Case Study

USS: It’s all about fiduciary responsibility

The Universities Superannuation Scheme (USS) is one of the largest pension schemes in the UK, managing around £64 billion in assets. USS’s investment mandate requires them to integrate environmental, social and governance (ESG) considerations such as animal welfare into their investment process where they are deemed material. This means that USS does not make investment decisions based on ethical or moral considerations alone. The scheme’s Responsible Investment (RI) team consists of six people and is tasked with ensuring that material ESG factors are integrated across all asset classes. 

A potential red flag

USS Responsible Investment Senior Analyst Patrick O’Hara explains that the scheme has a relatively low exposure to farm animal welfare issues but still takes them into consideration
where relevant. In particular, they use the Business Benchmark for Farm Animal Welfare (BBFAW) as a ‘flag’ with relevant companies to help gain insights into the overall quality of supply
chain management. O’Hara welcomes the fact that the research and analysis behind the benchmark has been done by someone else, freeing up his time to analyse the results.

He explains, “If company management doesn’t perform well on animal welfare, then this could be an indication that the firm is weak in other areas of supply chain management and we know that poor supply chain management in the food industry has been associated with risks to public health”

However, he argues that more work needs to be done to establish a correlation between animal welfare and other supply chain issues, establishing this issue as a meaningful
risk indicator.

O’Hara explains that the BBFAW is a useful tool which has been used by the RI team at USS when preparing for company meetings. He adds that Oxfam’s ‘Behind the Brands’ scorecard is also a useful tool.

“Animal welfare can also have reputational impacts,” says O’Hara. “We’ve seen how controversies like the horsemeat scandal can affect an organisation’s own reputation or the reputation of those in its supply chain. So that is one of the reasons a mainstream investor like us might consider it”.

Only when it’s material

Above all, USS’s fiduciary responsibility to its members is core and O’Hara points out, “Currently there is no hard and fast quantitative evidence to show that animal welfare issues are material to company valuations. So it is a big challenge when trying to assess materiality. This is also true of other environmental and social issues”.  for example, even if you look at share price performance in the wake of an environmental or social scandal, it is difficult to attribute performance to any single issue, as there may be a number of different factors at play, sometimes working in opposite directions. The BBFAW is just one of the sources of information that the Responsible Investment team at USS uses to form a picture of the environmental and social risks faced by a firm and how management are responding to those risks. Conclusions are discussed at regular meetings between the Responsible Investment team and fund managers.

In recent years animal welfare issues have also featured on occasion in the pension scheme’s shareholder engagement activities. For example, negative press coverage about animal welfare came up in a recent conversation between USS and a large US food company. USS also refers to BBFAW when considering shareholder resolutions that relate to animal welfare issues and supported a resolution in 2015 that asked for greater disclosure around the financial and operational risks associated with the use of pig gestation crates.

There are also opportunities in farm animal welfare, argues O’Hara. A number of large multinationals such as Sainsbury’s, Marks and Spencer, Waitrose and McDonald’s have invested in improvements to farm animal welfare standards, within their own companies and associated supply chains. This creates a positive story for these companies to communicate to their stakeholders and is potentially another source of competitive advantage in the market.

The stakes may be even higher in some emerging markets, such as China, following recent government commitments to improve safety standards.

On the trajectory of similar ESG issues

O’Hara says that although farm animal welfare may be a little down the ESG agenda at the moment, he could foresee it following a similar trajectory to other issues such as contemporary
slavery. “The Modern Slavery Bill has raised awareness of the issue of contemporary slavery within the investment community. The issue of aggressive tax avoidance is another example of an issue that was barely discussed in terms of corporate reputation and is now centre stage”. He considers that farm animal welfare is an increasingly important factor in influencing consumer behavior and this combined with tightening regulation could make it a more significant business risk in the eyes of mainstream investors.

A free-range future

O’Hara cites free-range eggs and meat as an example of concepts that were barely understood twenty years ago but now form a substantial portion of both those markets. He concluded that he would also like to see all the main ESG research providers include the issue in their core analysis, where relevant. He summarises, “Without this information investors  cannot make informed decisions about materiality.”

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