Case Study

Arisaig Partners: Sustainable farming is on the agenda in emerging markets

Arisaig Partners is an independent, employee-owned, investment management company established in October 1996. Arisaig’s investment strategy is long only, absolute return in style with an exclusive focus on listed consumer sector businesses in emerging markets. The firm has been a signatory to the UN-supported Principles for Responsible Investment since 2010 and is also a member of the International Corporate Governance Network and CDP.

Sustainable farming is already on the agenda in emerging markets

“Arisaig is very long term minded.” explains Partner, and Head of ESG, Rebecca Lewis, “We believe that consumer companies which effectively address ESG issues will be the long term winners in the emerging markets in which we invest”. She explains that FAIRR-related issues, such as sustainable farming or animal welfare, can be very important in emerging markets and cites the high profile ‘milk scandal’ in China in 2008 as a key example. The scandal found companies such as Sanlu had added melamine to milk and infant formula, leading to the death of several infants causing serious health issues for others. The scandal sent share price of the company and the parent company Fonterra crashing.

Arisaig invests in dairy farmer Vinamilk, Vietnam’s largest listed company, and Rebecca explains how consideration of ESG factors and shareholder engagement has helped create mutual benefit for all parties.

Engaging with Vinamilk

Vinamilk is the largest dairy company in Vietnam and owns over 126,000 cows across ten farms. Arisaig first invested in 2006 and recognised that, among other issues, the company’s management of greenhouse gas emissions and water were ‘business critical’ issues that needed to be addressed. Dairy tends to be one of the most carbon intensive industries in the consumer sector and is also guilty of heavy water usage, putting Vinamilk firmly in the firing line should water shortages arise or carbon emissions eventually come under scrutiny in Vietnam.

That explains why Arisaig began to engage with the company on these issues through the medium of what they call ‘Henry Root Letters’. Henry Root was a pseudonym used by a British activist in the 1970s who gained fame by writing open letters containing honest truths to politicians and businesses of the time.

Lewis explains that, “Arisaig’s ESG strategy on Vinamilk focussed mostly on governance issues, especially given the large stake held by the State, but from 2008 we began to address environmental issues more broadly. Around this time, we published a major report about water issues in Asia which identified dairy companies as intensive water users with a material need to use water efficiently.”

Over the years, Lewis continues, Arisaig has seen Vinamilk’s reporting standards on sustainability, including emissions and water usage, improve dramatically. Last year their reporting covered energy use, carbon emissions and water management.

Vinamilk has been successful in cutting greenhouse gases in recent years, reducing the proportion of CO2 emissions per tonne of  product by 21% between 2013 and 2016 and cutting absolute carbon emissions by 186,000 tonnes over the same period. It has also been a pioneer in organic farming, becoming the first large-scale producer of organic dairy products in Vietnam, and is now an EU certification-standard organic dairy farm. Arisaig was the first foreign investor to visit the organic farm, in 2017. In capturing demand from the country’s higher income consumers, who are more health- and sustainability-conscious, Vinamilk hopes to pick up financially and environmentally prudent
production techniques which can subsequently be translated into their conventional dairy business.

Bottom-line benefits

Arisaig’s funds and their investors, are seeing the business benefits of this engagement. Vinamilk’s stock price has performed exceptionally well over the long-term, giving Arisaig 22% annualised returns over the past ten years.

The drive for sustainability has also helped Vinamilk reduce its reliance on foreign suppliers, such as milk powder providers from New Zealand, and has driven the creation of more local farms, especially in Northern Vietnam. The company has set a target to source 40% of milk from local production by 2021, creating both financial and environmental benefits.

A shared endeavour

Lewis comments that Arisaig finds FAIRR a useful platform to discuss sustainable farming and other ESG issues with like-minded investors, and a chance to share research. She adds, “We are especially interested in the new Coller FAIRR Index, looking at the sustainability of the livestock and fisheries sector in general. We only invest in consumer businesses, so having an alternative, independent view and peer analysis in these sectors is invaluable.”

“We have to work out how to feed nine billion people, but we cannot accept increases in productivity at  the expense of environmental and social over the long term.”

-Rebecca Lewis Partner, and Head of ESG at Arisaig Partners

Lewis continues that she expects intensive farming issues to continue their rise up the ESG agenda. “We have to work out how to feed nine billion people, but we cannot accept increases in productivity at the expense of environmental and social standards over the long term. China, in particular, is beginning to see itself as a potential world leader in this area and policy-makers are mindful that there cannot be a ‘growth at all costs’ strategy there.”

She concludes that Arisaig is hugely optimistic about emerging markets in particular and their ability to meet these challenges in the years to come.

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