Blog

How to quantify the risk on your plate

Assessing how the world’s largest meat, fish and dairy companies are performing against material ESG risks

From rankings to risk reports, transition pathways to tracking controversies, there are multiple ESG tools on the market to help investors understand their exposure to sustainability risks – especially in carbon-intensive sectors such as energy, transport or chemicals.

In the case of the protein sector, however, the toolbox remains sparse.

“It is vital that responsible investors fully understand the risks and opportunities posed by food stocks in their portfolio”

There are several reasons for this, including historically poor ESG disclosure by food companies, complex and often opaque supply chains and regressive legislation in major producing countries such as the US, which exempts livestock farmers from having to estimate and report manure emissions to the federal government.

Despite these challenges, it is vital that responsible investors fully understand the risks and opportunities posed by food stocks in their portfolio. As reported in this journal, the environmental and public health concerns around the animal agriculture industry are mounting and the industry is ripe for disruption. Investors need to stay ahead of the curve to preserve and create future value.

To close this gap, FAIRR has created the freely-available Coller FAIRR Index – the world’s only assessment of how the world’s largest meat, fish and dairy companies are performing against material ESG risks.

A tool for engagement

The Index analyses the 60 largest publicly listed animal protein producers with a combined market cap of around $320 billion. These companies provide much of the meat, fish and dairy used in restaurants and supermarket shelves around the world. In addition to the overall ranking, FAIRR’s members get access to detailed company profiles that are an invaluable tool to drive active ownership strategies.

Tyson Foods is a case in point. The US-based firm is the only meat or dairy company to have set a Science-based target to reduce emissions. However, the Index shows that the company’s Scope 1 and 2 emissions actually increased by 8% from 2017 to 2018 and it has yet to disclose its Scope 3 emissions, making questions about how the food giant plans to meet its commitment a potentially interesting topic of shareholder engagement.

Similarly, investors might have read of Walmart’s target for zero net deforestation in its supply chain by 2020. However, the Coller FAIRR Index shows that key suppliers such as Sanderson Farms (US) and Cranswick (UK) do not report any commitments on deforestation. Investors can use this information in their direct engagement with consumer-facing companies as well as their biggest suppliers.

The Index also helps investors identify regulatory risk. By 2022, the EU will have implemented a ban on the prophylactic use of antibiotics in farming. Investors are telling us that the Index’s ability to tell them which companies have a robust approach to antibiotics stewardship is increasingly critical for them.

A tool for ESG integration

With over 3,000 data points, the Coller FAIRR Index is also designed for ESG integration. Analysts can clearly evaluate company performance across each of the eight themes and 30 indicators, with the ability to filter by protein type, country, region and market cap. FAIRR’s members also have access to detailed Excel documents, making it easy to integrate the data into their own proprietary models.

The Index covers multiple risks in-depth and across the supply chain, helping analysts develop a holistic view of company strategy (or the lack of one) on material ESG issues. For example, the livestock sector is increasingly being scrutinized for its impacts on local water sources and the Index reports that WH Group’s subsidiary (Smithfield Foods) this year faced over 20 lawsuits for its lack of management of manure waste, with penalties totalling over $550m. Similarly, the Index found that feed prices for Singapore-listed company QAF (which owns pig farms in Australia) increased 55% in 2018 due to water scarcity issues. The Index assesses how companies address water pollution and scarcity risks in their feed supply chains and operations.

One of the key focus areas of the Index is to enable investors to identify the extent to which companies in the sector are using innovation and technology to manage risks and unlock market opportunities. For example, as traceability in sourcing becomes a key market expectation, the Index tests if companies are investing in consumer-facing technologies (such as blockchain) to make their supply chains more resilient. Similarly, to transition away from an overreliance on antibiotics, companies should be making current investments in alternative therapies, including probiotics, vaccines, improved welfare and biosecurity measures.

This decade represents one of the most disruptive eras in protein production – multiple analysts now expect that at least 10% of the meat market in the next 15 years will be captured by alternative proteins. A stark example of this trend is America’s biggest milk company, Dean Foods, which filed for Chapter 11 bankruptcy this month citing the increasing demand for plant-based alternatives as a key reason in its decline.

The Index shows that of the 60 firms assessed, 15 now have some investments in alternative proteins, a threefold increase from last year. Our results help analysts identify which companies are making a serious play for the exploding alternative protein market, and which are simply dipping their toes.

Bridging the gap

The global food industry is too important a sector for the ESG community to ignore. We need the tools to ensure its risks and opportunities are comprehensively mapped and tracked. The Coller FAIRR Index is a great start, and FAIRR was delighted that it was shortlisted for the ESG Research Report of the Year by the UN-supported Principles for Responsible Investment.

I hope it continues to be an indispensable tool for investors for assessing risk in an industry that has a sustainability problem on its plate.

Explore the data on the Coller FAIRR Index here.

**First published in Responsible Investor