About the issues

There is extensive evidence that ESG issues can impact the performance of companies involved in animal factory farming. The most visible financial impacts come from short-term events, but the financial performance of companies in this sector is also contingent on longer-term environmental, social and regulatory trends and the ability for companies to successfully anticipate and navigate these changes.

Our research has identified 28 key ESG issues (see right) that drive value in the intensive animal production industry. These issues affect production and pricing, market access, corporate reputation and legal and regulatory action for companies across the food and agriculture value chain.

Environment

The animal factory farming industry causes environmental harm and is also negatively affected by environmental factors. Intensive animal production is a key contributor to air, water and soil pollution, greenhouse gas emissions and deforestation – the latter either directly through land conversion for farms or indirectly through the clearing of land for feed production. The industry will in turn suffer lower productivity and higher input costs arising from climate change.

Currently, the US dairy and beef industries collectively lose over $1.2 billion a year due to ‘heat stress’, when cattle produce less milk and suffer slower weight gain in particularly hot weather. The top 10 countries with the greatest head of cattle account for 59% of global cattle production. On average, these countries are set to experience a 21% increase in the number of days cattle are affected by heat stress days by 2045, which will significantly impact value.

Social

There is a tremendous amount of financial value potentially at risk as a result of social issues. The social issues broadly impact reputational risk and health-related risk. The food sector is very sensitive to changing public sentiment regarding welfare issues. In 2008, evidence of animal cruelty and health concerns were brought against Hallmark Westland Meat Packing Company, prompting the US Department of Agriculture to recall over 140 million pounds of beef (the largest beef recall in US history). A $500 million court judgement was also made against the company, and it went bankrupt in 2012.

Intensive livestock production has been implicated in a number of global health scares with material financial impacts. According to economist estimates, the 2014-15 bird flu outbreak in the US led to the cull of 42 million chickens – equalling 10% of all egg-laying hens in the country – and consequently cost the economy nearly $3.3 billion. Antibiotic resistance is also a key risk. Intensive farming facilities are reliant on routinely feeding antibiotics to animals to prevent disease from taking hold among animals in confined conditions: 75% of all antibiotics sold in the US and around 55% in the EU are given to farm animals. This overuse of antibiotics contributes to the development of antibiotic resistance. A UK government report estimates that by 2050, drug-resistant infections will cause 10 million deaths a year – and the loss of $100 trillion from the global economy.

Governance

Governance issues are important to every company but those in the animal protein industry face some unique risks. In many developed and developing markets, including the US and UK, the industry is heavily reliant on government subsidies. Changes in government policy can present significant financial risks to the livestock production industry.

Food fraud and safety issues can cause serious lack of trust among consumers and investors and may lead to large financial losses. In 2014, Chinese supplier Shanghai Husi Food Co. (owned by US-based OSI Group) was accused of intentionally selling meat beyond its shelf life to fast-food chain restaurants in China and Japan, including McDonald’s and Yum! Brands. Sales fell to such an extent that the two companies lost over $10 billion in value in the two months following the scandal. In March 2017, Brazilian company JBS was found to be exporting expired meat to several international markets. Following a legal investigation, numerous import bans around the world and numerous other governance issues, the company has been ordered to pay over $3 billion in fines. A planned IPO on the New York Stock Exchange was postponed due to lowered investor interest in the deal. between March – October 2017, JBS lost nearly $4 billion in market value.

 For further information and case studies, see FAIRR’s “Factory Farming: Assessing Investment Risks” report.


The 28 ESG risks and their connections to financial levers.