATORY RISK<br />
Global health pandemics and public concerns over<br />
animal welfare have resulted in clear financial<br />
impacts to the agricultural sector as a whole and<br />
to individual companies. Animal factory farming has<br />
been implicated in a number of global health scares.<br />
There is evidence that the 2009 H1N1 strain of swine<br />
flu – which the CDC estimates resulted in between<br />
151,700 and 574,400 deaths globally 72 – first originated<br />
in US factory farms in 1998. 73 In addition, poultry factory<br />
farming was implicated in the emergence and spread<br />
of bird flu (or avian influenza) in both 2015 and 2003.<br />
The large number of densely confined birds facilitates<br />
the mutation of viruses into harmful strains and<br />
international trade contributes to the global spread.<br />
The industry at both a national and regional level is<br />
highly exposed to negative financial consequences in<br />
the event of disease outbreak. According to one study,<br />
the H1N1 outbreak led to an 11% drop in global pork<br />
trade. 74 In the US, farmers were estimated to be losing<br />
US$30 to US$35 on every sold pig. Major producers<br />
such as Tyson Foods and Smithfields Foods were<br />
reducing their herds and selling assets, and thousands<br />
of producers were predicted to be put out of business. 75<br />
The sudden reduction in consumer demand saw pork<br />
prices drop in many countries. Market access was also<br />
restricted for many producers as major importers such<br />
as Russia and China introduced import bans on pork<br />
from the US (see Case study 4 for further information on<br />
the financial impacts of global health pandemics and<br />
food safety scandals at a sector level.).<br />
Resistance in the<br />
foodborne zoonotic<br />
bacteria Salmonella and<br />
Campylobacter is clearly<br />
linked to antibiotic use in<br />
food animals, and foodborne<br />
diseases caused by such<br />
resistant bacteria are well<br />
documented in people. 76<br />
World Health Organization<br />
The animal factory farming industry may suffer<br />
reputational impacts and is subject to unforeseen costs<br />
due to impacts to human health arising from excessive<br />
antibiotic use. According to estimates, approximately<br />
50% of all antibiotics used in the UK and 80% of all<br />
antibiotics sold in the US are given to farm animals. 77<br />
Moreover, farm use of antibiotics has increased over<br />
the past decade while human medical use is declining. 78<br />
Antibiotic resistance presents an increasing human<br />
and animal health risk globally, linked to a higher risk<br />
of death and more severe illness. The additional costs<br />
of healthcare associated with antibiotic resistance<br />
are huge – estimated costs to the US economy reach<br />
as high as US$20 billion in direct healthcare costs. 79<br />
There is substantial debate over the use of antibiotics<br />
within animal factory farming, particularly those<br />
considered critically important for human and animal<br />
medicine. The debate is driven by concern over the<br />
development of drug-resistant bacteria in humans, such<br />
as E. coli, Salmonella and MRSA, which can be linked<br />
to high antibiotic use in farm animals. In June 2015 an<br />
investigation by the Guardian newspaper in the UK found<br />
that the livestock-associated MRSA CC398 virus, which<br />
is linked to the intensive farming of pigs, had spread to<br />
humans. In Denmark 1,271 people contracted the CC398<br />
bug as a result of the infection 80 .<br />
26 | fairr.org fairr.org | 27
Some companies within the industry are beginning to<br />
As animal factory farming becomes more dominant<br />
address reputational risks presented by antibiotic use.<br />
in Asia, low labour standards and enforcement<br />
In the last two years, a number of large food producers<br />
regimes are likely to pose increasing reputational<br />
that operate animal factory farms have taken significant<br />
risks to investors.<br />
steps to reduce the amount of antibiotics they use.<br />
In September 2014, Perdue Farms, the third largest<br />
Another often cited example of mismanaged social<br />
chicken producer in the US, announced that it had<br />
risks is AgriProcessors slaughterhouse (now AgriStar)<br />
stopped using antibiotics at its chicken hatcheries. 81<br />
in Postville, Iowa. In this case, a 2004 undercover expose<br />
The following month Tyson Foods – the second<br />
into animal cruelty prompted investigations into worker<br />
largest producer of chicken, beef and pork globally –<br />
rights abuses and the use of undocumented workers.<br />
announced it was no longer using antibiotics in its<br />
In 2008 the plant was subject to the largest single-<br />
35 chicken hatcheries. 82 Changing consumer attitudes<br />
site immigration raid in US history and the plant went<br />
towards antibiotic use are also presenting commercial<br />
bankrupt as a result 85 .<br />
opportunities. Despite the risk of increased production<br />
costs, sales of antibiotic-free meat are growing quickly<br />
When animal factory farms impact on local<br />
– indicating increased consumer demand. According to<br />
communities, costs borne by companies are likely to<br />
market research, the value of US sales of antibiotic-free<br />
arise as a result of conflict. Issues such as the loss<br />
chicken rose by 34% in 2013. 83<br />
of rural livelihoods or health impacts may become<br />
Regulatory restrictions on the use of antibiotics in<br />
farm animals will result in financial harm, as animal<br />
factory farming is dependent on high use of antibiotics<br />
as a main driver of profitability. Within the industrial<br />
antibiotics in the US would cost producers US$4.50 per<br />
animal during the first year and cost the industry over<br />
US$700 million over a 10-year period (at 2003 prices).<br />
LOCAL IMPACTS UNDERMINE THE<br />
INDUSTRY’S REPUTATION, JEOPARDISING<br />
SOCIAL LICENSE TO OPERATE<br />
intertwined with environmental concerns and result in<br />
community opposition to proposed or current facilities.<br />
Examples of community opposition to factory farms<br />
exist in multiple jurisdictions, in both developed and<br />
model, antibiotics are used for both prevention and<br />
However, these European bans remain limited as they<br />
There are multiple social issues linked to the impacts<br />
developing countries.<br />
treatment of disease and for growth promotion.<br />
only cover drugs deemed presently valuable for humans<br />
of animal factory farming on those working in the<br />
Restrictions on prophylactic antibiotic use could<br />
and treatment of birds for direct human consumption,<br />
industry and on surrounding local communities.<br />
In 2014, community opposition was mobilised against<br />
undermine productivity due to the increased prevalence<br />
rather than addressing the full chain of chicken production<br />
Social issues include impacts on rural livelihoods and<br />
a proposed 25,000-pig factory farm near Foston, in the<br />
of disease and sickness in densely packed facilities.<br />
(including parent birds). Therefore, this negative impact<br />
health, poor working conditions, and human rights<br />
county of Derbyshire, UK. The concerns cited by the<br />
More comprehensive bans on antibiotics that constrain<br />
on industry may be minimal compared to what could be<br />
and land rights violations. Where adverse impacts are<br />
opposition group included: animal welfare; the use of<br />
drug use in the entire chain of chicken production<br />
on the horizon in the regulatory future, as consumers<br />
experienced by workers – including illegal, migrant or<br />
antibiotics, and their potential impact on human health;<br />
(including parent birds) would cause more significant<br />
and governments begin to demand more meaningful<br />
seasonal workers, those on low wages, and child,<br />
air pollution and bad odours; the economic effects on<br />
financial harm, as they would require a complete<br />
elimination of drugs from the production system.<br />
forced or trafficked workers – costs to the company<br />
smaller producers, and increased traffic. 86 The strength<br />
restructuring of the infrastructure of the animal<br />
are likely to arise in the form of fines, compensation<br />
of opposition contributed to lengthy delays in the<br />
factory farm model.<br />
A related investment risk stems from trade<br />
or legal fees, and reputational harm.<br />
approvals process for the Foston Farm. The farm was<br />
restrictions arising over the use of antibiotics in<br />
first proposed in 2009 and had still not been approved<br />
Some European countries, including the Netherlands<br />
animal feed. For example, in 1989 the EU banned<br />
In 2005, Human Rights Watch found that in the US,<br />
as of November 2014.<br />
and Denmark, have banned the use of preventative<br />
the import of beef from animals raised using growth<br />
“meat and poultry industry producers set up the<br />
antibiotics in farming, while it is still legal in the UK<br />
hormones – the move was in response to concerns<br />
workplaces and practices that create [health and<br />
In Germany, civil society halted the development of 11<br />
and the USA (with antibiotic use for growth promotion<br />
about the addition of six hormones to the vast majority<br />
safety] dangers, but they treat the resulting mayhem<br />
factory farming operations within a four-month period 87<br />
also legal in the USA). There is mixed evidence relating<br />
of American beef. Now rising fears over antibiotic<br />
as a normal, natural part of the production process,<br />
while in the Netherlands, a judge ruled against what<br />
to the economic impact of these bans, as they do not<br />
resistance are prompting many jurisdictions, including<br />
not as what it is – repeated violations of international<br />
would have been the country’s first animal factory<br />
apply to the whole supply chain and only cover certain<br />
the EU, New Zealand and South Korea, to introduce<br />
human rights standards”. In response to a high number<br />
farm – a proposed development for housing 1.1 million<br />
antibiotics. For example, according to the World Health<br />
restrictions and bans on the import of livestock and<br />
of fatalities and injuries on Wisconsin dairy farms, the<br />
chickens and 35,000 pigs. 88 There is very limited<br />
Organisation (WHO), Denmark’s 1998 ban on use of<br />
poultry products grown with antimicrobial drugs.<br />
Occupational Safety and Health Administration (OSHA)<br />
empirical evidence as to the economic costs of these<br />
some antibiotics for broiler chickens and swine did<br />
The introduction of these measures can have a negative<br />
established a more rigorous inspection regime in 2012. 84<br />
events to the affected companies. However, it is likely<br />
not significantly affect farmers’ incomes; in contrast<br />
impact on producers in countries with more lax<br />
Approximately 40% of the state’s 34,000 dairy farm<br />
that costs will emerge as a result of delays during<br />
industry-funded research found that several large<br />
regulations. While it is difficult to predict or quantify the<br />
labourers are immigrants, the implication being that<br />
the approval or construction process, extra staff time<br />
producers experienced severe health problems and<br />
aggregate magnitude of impact to affected producers, it<br />
they are less likely to be familiar with health and safety<br />
required to manage conflicts, and reduced productivity<br />
large costs. It has been estimated that a similar ban on<br />
is an area that investors can readily monitor and assess.<br />
rights and responsibilities than domestic workers.<br />
due to work disruptions.<br />
28 | fairr.org fairr.org | 29
CASE STUDY 4: RISK OF PANDEMIC DRIVES UNDERPERFORMANCE OF FOOD COMPANIES<br />
Global health pandemics – such as swine flu,<br />
US-based Smithfield Foods, Tyson Foods and Hormel<br />
avian influenza (bird flu) and Bovine Spongiform<br />
Foods were three of the world’s largest pork producers.<br />
Encephalopathy (BSE) – pose a major financial risk As illustrated in Figure 5, each company suffered a drop in<br />
to investments in companies linked to animal factory share price following initial confirmation by US authorities<br />
farming, including those in the wider meat supply chain. of several human cases of swine flu in April 2009. Between<br />
It is difficult to disentangle the financial impacts on 14 April and 28 April, Smithfield Foods experienced the<br />
companies arising from pandemic outbreaks from other greatest decline, with shares dropping 12.8%. The company<br />
factors that can affect performance. However, analysis of was linked to the initial disease outbreak at a Mexican<br />
the US swine flu outbreak of 2009 and the China avian flu subsidiary. Tyson share prices declined by 5.6% over the<br />
outbreak of 2013 indicates a correlation between these period and Hormel shares dropped by 3.1%. In comparison,<br />
events and the underperformance of companies with the MSCI US Agriculture and Food Chain Index – which<br />
significant exposure to the pork and poultry sectors. includes US listed companies operating across the<br />
agriculture food chain – fell by 1.5% over the period.<br />
SWINE FLU (2009)<br />
The 2009–2010 H1N1 strain of swine flu began in Tyson Foods and Hormel Foods make reference to<br />
spring 2009, spreading to the US via Mexico. As the swine flu in their financial reports for 2009, outlining<br />
outbreak unfolded in April 2009, investors responded the risk to business from impacts on production,<br />
by moving money from exposed sectors, with shares export restrictions and changing demand for pork<br />
in pork producers, airlines and hotel firms suffering products. Smithfield stated that the company’s first<br />
as a result. The outbreak forced major US producers quarter 2009 loss “reflects the continuing adverse<br />
to reduce their swine herds and sell assets, while the business environment in the hog production segment …<br />
viability of thousands of smaller producers was also the sharply lower hog prices reflect the impact of the<br />
threatened. 89 By January 2010, there were confirmed (H1N1) outbreak at the end of the prior quarter…” 92<br />
cases in 171 countries and 14,738 deaths attributed to<br />
the virus (although the true figure is likely to be much Although the impact on share prices was significant, it was<br />
higher 90&91 ). The US experienced more deaths than any also short-lived and these large companies performed<br />
other country (2,328).<br />
well over the course of the year. In part this was due to<br />
the easing of concerns over the pandemic and a better<br />
understanding of the risks presented by the virus, as well<br />
as a general improvement in economic conditions.<br />
AVIAN FLU (2013)<br />
The H7N9 strain of bird flu was first recorded in China in<br />
March 2013. According to the World Health Organisation,<br />
most cases of human infection were reported following<br />
exposure to live poultry and contaminated environments.<br />
The virus spread prompted culling and restrictions on live<br />
poultry markets in China, resulting in significant economic<br />
impacts. A 2014 study of the February to May 2013 outbreak<br />
estimates poultry industry losses of US$1.24 billion in<br />
the ten affected provinces and US$0.59 billion across<br />
eight neighbouring, unaffected provinces, with lost sales<br />
accounting for the majority of the losses. 93<br />
Several large poultry producers have been adversely<br />
affected by the most recent outbreak, including<br />
Thai-based Charoen Pokphand Foods PCL (CPF)<br />
and Chinese company New Hope Liuhe Co Ltd.<br />
CPF is Thailand’s largest agribusiness, operating in<br />
12 countries including China where they are heavily<br />
involved in swine and poultry production. New Hope<br />
Liuhe operates across multiple countries in Asia and<br />
200<br />
180<br />
is involved in the manufacture and distribution of<br />
feedstuffs, and meat and milk products. The company<br />
was China’s biggest poultry supplier in 2012.<br />
Between 29 March and 31 December 2013, the share<br />
prices of both companies underperformed relative to many<br />
industry peers and the MSCI Asia Agriculture and Food<br />
Chain Index for large periods. Over these months shares<br />
in CPF fell by 15%, reducing its market capitalisation by<br />
US$1.23 billion. It was not the first time the company had<br />
been adversely affected by the virus. During a bird flu<br />
outbreak in 2003–04 the company’s shares experienced a<br />
sudden 6.5% drop after Thailand confirmed its first human<br />
deaths from the virus and Japan and the EU imposed bans<br />
on Thai chicken products. 94<br />
29 March to 31 December: CPF and New Hope Liuhe share prices<br />
underperform against MSCI Asia Agriculture & Food Chain Index;<br />
Although the share price of New Hope Liuhe increased by<br />
20% between March and December 2013, between the end of<br />
March and 26 July the share price declined by 23%. According<br />
to Forbes Asia, as a result of bird flu net profits at New Hope<br />
Liuhe dropped 15% in the first half of the year to US$141<br />
million. 95 The company’s Chairman Liu Yonghao stated<br />
that bird flu had “tremendously impacted” Chinese poultry<br />
farmers 96 and that in response to the virus he was looking to<br />
invest outside of China, mainly in developed countries. 97<br />
Source: Bloomberg<br />
160<br />
160<br />
140<br />
120<br />
SHARE PRICE<br />
140<br />
120<br />
100<br />
SHARE PRICE<br />
100<br />
80<br />
60<br />
40<br />
20<br />
Jan<br />
Feb<br />
Mar<br />
Apr<br />
May<br />
US authorities confirmed several human cases of swine flu in<br />
April 2009. Following these announcements between 14 April<br />
and 28 April, Smithfield's shares dropped 12.8%, Tyson's<br />
dropped 5.6% and Hormel dropped by 3.1%. The MSCI US<br />
Agriculture & Food Chain Index fell by 1.5% over this period.<br />
Jun<br />
Tyson foods Hormel foods Smithfield foods MSCI US Agriculture & Food Chain Index<br />
2014<br />
Jul<br />
Aug<br />
Sep<br />
Oct<br />
Nov<br />
Dec<br />
Source: Bloomberg<br />
80<br />
60<br />
40<br />
Jan<br />
March 2013: H7N9 strain of<br />
bird flu first recorded in China<br />
Feb<br />
Mar<br />
Apr<br />
New Hope Liuhe Co Ltd Charoen Pokphand Foods Public Co. Ltd MSCI Asia Agriculture & Food Chain Index<br />
Shanghai Greencourt Investment Group Henan Shuanghui Investment & Development Shenzhen Agricultural Products<br />
Beijing Shunxin Agriculture Jiangxi Huangshanghuang Group Food Jiangxi Huangshanghuang Group Food<br />
Chuying Agro-Pastoral Group<br />
May<br />
Jun<br />
29 March to 26 July: New Hope<br />
Liuhe share price falls 23%<br />
Jul<br />
2013<br />
Aug<br />
Sep<br />
Guangdong Guanghong Holdings<br />
29 March to 31 December: New<br />
Hope Liuhe share price falls 15%<br />
Oct Nov Dec<br />
FIGURE 5: US pork producers see share prices plummet following swine flu outbreak, Apr 2009<br />
FIGURE 6: Major Asian poultry firms see share price declines during avian influenza outbreak, 2013<br />
30 | fairr.org fairr.org | 31
2.5 GOVERNANCE ISSUES<br />
AND IMPACTS<br />
4 broad governance issues impact the animal<br />
factory farming industry<br />
Animal factory farming vulnerable to changes to<br />
the commercial context in which it operates<br />
Changes in government policy, particularly subsidy<br />
support, present significant financial risk<br />
Shifting production to developing countries<br />
presents strong longer-term risk due to less<br />
robust corporate governance in these countries<br />
GOVERNANCE ISSUES DETERMINED BY<br />
CORPORATE AND POLITICAL DECISION MAKING<br />
Within this report, governance refers to both internal<br />
corporate management activities and the external<br />
commercial context as defined by politics and regulatory<br />
decisions. Like most industries, animal factory farming<br />
is highly vulnerable to changes to the commercial context<br />
in which it operates. Strong evidence suggests that the<br />
future success of the industry is dependent on continuity<br />
in government policy. This is particularly true with respect<br />
to direct and indirect subsidy support. There is also<br />
growing recognition among corporations and investors that<br />
companies which can show they are more prepared for<br />
the ESG issues they face are better positioned to manage<br />
them. In turn, enhanced disclosure on ESG issues can<br />
help to attract investment and drive long-term value. 98<br />
POLICY CHANGES COULD<br />
DRAMATICALLY AFFECT PRODUCTION,<br />
PRICING AND MARKET ACCESS<br />
Changes in government policy, particularly<br />
subsidy support, present significant financial risks to<br />
animal factory farming. The industry receives subsidy<br />
support in both developed and developing countries.<br />
The majority of attention has focused on the US, where<br />
the animal factory farming industry receives direct and<br />
indirect government support. Direct support includes<br />
insurance payments, which protect farming operations<br />
from income losses stemming from weather-related<br />
disasters or reduced revenue. Indirect support arrives<br />
via the purchase of subsidised grain (or policies which<br />
result in crop overproduction), and public funding to<br />
help prevent pollution and remediate polluted land.<br />
In the US, the animal factory farming industry receives<br />
public support in the form of funding (US$125 million in<br />
2007) to help prevent pollution from farms, and publicly<br />
met remediation costs (US$56 million just in Kansas)<br />
for cleaning up the land under hog and dairy CAFOs. 99<br />
In China, animal factory farming has received government<br />
support via various subsidies and land access. 100<br />
Feed prices often account for the largest proportion<br />
of operating costs. Therefore, increasing feed costs<br />
are likely to have a material impact on financial<br />
performance. Evidence indicates that grain subsidies<br />
created over a number of decades indirectly benefit<br />
CAFOs in the US by almost US$4 billion annually. 101<br />
As a result of the US Farm Bill (1996), commodity<br />
prices dropped to 26% below production costs,<br />
thereby dramatically reducing feed costs for industrial<br />
operations. 102 This decline reduced hog CAFO operating<br />
costs by 15%, saving these types of operations<br />
US$947 million annually between 1997 and 2005. 103<br />
Academic research shows that changes to the Farm Bill<br />
saw the US broiler industry gain average monetary<br />
benefits of US$1.25 billion per year between 1997 and<br />
2005. 104 The research concluded that although the<br />
Farm Bill was designed to support family farmers,<br />
agribusiness and industrial livestock operations are major<br />
beneficiaries. Furthermore, it found that government<br />
policies were effectively driving industrialisation in the<br />
livestock production system by “making factory farms<br />
appear more cost efficient than diversified, independent<br />
operations that grow their own feed.”<br />
GOOD CORPORATE GOVERNANCE<br />
REQUIRED TO MANAGE EMERGING<br />
ESG RISKS AND OPPORTUNITIES<br />
The range and significance of ESG issues related to<br />
animal factory farming underscores the importance<br />
of strong corporate sustainability disclosure.<br />
The evidence presented above includes multiple<br />
examples of how ESG issues have impacted financial<br />
performance. However, animal factory farming is exposed<br />
to ESG issues that can result in financial impacts over<br />
medium and longer term horizons. Disclosure and<br />
transparency can provide investors with insight into<br />
how companies are managing their ESG exposure.<br />
Additionally, although not specific to animal factory<br />
farming, there is evidence showing that a strong ESG<br />
TABLE 3: Key governance issues<br />
ISSUES<br />
Policy changes (e.g. removal of<br />
government subsidies, changes<br />
to policy, trade restrictions)<br />
reputation can help to shield companies from financial<br />
harm. 105 Overall, evidence suggests that companies<br />
with high ratings for corporate social responsibility (CSR)<br />
and ESG issues enjoy a lower cost of capital. 106<br />
Production<br />
& price<br />
Such companies are also a lower risk to investors. 107<br />
Large corporations with significant exposure to animal<br />
factory farming (either directly through ownership of<br />
operations or indirectly as a result of their position with<br />
the wider value chain) have begun to focus on improving<br />
their sustainability reporting. Smithfield Foods released<br />
an integrated report in 2013, fulfilling the application level<br />
A from the Global Reporting Initiative for the first time.<br />
The company’s “reputation for quality and safety” was a<br />
cited as a key factor in Chinese pork producer, WH Group’s<br />
US$4.7-billion acquisition of Smithfield in 2013. 108<br />
Good corporate governance is also likely to become<br />
an increasingly important factor due to the exposure<br />
of animal factory farming to ESG issues and high<br />
levels of industry growth in developing economies.<br />
There is strong empirical evidence that good corporate<br />
governance affects overall company performance, 109<br />
although there is little information specific to animal<br />
factory farming. It is also recognised that a key function<br />
of corporate governance is, according to the OECD, to<br />
ensure that “risks are understood, managed and, when<br />
IMPACT ON<br />
FINANCIAL LEVERS<br />
Market<br />
access<br />
Reputation<br />
Legal &<br />
Regulatory<br />
EXTENT OF<br />
IMPACTS<br />
Magnitude<br />
(systemic,<br />
widespread,<br />
isolated)<br />
appropriate, communicated”. 110 The substantial<br />
and potentially material financial risks presented by<br />
ESG issues underscore the importance of strong corporate<br />
governance with respect to animal factory farming.<br />
Timescale<br />
a a a M<br />
Weak regulatory oversight a a a a S<br />
Sustainability disclosure a S–M<br />
Corporate governance a a S–M<br />
For definitions and colour key, refer to Table 2 on page 18.<br />
China’s food industry<br />
has faced a real crisis<br />
of confidence over<br />
the past seven years.<br />
Despite government<br />
efforts, the number of<br />
scandals continues to<br />
keep coming. [Should the<br />
US trust Chinese food<br />
processing given] China’s<br />
poor enforcement of their<br />
own laws and rampant<br />
corruption? 113<br />
Chris Smith (US Republican politician)<br />
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Furthermore, animal factory farming is assuming a more<br />
dominant role in developing countries, where corporate<br />
governance is less robust than in developed countries.<br />
Less developed countries are expected to account for<br />
77% of additional meat output growth between 2012 and<br />
2021. 111 Despite being lauded for ‘quality and safety’,<br />
corporate governance concerns were among the reasons<br />
why the China’s WH Group’s initial IPO was cancelled in<br />
April 2014. 112 In contrast, UK poultry producer Moy Park<br />
demonstrates a robust approach to corporate governance<br />
and a progressive attitude towards sustainable meat<br />
production. These factors have contributed to a positive<br />
outlook and keen investor interest in the company’s<br />
potential IPO (see Case study 5).<br />
Legal and regulatory frameworks and government<br />
oversight is also generally weaker in developing<br />
countries, increasing the potential risks associated<br />
with many ESG issues. For example, the explosion in<br />
pig production in the Chinese city of Jiaxing in Zheijiang<br />
province has led to severe environmental damage,<br />
improper production and processing practices, and a<br />
black market meat trade. The severity of the problem<br />
was brought to international attention when, in<br />
March 2013, more than 16,000 dead pigs were found<br />
in the region’s waterways, threatening drinking supplies.<br />
In locations such as these there will be a greater onus<br />
on companies to ensure they are mitigating risks to<br />
their own operations and in their supply chains.<br />
CASE STUDY 5: STRONG GOVERNANCE OF FARM ANIMAL<br />
WELFARE ISSUES BOOSTS REVENUE AND INVESTOR INTEREST<br />
CHAPTER 3:<br />
INTEGRATING ANIMAL <strong>FACTORY</strong> <strong>FARMING</strong><br />
RISKS INTO INVESTMENT PROCESSES<br />
3.1 OVERVIEW<br />
The food and agriculture sector presents significant<br />
investment opportunities with a growing world<br />
population driving ever-increasing demands for more<br />
food. However there are signs of growing recognition<br />
amongst stakeholders, including many in the financial<br />
sector, that investments in agriculture should not<br />
negatively affect people, livelihoods and the natural<br />
environment.<br />
Businesses that address<br />
or enhance animal welfare<br />
are likely to win or retain a<br />
competitive advantage in the<br />
global marketplace 119<br />
International Finance Corporation<br />
UK poultry producer Moy Park, was purchased by<br />
The company’s animal welfare programme is based on<br />
Within this context, animal factory farming is under<br />
However, there are signs that the financial community<br />
Brazil-based chicken giant JBS in June 2015, for a<br />
the concept of the Five Freedoms, in which all Moy Park<br />
increasing scrutiny and some leading investors are<br />
is beginning to recognise the need to ensure that<br />
reported $1.5bn.<br />
farmers must be trained. Furthermore, the company<br />
looking more carefully at risks associated with the<br />
investments in agriculture, including meat production,<br />
has a fully traceable supply chain in place and actively<br />
sector including development finance institutions<br />
are responsible and do not negatively affect people,<br />
Moy Park’s progressive strategy to focus on marketing<br />
works to reduce its carbon footprint. It also operates<br />
and those who define themselves as mainstream<br />
livelihoods and the natural environment. In response,<br />
its high-quality, high-welfare chicken appears to<br />
an ‘Antimicrobial Stewardship Forum’, which aims to<br />
responsible investors.<br />
a number of instruments – guidelines, compacts,<br />
support strong sales and the company’s continued<br />
educate poultry producers in antimicrobial resistance<br />
principles, standards, etc. – have been created to help<br />
development. The company has not been implicated<br />
in recent food safety scandals involving the UK poultry<br />
industry. In the second quarter of 2014, Moy Park’s<br />
and best practice to reduce usage of antimicrobials.<br />
Sustainability disclosure is supported through a<br />
3.2 INVESTING IN FOOD AND<br />
AGRICULTURE<br />
inform responsible investment across the agricultural<br />
sector and specific sub-sectors, such as livestock<br />
production. For example, the International Finance<br />
revenue rose by 0.6% to £356.4 million. 114<br />
plethora of literature, including Moy Park’s ‘Farming<br />
Corporation (IFC) issued voluntary guidelines and<br />
Way’ booklet and Corporate Responsibility brochures,<br />
The food and agriculture sector presents significant<br />
recommendations for clients on how to incorporate animal<br />
Moy Park was the first company in the UK to introduce<br />
as well as the company website. Moy Park’s clear<br />
investment opportunity. Overall food production<br />
welfare considerations in intensive livestock operations.<br />
free range and organic birds. The company is now the<br />
commitment to corporate responsibility and<br />
must increase by around 70% between 2005/07 and<br />
Instruments such as these are increasingly being used<br />
largest producer of organic and free range chicken<br />
responsible farming has been awarded in several<br />
2050 to meet rising global food need. 118 This is being<br />
by investors to help improve financial performance,<br />
in the UK and Ireland. 115 Although the company’s<br />
ways. The Business Benchmark on Farm Animal<br />
driven by population growth and, currently, by greater<br />
manage risk and contribute to the economic, social and<br />
chickens are raised using in a variety of ways – organic,<br />
Welfare (BBFAW), which assesses companies on their<br />
demand for animal protein as a result of rising wealth.<br />
environmental sustainability of the agricultural sector (see<br />
free range, indoors – all methods aim towards higher<br />
approach to managing farm animal welfare, recognises<br />
Meanwhile, there has also been an upward trend<br />
Case study 6: International financial institutions get on the<br />
welfare standards. For example, Moy Park has<br />
the efforts of Moy Park (under the Marfrig Group).<br />
in food prices in recent years. On the back of these<br />
front foot to monitor factory farms).<br />
stringent stocking density standards and antibiotic-<br />
fundamentals, appetite for agricultural investment<br />
use policies. 116 According to Moy Park’s principles, it is<br />
In 2013, Moy Park reached Tier 2 (‘Integral to Business<br />
is strong and can be met through several options<br />
There is also growing engagement by investors on<br />
committed to working with its farmers to ensure<br />
Strategy’) of the BBFAW, improving from Tier 4 (‘Making<br />
including commodity futures, equity in farming and<br />
ESG concerns specifically related to animal factory<br />
that the best welfare conditions are provided for<br />
Progress on Implementation’) in 2012. Moy Park was<br />
food production companies, and agricultural ETFs.<br />
farming. Led by the international financial institutions,<br />
all of its birds. 117<br />
also the first poultry company to be recognised in the<br />
For many investors the sector is attractive because of<br />
a small group of private investors are now looking<br />
Business in the Community’s Corporate Responsibility<br />
the significant potential for positive returns or value<br />
more carefully at risks associated with poor animal<br />
Index. This was improved upon in 2014, when the<br />
preservation. It also provides an opportunity to diversify<br />
welfare which primarily stem from the proliferation of<br />
company was awarded a ‘3 star’ rating in the index.<br />
portfolios, manage inflation risks and provide exposure<br />
animal factory farming. Awareness of the additional<br />
to emerging markets.<br />
ESG challenges that are linked to the intensification<br />
34 | fairr.org fairr.org | 35
of livestock production is also rising. Largely within<br />
the context of responsible investment, animal factory<br />
farming risks are:<br />
••<br />
Being integrated into ESG research<br />
and decision making;<br />
••<br />
The focus of engagement and active<br />
ownership; and<br />
••<br />
Providing the basis of greater<br />
demands for disclosure.<br />
CASE STUDY 6: INTERNATIONAL FINANCIAL INSTITUTIONS<br />
GET ON THE FRONT FOOT TO MONITOR <strong>FACTORY</strong> FARMS<br />
Several international financial institutions (IFIs) have<br />
established policies, guidelines and tools to ensure<br />
that they do not fund projects that would result in<br />
significant environmental or social harm, including<br />
those that would be considered animal factory<br />
farming. Pressure from outside stakeholders<br />
(such as NGOs) has encouraged financial institutions<br />
to consider the environmental and social dimensions<br />
of their investments. These same pressures are<br />
helping to driving improved practice within the<br />
financial sector, such as how issues such as<br />
animal factory farming should be treated.<br />
Key examples of how IFIs have sought to influence<br />
investment in animal factory farming include:<br />
World Bank: A 2001 World Bank report<br />
recommended that the organisation “avoid funding<br />
large-scale commercial, grain-fed feedlot systems<br />
and industrial milk, pork and poultry production<br />
except to improve the public good areas of<br />
environment and food safety.” 120<br />
International Finance Corporation (IFC):<br />
In 2006, the (IFC) incorporated the issue of animal<br />
welfare in intensive livestock operations into its<br />
investment decisions through a Good Practice<br />
Note (GPN) on animal welfare. The GPN provides<br />
voluntary guidelines and recommendations for<br />
IFC clients, rather than compulsory requirements.<br />
In 2007, the IFC published environmental, health<br />
and safety guidelines for intensive poultry<br />
3.3 INTEGRATING ANIMAL<br />
<strong>FACTORY</strong> <strong>FARMING</strong> RISKS INTO<br />
INVESTMENT PROCESSES<br />
INTEGRATING ANIMAL <strong>FACTORY</strong><br />
<strong>FARMING</strong> RISKS INTO ESG RESEARCH<br />
AND DECISION MAKING<br />
Integrating animal factory farming risks into ESG<br />
research and decision making helps investors to<br />
production 121 and mammalian livestock production. 122<br />
In 2013, the IFC commissioned an update of the<br />
2006 GPN to reflect emerging best practice and<br />
thinking on the issues. 123<br />
European Bank for Reconstruction and<br />
Development (EBRD): In May 2014, the EBRD<br />
revised its Environmental and Social Policy (ESP)<br />
to guarantee agribusiness clients’ compliance with<br />
EU animal welfare laws. 124 This is the first time that<br />
an IFI has introduced compulsory animal welfare<br />
standards for investments. The revision followed<br />
the publication by Humane Society International,<br />
Compassion in World Farming and Four Paws of a<br />
report in 2013 in which the EBRD was criticised for<br />
providing loans to non-EU companies using extreme<br />
farm animal confinement practices.<br />
Equator Principles (EPs): Eighty financial<br />
institutions located in 34 countries have adopted<br />
the Equator Principles (EPs), a risk management<br />
framework to provide environmental and social<br />
due diligence for certain project finance advisory<br />
services, project finance, project-related corporate<br />
loans and bridge loans. 125 The identification of<br />
projects requiring environmental and social review<br />
and due diligence is based on the IFC performance<br />
standards and would be applied to animal factory<br />
farming projects.<br />
manage key factors driving risk and returns and<br />
select the best-positioned companies. The integration<br />
of animal factory farming risks also recognises that<br />
negative impacts from the sector may affect long-term<br />
sustainable returns by undermining social, environmental<br />
and economic systems. Integrating the risks from animal<br />
factory farming depends on creating the appropriate<br />
policies and associated documentation and then<br />
implementing these into the investment process.<br />
Financial institutions have developed policies,<br />
guidelines and position statements to steer and<br />
explain their activities in relation to animal factory<br />
farming. Rabobank, reportedly one of the world’s<br />
largest investors in factory farms, 126 has established<br />
livestock farming position papers 127 and a separate<br />
animal welfare statement. 128 Triodos Bank excludes<br />
(animal) factory farming from financing due to increased<br />
sustainability risks, unless firms can demonstrate<br />
that they are proactively attempting to prevent<br />
controversies. 129<br />
A number of ethical investment funds include<br />
factory farming as a negative investment screening<br />
criteria, excluding companies involved in the rearing<br />
of animals in intensive conditions. 130 For example,<br />
ethical funds sold by Standard Life Investments<br />
avoid investments in companies that use intensive<br />
One of the key elements<br />
of our research process<br />
is what we call ‘horizon<br />
scanning’, that is looking<br />
out for those issues and<br />
risks that may not be<br />
material today but that may<br />
significantly impact on our<br />
investments in the future.<br />
One such issue is farm<br />
animal welfare. 134<br />
BNP Paribas<br />
CASE STUDY 7: LEADING<br />
INVESTORS PUTTING ANIMAL<br />
<strong>FACTORY</strong> <strong>FARMING</strong><br />
ON THE ESG AGENDA<br />
There are a number of different investors that are<br />
integrating ESG risks associated with animal factory<br />
farming into their investment processes. These<br />
include asset owners and investment managers,<br />
retail and institutional investors, those with a specific<br />
ethical mandate and mainstream investors. There are<br />
also a wide range of ways in which investors, or their<br />
service providers, are approaching this challenge,<br />
including via use of ESG research, engagement and<br />
active ownership, and encouraging greater disclosure<br />
with respect to animal factory farming risks.<br />
In one of its first documents the FAIRR Initiative<br />
published case studies from nine investors or<br />
investment agencies to show how they are taking<br />
these issues into consideration. The featured<br />
investors are:<br />
The case study book can be accessed via the<br />
FAIRR.org website or by clicking here<br />
<strong>FARMING</strong><br />
36 | fairr.org fairr.org | 37
farming methods. 131 Ethical funds offered by Kames<br />
Capital do not include companies that have any<br />
decided not to adopt specific policies on animal<br />
welfare or factory farming although it does continually<br />
to engaging with portfolio company management –<br />
these approaches are contingent on factors such as<br />
ENCOURAGING GREATER CORPORATE<br />
DISCLOSURE ON ANIMAL <strong>FACTORY</strong> <strong>FARMING</strong><br />
involvement in intensive farming. 132 Firms such as<br />
monitor and report on both issues. 133 However, PGGM<br />
investment strategy and governance models.<br />
Food companies and agribusiness are increasingly<br />
PGGM, a Dutch pension fund service provider, have<br />
recognises that animal welfare can be a material factor<br />
The amount of influence that an investor bears will<br />
expected to report on their performance with respect<br />
in investment decisions.<br />
also reflect the level of investment and the culture of<br />
to farm animal welfare and material sustainability<br />
The key risks from the<br />
stock sheet drew on ESG<br />
analysis, highlighting that “crop<br />
failure due to climate change<br />
impacts on feed prices. Feed<br />
costs are a very significant<br />
part of the livestock producers’<br />
P&L and disruptions to<br />
the supply chain caused by<br />
climate change would impact<br />
on farm profitability with a<br />
consequential knock-on to<br />
[the company]”. 136<br />
There are a number of practices that investment firms<br />
are using or could use to integrate animal factory<br />
farming risks into ESG research and decision-making.<br />
Investors are utilising the available evidence to support<br />
investment objectives with respect to animal factory<br />
farming. Key stages where these activities are taking place<br />
include: due diligence, such as screening and company<br />
investigation; investment decision; and the investment<br />
agreement. 135 Table 5 illustrates ways to integrate ESG<br />
issues into equity research and the variety of resources<br />
that are available to support these activities, such as the<br />
Business Benchmark on Farm Animal Welfare (BBFAW),<br />
which provides a tool for investors to assess corporate<br />
animal welfare policies and performance.<br />
ENGAGEMENT AND ACTIVE OWNERSHIP<br />
ON ANIMAL <strong>FACTORY</strong> <strong>FARMING</strong> RISKS<br />
Investors are engaging with their portfolio<br />
companies to encourage improved performance on<br />
the portfolio company or region it is based in. 137<br />
Examples of active engagement and ownership on<br />
animal factory farming risks include:<br />
••<br />
Proxy voting: A number of investment firms –<br />
such as JP Morgan, Russell Investments, First<br />
Affirmative and AllianceBernstein (part of AXA) –<br />
include animal welfare within their proxy voting<br />
procedures and guidelines.<br />
••<br />
Shareholder resolutions (animal welfare):<br />
Ethical engagement policies have also provided<br />
the basis for investors to discuss animal factory<br />
farming production systems with companies they<br />
hold equity. In 2014, Wespath co-filed a shareholder<br />
resolution (alongside the Humane Society of the US<br />
and Green Century Capital Management) with Tyson<br />
Foods that encourages the company to consider and<br />
report on the reputational, financial and regulatory<br />
risks associated with its use of gestation crates.<br />
A coalition of US SRI investors filed a shareholder<br />
resolution in 2007 with US-based Dean Foods over<br />
issues. Citigroup cites animal cruelty as a ‘headline<br />
risk’ that can impact companies, while investor support<br />
firm Glass Lewis believes that a ‘high-profile [animal<br />
welfare] campaign launched against a company could<br />
result in shareholder action, a reduced customer base,<br />
protests and potentially costly litigation.’ These positions<br />
are situated within a broader consensus that companies<br />
that address ESG issues achieve better growth, cost<br />
savings, and profitability. 142 Therefore, improved<br />
disclosure in farm animal welfare and sustainability<br />
issues provides investors with the information they<br />
need to manage their exposure to risks of investing in<br />
companies linked to animal factory farming.<br />
With investors and NGOs working together on issues<br />
related to farm animal welfare and sustainability,<br />
demand for action on animal factory farming could<br />
significantly increase. From an investment perspective,<br />
there have been largely separate debates over the<br />
exposure of animal factory farming to farm animal<br />
The Co-operative Asset Management<br />
farm animal welfare and broader sustainability issues.<br />
There are varying approaches that an investor can take<br />
the company’s organic milk claims despite operating<br />
factory farming conditions. In 2008, a shareholder<br />
welfare and sustainability risks. However, these appear<br />
to be converging as long-term sustainability issues<br />
resolution was filed against Tesco over its animal<br />
provide greater justification for re-evaluating how food<br />
welfare practices.<br />
animals are raised. The business case for corporate<br />
••<br />
Shareholder resolutions (sustainability):<br />
disclosure on sustainability issues has been established<br />
Since 2011, there have been 39 shareholder<br />
– 89% of the more than 160 academic studies, research<br />
resolutions filed by members of the CERES<br />
papers and meta-studies showed that companies with<br />
investor network with companies in the food and<br />
high ESG performance ratings exhibit market-based<br />
beverage sector over sustainability-related issues. 138<br />
outperformance compared to industry peers. 143<br />
Even Chipotle Mexican Grill, with its sustainability<br />
The evidence base specific to farm animal welfare<br />
and animal welfare policies, has come under<br />
is less mature.<br />
fire from shareholders over its failure to produce<br />
an annual sustainability report and validate<br />
However, there is growing awareness within the<br />
its credentials. 139<br />
financial sector of the risks associated with farm<br />
••<br />
Monitoring: Responsible investment policies<br />
animal welfare. Multi-stakeholder initiatives such as<br />
can also help investors prioritise which ESG issues<br />
the Business Benchmark on Farm Animal Welfare<br />
they should focus on in the short and medium-term<br />
have developed to provide firms with the information<br />
with their portfolio companies. For example,<br />
they need to understand the business implications of<br />
Co-operative Asset Management encourages<br />
farm animal welfare for the companies in which they<br />
companies to shift from intensive farming systems. 140<br />
are invested. This information is used to provide<br />
The Co-operative has written to Kellogg’s regarding<br />
investors with reassurance that these types of issues<br />
its use of animal factory farming systems, including<br />
are being effectively managed across their operations<br />
barren battery cages. 141<br />
and supply chains.<br />
38 | fairr.org fairr.org | 39
TABLE 5: Integrating ESG issues into equity research<br />
INVESTMENT<br />
ACTIVITY<br />
PURPOSE<br />
TYPES OF RESOURCES<br />
AVAILABLE<br />
EXAMPLES<br />
INVESTMENT<br />
ACTIVITY<br />
PURPOSE<br />
TYPES OF RESOURCES<br />
AVAILABLE<br />
EXAMPLES<br />
Analysis of<br />
financial reports<br />
To enable a better<br />
understanding of<br />
Governments provide early<br />
warning or consultation<br />
••<br />
Economics of Heat Stress:<br />
Implications for Management (De<br />
Industry analysis<br />
To enable a better<br />
understanding<br />
of the sensitivity<br />
of animal<br />
factory farming<br />
as a whole to<br />
particular ESG<br />
issues<br />
There are studies revealing the<br />
risks associated with changes in<br />
particular parameters, such as<br />
resource availability, temperature<br />
and government subsidies.<br />
Analysis also highlights the<br />
‘hidden costs’ associated<br />
with animal factory farming,<br />
demonstrating the industry’s<br />
sensitivity to key issues (e.g.<br />
greenhouse gas emissions).<br />
••<br />
Agricultural Policy Monitoring and<br />
Evaluation 2013 (OECD) 144<br />
••<br />
OECD-FAO Agricultural Outlook<br />
2014–2023 145<br />
••<br />
Beyond Factory Farming:<br />
Sustainable Solutions for Animals,<br />
People and the Planet (Compassion<br />
in World Farming, 2009)<br />
••<br />
Livestock’s Long Shadow:<br />
Environmental Issues and Options<br />
(FAO, 2006)<br />
how companies<br />
are managing<br />
ESG risks and<br />
opportunities<br />
related to<br />
animal factory<br />
farming and<br />
the subsequent<br />
impact on key<br />
performance<br />
metrics<br />
opportunities regarding proposed<br />
changes to legislation or<br />
regulations.<br />
There are multiple datasets<br />
and tools available to model the<br />
impacts of key climate parameters<br />
on operational performance.<br />
Surveys are regularly published on<br />
changing consumer attitudes and<br />
buying preferences.<br />
Vries, A., 2014) 150<br />
••<br />
Intergovernmental Panel on Climate<br />
Change: Impacts, Adaptation and<br />
Vulnerability (2014) 151<br />
••<br />
PreLex: monitoring of European<br />
Commission proposals 152<br />
••<br />
Attitudes of EU citizens towards<br />
Animal Welfare (EC, 2007) 153<br />
Macroanalysis at<br />
To enable a better<br />
Research highlights the impacts<br />
••<br />
CAFOs Uncovered: The Untold<br />
the country level<br />
understanding of<br />
of evolving regulations or subsidy<br />
Costs of Confined Animal Feeding<br />
ESG issues that<br />
regimes on animal factory farming<br />
Operations (Union of Concerned<br />
are likely to affect<br />
and long term constraints on<br />
Scientists, 2008)<br />
animal factory<br />
growth, such as land or water<br />
••<br />
Costs of compliance with EU<br />
farming within a<br />
availability.<br />
regulations and competiveness of<br />
particular country<br />
the EU dairy sector (Bezlepkina, I.V.<br />
There is extensive information<br />
et al, 2008 146 )<br />
available that can be used to<br />
••<br />
Assessing the economic cost of<br />
assess country-level factors which<br />
endemic disease on the profitability<br />
can impact the industry, such as<br />
of Australian beef cattle and sheep<br />
levels of government investment<br />
producers (Meat and Livestock<br />
in supportive infrastructure<br />
Australia, 2008 147 )<br />
and long-term economic or<br />
••<br />
International Monetary Fund (IMF)<br />
demographic trends.<br />
regional and country reports 148<br />
Analysis of<br />
To enable a better<br />
Corporate documentation<br />
••<br />
Business Benchmark on Farm<br />
company strategy<br />
understanding of<br />
and third party information<br />
Animal Welfare (2012, 2013) 149<br />
how companies<br />
demonstrates corporate<br />
••<br />
Company CSR/Sustainability reports<br />
are managing<br />
awareness and management of<br />
ESG risks and<br />
ESG issues.<br />
opportunities<br />
related to<br />
animal factory<br />
farming and<br />
the subsequent<br />
impact on key<br />
performance<br />
metrics<br />
40 | fairr.org fairr.org | 41
3.4 INTEGRATING FARM ANIMAL<br />
WELFARE OPPORTUNITIES INTO<br />
INVESTMENT DECISIONS.<br />
By integrating farm animal welfare issues into their<br />
investment process, investors are also becoming<br />
aware of opportunities around the potential changes<br />
in the market. This is because as food safety scandals<br />
and other risk from factory farmed meat appear to be<br />
changing consumer behaviour, companies with high<br />
animal welfare standards are positioned to benefit.<br />
The case study of American fast food chain Chipotle is<br />
a good illustration of this trend. Chipotle used ethics<br />
US restaurant chain, Chipotle, has a history of increasing<br />
sales and share prices by recognising the importance<br />
of animal welfare. After a visit to an animal factory farm<br />
in 1999, Chipotle’s CEO Steve Ells implemented a new<br />
sourcing policy for ‘natural’ pork. Under the Chipotle<br />
policy, ‘natural’ refers to animals that are:<br />
••<br />
Fed a vegetarian diet<br />
••<br />
Not given growth hormones or antibiotics in<br />
their feed<br />
••<br />
Allowed to roam free in a pasture and are<br />
treated humanely.<br />
Following the switch towards sustainable sourcing<br />
efforts in 2000, Chipotle was forced to raise the price<br />
of its pork burrito by US$1. Typically, sales would be<br />
expected to drop following a price increase, however<br />
Chipotle saw sales increase sharply as a result of its<br />
commitment to better welfare pork. Since then, Chipotle<br />
has broadened its natural sourcing policy to include<br />
chicken and beef where possible. Chipotle is now<br />
reported to be the largest restaurant buyer of naturally<br />
raised meat in the US. Other sustainability efforts,<br />
such as sourcing local and organic produce, support<br />
Chipotle’s commitment to ‘food with integrity’.<br />
"Food with Integrity" is our commitment to always look<br />
closer, dig deeper, and work harder to ensure that our<br />
and good animal welfare standards as part of their<br />
marketing in 2012 and saw revenues rise 23%.<br />
There are also exciting opportunities to invest in<br />
companies developing plant-based alternatives to<br />
satisfying the world’s growing demand for protein,<br />
including companies related to the technology and<br />
infrastructure of those more sustainable alternatives.<br />
The case study on the growth of Hampton Creek is<br />
a good example of this, as are US food technology<br />
company Impossible Foods which uses specific<br />
proteins and nutrients from greens, seeds, and<br />
grains to recreate the complex taste of meat<br />
and dairy products.<br />
CASE STUDY 8: TASTY FINANCIAL RESULTS FOR US RESTAURANT THAT<br />
PUTS HIGH ANIMAL WELFARE STANDARDS AT HEART OF ITS BUSINESS<br />
actions are making things better, not worse. It’s our<br />
promise to run our business in a way that doesn’t exploit<br />
animals, people or the environment. ”<br />
Steve Ells 154<br />
In recognition of the low awareness among consumers of<br />
farm animal welfare and factory farming issues in the US,<br />
Chipotle has invested in awareness-raising campaigns<br />
over a number of years, including an award-winning<br />
animated film in 2014, to support their sustainability<br />
strategy. Industry metrics following Chipotle’s ‘Cultivate<br />
a Better World’ marketing campaign showed improved<br />
customer loyalty. 155 Social media activity during the<br />
campaign reportedly contributed to a 23.2% increase in<br />
Chipotle’s revenue during the first half of 2012.<br />
Chipotle’s initial public offering in 2006 rose 100%<br />
during its first day on the New York Stock Exchange, with<br />
share prices rising from US$22 to US$44 per share. 156<br />
The company’s announcement in 2013 that it will strive to<br />
remove GMO ingredients from its products was followed<br />
by a 15% increase in stock prices. Chipotle’s share price<br />
sat at US$619.25 (as of 23 June 2015). The share price<br />
remained relatively high compared to historic levels even<br />
after an E.coli outbreak in late 2015 offered a reminder<br />
that managing potential health risks is an ongoing<br />
challenge for even progressively-minded food retailers.<br />
CASE STUDY 9: EGG SUBSTITUTE COMPANY SET TO BECOME<br />
FASTEST GROWING FOOD COMPANY IN HISTORY<br />
Established in 2011 Hampton Creek is a US based<br />
food tech company built on the belief that there are<br />
more sustainable, humane and cheaper ways to feed<br />
the planet than animal factory farms. Based in San<br />
Francisco, the company has analysed thousands<br />
of plant proteins to find low-cost, environmentally<br />
friendly and healthy alternatives to animal-based<br />
proteins to use in a range of products, such as a<br />
Canadian yellow pea protein as a substitute for<br />
egg. Its current products include: ‘Just Mayo’,<br />
‘Just Cookies’ and ‘Just Scrambled’.<br />
Growing and harvesting plant protein is less<br />
resource intensive and expensive than egg production.<br />
This means Hampton Creek products are cheaper<br />
than equivalent products containing eggs. Just Mayo<br />
the company’s first product for example can be<br />
supplied to supermarkets for about 10% less than<br />
the normal cost of regular egg based mayonnaise.<br />
In terms of resource use, Hampton Creek estimates<br />
it has saved over one billion gallons of water in the<br />
last year 157 , an issue that is becoming increasingly<br />
critical to business – no more so than in California<br />
where the company is based.<br />
In just four years of operation, Hampton Creek has<br />
attracted a number of large customers. Such as<br />
Compass Group, a global catering company who supply<br />
over 4bn meals a year to schools and hospitals across<br />
the US. and UK and the convenience store 7/11. Hampton<br />
creek estimates the switch to Just Mayo in 7/11 products<br />
will save 81m gallons of water and 191m grams of CO 2<br />
each year 158 .<br />
The 2015 outbreak of Avian flu crisis in the U.S has shown<br />
both the vulnerability of current egg production models<br />
and the potential of companies such as Hampton Creek.<br />
The outbreak led to the death of more than 45m birds<br />
(80% of which are egg laying hens in factory farms) in the<br />
first half of 2015 159 . The Avian flu outbreak has led to an egg<br />
shortage in the U.S with egg prices more than doubling.<br />
Since the avian flu crisis hit, Hampton Creek reports<br />
receiving enquires from most major fast food chains and<br />
predicts its revenue run rate will from $48m to $120m<br />
by next January. The company looks on track to become<br />
the fastest growing food company in history 160 .<br />
42 | fairr.org fairr.org | 43
CASE STUDY 10: HEINZ – GLOBAL FOOD GIANT IMPROVES<br />
PRACTICES FOLLOWING POOR BBFAW RANKING<br />
CHAPTER 4:<br />
IMPLICATIONS AND NEXT STEPS<br />
Heinz is a global food processing company, which has<br />
Other animal welfare policy commitments introduced<br />
plants on six continents and products for sale in 200<br />
by the company include a commitment to work with<br />
countries and territories. In the 2013 edition of the<br />
suppliers across the globe in order to reduce the use<br />
Business Benchmark for Animal Welfare (BBFAW),<br />
of battery cages for laying hens and to work with pork<br />
the company was named and shamed as a company<br />
in the bottom tier (tier six) of the benchmark.<br />
A tier six ranking on the benchmark means that<br />
supplier to phase out gestation crates. Already in the<br />
UK Heinz uses free-range eggs in its mayonnaise,<br />
whilst in the US the company aims to source 20% of<br />
4.1 OVERVIEW<br />
4.2 IMPLICATIONS OF THE<br />
FINDINGS FOR INVESTORS<br />
animal welfare does not appear to be an issue on<br />
its eggs from free-range facilities by the end of 2015.<br />
This report draws on a wide range of sources to assess<br />
a company’s business agenda and is the lowest<br />
the potential material risks of animal factory farming<br />
The social and environmental impacts of animal<br />
possible benchmark ranking.<br />
These efforts and improved transparency on policies<br />
from an ESG perspective. A strong case is made for<br />
factory farming identified in this report support<br />
were enough for Heinz to improve by two tiers to tier<br />
responsible investors to incorporate these risks into<br />
the case for greater scrutiny of the sector as part<br />
A number of publications including the Financial<br />
four in the 2014 benchmark. There remains room<br />
their investment approaches. However, the limited<br />
of responsible investment practice. Animal factory<br />
Times reported on the results of the benchmark and<br />
for improvement in Heinz’s policies and practices.<br />
extent to which investors have engaged with animal<br />
farming is associated with severe environmental<br />
Heinz received negative publicity for the poor score.<br />
However this is clear evidence that investor tools like the<br />
factory farming historically indicates a need to raise<br />
and social impacts, which can be experienced at<br />
benchmark can lead to improvements at companies.<br />
more awareness of the financial risks associated<br />
local, regional and global scales. This places animal<br />
Heinz has since acknowledged that consumers have<br />
with the sector.<br />
factory farming alongside other high impact sectors<br />
concerns about animal welfare and has worked to<br />
including oil and gas, mining, and clothing and apparel.<br />
improve and publicly disclose its animal welfare<br />
A number of activities can be undertaken to help<br />
Environmental and social risks can have a significant<br />
policies for its operations and throughout its<br />
address existing knowledge gaps and provide the<br />
financial impact on investments, including reducing<br />
supply chain. With help from the Humane Society<br />
investment community with a better understanding<br />
the value of the asset or diminishing dividends as a<br />
of the United States Heinz has introduced a new<br />
of the risks associated with animal factory farming.<br />
result of changes in the operating costs. The reputation<br />
sustainability procurement policy and an animal<br />
These activities include:<br />
of investors may also be at stake if stakeholders<br />
welfare programme based on the principles of the<br />
associated them with environmentally or socially<br />
five freedoms for animal welfare. Under the policy,<br />
••<br />
Further in-depth research, which explores in more<br />
damaging investments.<br />
all Heinz suppliers are required to adhere to the five<br />
detail the connection between the issues and<br />
freedoms and can be audited to ensure compliance.<br />
financial returns and distinguishes animal factory<br />
The negative financial impacts of ESG issues on<br />
farming from traditional livestock production.<br />
animal factory farming highlight the importance of<br />
••<br />
Analysis of the effect of strong ESG management<br />
integrating analysis of these issues into investment<br />
(including high animal welfare standards) on the<br />
research and decision-making. ESG issues can affect<br />
long-term financial performance and investment<br />
financial outcomes through a range of pathways,<br />
returns of the animal factory farm sector.<br />
including production and pricing, market access,<br />
••<br />
Increased engagement with stakeholders in<br />
legal and regulatory and reputation. The manner in<br />
countries that are expected to see the highest<br />
which ESG issues affect these financial levers can be<br />
future growth in animal factory farming.<br />
relatively straightforward, such as in the case of short-<br />
••<br />
Deepening understanding and raising awareness<br />
term events like natural hazards or food scandals.<br />
of how investors are engaging with animal factory<br />
However, the magnitude and time-scales over which<br />
farming and shifting investment to less intensive<br />
effects are felt can vary tremendously. Disentangling<br />
production systems or plant-based agriculture.<br />
the longer-term effects of ESG issues from other<br />
drivers of company and investment performance is<br />
These activities will also help to build the<br />
more challenging.<br />
momentum around responsible investment<br />
and animal factory farming.<br />
44 | fairr.org fairr.org | 45
Investors that integrate analysis of ESG issues into<br />
their investment approach must look across agriculture<br />
and food value chains, particularly as the magnitude of<br />
financial risks is likely to increase over the long term.<br />
Companies directly involved in animal factory farming are<br />
most exposed to key ESG issues. However, consumerfacing<br />
companies at the end of the value chain – such<br />
as food retailers and restaurants – are also exposed to<br />
financial harm. The magnitude of risks to companies<br />
involved in animal factory farming and industrial<br />
food production are likely to increase as a result of<br />
rising capital costs, the shifting gravity of production<br />
to developing countries with less robust regulation,<br />
the impacts of climate change and increasing social<br />
concerns over animal welfare and sustainability.<br />
There is a need to raise awareness of ESG issues<br />
related to animal factory farming and the financial<br />
risks they present to more investors, and to<br />
companies with links to the sector. Outside of a few<br />
far-sighted institutions there is a general lack of<br />
awareness among the wider investment community of<br />
the short and long-term risks that are inherent to the<br />
continued growth of the animal factory farm industry.<br />
Finally, there is a clear need for additional research<br />
in a number of areas to support the initial exploratory<br />
findings contained in this report. The bulk of the<br />
evidence for this report has been drawn from<br />
a) academic, government and industry studies on<br />
short-term events that are well recognised by the<br />
livestock industry; b) pressure group reports, with<br />
some lacking the perceived rigour of objective, peer<br />
reviewed research; and c) anecdotal media stories.<br />
However, there is still a significant knowledge gap with<br />
respect to the financial implications of ESG issues for<br />
companies associated with the animal factory farming<br />
industry. Suggestions for further research are included<br />
in the ‘Next Steps’ section below.<br />
4.3 NEXT STEPS<br />
Greater scrutiny of animal factory farming by a wide<br />
range of stakeholders has highlighted the need<br />
for further research and engagement on critical<br />
ESG issues. Governments, civil society, the public,<br />
companies and financial institutions would all be wise<br />
to take a closer look at the negative impacts of animal<br />
factory farming and how the industry may potentially<br />
be affected by external changes to the operating<br />
environment. These stakeholders can ask challenging<br />
questions to help them write laws and regulations,<br />
mobilise support for opposition campaigns, buy<br />
goods, develop business strategies and to help<br />
inform investment decisions.<br />
Despite increasing interest and momentum, many of<br />
these questions remain unanswered. A number of<br />
steps would help to address these knowledge gaps.<br />
These include further research that may include:<br />
••<br />
Research to clearly distinguish between the effects<br />
of ESG issues on animal factory farming and<br />
traditional (or ‘smaller scale’) production.<br />
••<br />
Research which more clearly identifies the<br />
specific effects of ESG issues on different types<br />
of animal factory farming, such as cattle, poultry<br />
and pig production.<br />
••<br />
More detailed analysis of the extent to which strong<br />
ESG management (including high animal welfare<br />
standards) in the farming sector could improve longterm<br />
financial returns. This should include a clear<br />
definition of the animal farming universe and how<br />
the performance of these companies would compare<br />
to those with poor ESG management.<br />
••<br />
Research to establish practical steps that can best<br />
retool and improve industry practices so that the<br />
sector can both help meet the demand for global<br />
meat while exhibiting strong ESG management<br />
Practical steps to close the knowledge gap can<br />
also include:<br />
••<br />
Increased engagement from investors with animal<br />
factory farming stakeholders in countries that are<br />
expected to see the highest growth in animal factory<br />
farming over coming decades, particularly China<br />
and India.<br />
••<br />
Publishing more case studies that demonstrate<br />
how private investors are engaging with animal<br />
factory farming (including shifting investment<br />
towards less intensive production systems or<br />
plant-based alternatives to meat) and the results<br />
that have been achieved.<br />
Events at SeaWorld in Florida over the last two years<br />
perfectly demonstrate the material impact that poor<br />
management of animal welfare issues can have on<br />
investment value.<br />
SeaWorld in Florida, part-owned by private equity group<br />
Blackstone, has suffered plummeting stock prices and<br />
attendance figures since the release of independent<br />
documentary Blackfish in 2013, a film cataloguing<br />
alleged mistreatment of whales at SeaWorld’s parks.<br />
For example, the film claims that the company’s<br />
treatment of whales provoked violent behaviour in the<br />
animals, contributing to the deaths of three people.<br />
Between the release of that documentary and the time<br />
of writing (Nov 15) SeaWorld’s shares have lost over half<br />
of their value. The company also saw the CEO resign<br />
at the end of 2014 and has seen attendance at its orca<br />
theme parks in San Diego and San Antonio continue to<br />
fall. Figures from San Diego authorities showed a 17%<br />
drop in attendance at the park in 2014 from 4.5 million<br />
to 3.7 million 161 .<br />
The original Blackfish film is thought to have cost just<br />
$76,000 to produce and originally played in only five<br />
movie theatres yet its financial impact on SeaWorld<br />
Entertainment continues to be felt. In November 2015,<br />
investors were warned that full-year profits will fall by<br />
a further $10m.<br />
There has also been regulatory backlash. In October<br />
2015, California authorities banned SeaWorld from<br />
attempting to breed new whales in a planned $100m<br />
extension to its whale tanks in San Diego.<br />
SeaWorld have clearly recognized the long-term<br />
damage done to their reputation. It has reportedly<br />
spent $15m on a TV and social media campaign to<br />
counter negative sentiment and promote the work<br />
it does to protect and care for whales and other<br />
animals. In November 2015, SeaWorld in San Diego<br />
responded to the ongoing pressure by announcing<br />
that they would end live killer whale performances<br />
at the park.<br />
CASE STUDY 11: SHARE PRICE TANKS AFTER ANIMAL WELFARE REVELATIONS<br />
$38<br />
$34<br />
$28<br />
$24<br />
$20<br />
$16<br />
2014 2015<br />
Representation of SeaWorld Entertainment share<br />
prices drom December 2013 to November 2015.<br />
SeaWorld’s shares have<br />
lost over half of their value<br />
following the release of a<br />
film alleging mistreatment<br />
of animals<br />
FAIRR founder Jeremy Coller commented,<br />
"SeaWorld is not part of the factory farming universe<br />
but I think the harsh financial lessons its investors have<br />
learnt since the release of Blackfish shows the dangers<br />
of not acting to manage animal welfare risks. We live in<br />
an age where the power of social media and changing<br />
consumer behaviour can quickly combine to transform<br />
profitable businesses into value-destroying liabilities.<br />
Smart investors will take note."<br />
46 | fairr.org fairr.org | 47
APPENDIX<br />
ENDNOTES<br />
DEFINITIONS<br />
Animal factory farming – This report does not seek to<br />
define animal factory farming using specific criteria or<br />
thresholds. Instead, it considers animal factory farming<br />
to be operations which exhibit certain characteristics<br />
that differentiate it from traditional, non-intensive<br />
livestock production. These are:<br />
••<br />
The large scale of the operations in terms of<br />
animal stock numbers;<br />
••<br />
Confinement that undermines the five<br />
animal welfare freedoms; 162<br />
••<br />
Management and husbandry practices which may<br />
compromise the health and safety of workers,<br />
surrounding communities and the environment;<br />
••<br />
Highly mechanised production methods, such as<br />
the use of hardware and automation for tasks such<br />
as feeding and cleaning.<br />
There is no universally agreed definition of ‘animal<br />
factory farming’. The term has been used mainly by<br />
NGOs or pressure groups to refer to livestock<br />
production systems that demonstrate the above<br />
characteristics. Alternative terms include ‘industrial<br />
livestock production’ and ‘intensive animal farming’.<br />
Various definitions are provided by government<br />
regulators. The term ‘Concentrated Animal Feeding<br />
Operations’ (CAFO) is commonly used by industry<br />
and external interests to describe animal factory<br />
farming. The term originates from the United States<br />
Environmental Protection Agency which defines<br />
CAFOs as farm operations that exhibit particular<br />
characteristics. These include the confinement of<br />
animals for at least 45 days per year, and the absence<br />
of grass or other vegetation from the confinement area<br />
during the normal growing season. 163 In the US, CAFOs<br />
can be classed as large, medium or small, depending<br />
on the number of animals that are confined, how<br />
wastewater is managed, and whether the operation<br />
is a significant contributor of pollutants. 164<br />
In the European Union (EU), ‘intensive’ is defined as<br />
an operation which may rear, or be designed to rear,<br />
40,000 poultry, 2,500 production pigs (over 30kg), or<br />
750 sows. 165 The EU recognises that “intensive farming<br />
is likely to result in worse conditions for the animals<br />
than low intensity, ‘natural’ or organic farming”. 165<br />
The Canadian province of Saskatchewan defines an<br />
‘intensive livestock operation’ as one where the space<br />
per animal unit, in which livestock is confined, is less<br />
than 370m 2 . 166<br />
The US-based Pew Commission on Industrial<br />
Farm Animal Production has developed a more allencompassing<br />
term, Industrial Farm Animal Production<br />
(IFAP). This refers to highly intensive production practices<br />
regardless of the size of the facility. 168 IFAP “encompasses<br />
all aspects of breeding, feeding, raising and processing<br />
animals or their products for human consumption”,<br />
with a focus on a small number of species.<br />
Animal factory farming can also be differentiated<br />
from traditional or conventional farming, although<br />
the distinctions may not always be entirely clear cut.<br />
Generally traditional or conventional farms are often<br />
considered to be family owned and operated, smaller<br />
in scale, use less chemicals, antibiotics and feed<br />
inputs, raise a range of animal breeds and treat<br />
animals more humanely.<br />
This report focuses on primary livestock species<br />
associated with animal factory farming: cattle, poultry<br />
and pigs. Globally, however, there are a large number<br />
of livestock species, including rabbits, ducks, and<br />
buffalo that are raised in conditions consistent with<br />
the characteristics of factory farming.<br />
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54 | fairr.org fairr.org | 55
ABOUT US<br />
The FAIRR Initiative is a collaborative investor<br />
network that aims to raise awareness of the material<br />
impacts farm animal welfare issues can have on their<br />
portfolio. It helps investors share knowledge and form<br />
collaborative engagements on the issue.<br />
Signing up as either a signatory or supporter<br />
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Launched in summer 2015 the FAIRR network<br />
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signatories and individual supporters.<br />
••<br />
A global network of investors working to<br />
integrate animal welfare issues into their<br />
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••<br />
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Find out more, or join us, at: fairr.org<br />
Follow us: @FAIRRinitiative<br />
ACKNOWLEDGEMENTS<br />
The research for this report was conducted by<br />
James Allan and his team at Verisk Maplecroft.<br />
We would also like to thank all those who<br />
reviewed the report including individuals from<br />
Compassion in World Farming, ShareAction,<br />
Ownership Capital, Farm Forward and<br />
Humane Society, US. Many thanks also to<br />
ESG Communications for their work on refining<br />
and designing the report.<br />
CONTACT<br />
Alan Briefel<br />
Executive Director, FAIRR Initiative<br />
T: +44 7770 681333<br />
E: alan.briefel@fairr.org<br />
Rosie Wardle<br />
FAIRR Initiative<br />
T: +44 7525 434162<br />
E: rosie.wardle@fairr.org<br />
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