Why factory farming is becoming a major risk to portfolios
ESG initiative hits $1trn mark
Alan Briefel, Executive Director of the Farm Animal Investment Risk and Return Initiative, explains why exposure to factory farms is becoming one of the biggest risks in many portfolios.
In the last decade, we have seen investors respond en masse to major global trends such as rising populations, a warming climate and shifting economic power from west to east.
To ensure the impacts of these trends feed into risk management and return enhancement strategies, hundreds of institutions now take environmental, social and governance (ESG) issues such as climate change, employee diversity and anti-corruption into account into their investment process.
For example, Bloomberg recently revealed they provide ESG data to more than 12,000 customers, with ESG data points covering more than 11,300 companies.
However, one important trend that has gone almost unnoticed by most investors has been the rapid industrialisation of global meat production and its enormous implications for the environment, human health and portfolio value.
That is why last summer, a new initiative – the Farm Animal Investment Risk & Return (FAIRR) Initiative – was formed to raise awareness among investors about the risks and opportunities associated with the growth of the factory farming model.
It is evidence of how rapidly this issue is rising up the agenda that in just under a year FAIRR has attracted investors with more than $1trn of combined AUM including the likes of Aviva Investors, Strathclyde Pension fund, Robeco and Triodos Investment Management.
A global trend hidden in plain sight
Factory farming (defined as manufacturing-style operations rearing large numbers of farm animals in confinement) is a relatively recent phenomenon that has become the predominant mode of global meat production. It rears more than 70% of the world’s farmed animals, rising to a remarkable 99% in the US.
To give a sense of this growth in 1992, 30% of all US pigs were factory farmed -now it is 97%. Similarly, in the two decades from 1993, the global chicken population grew by more than 75% from 13 billion to 23 billion.
Some may see this as positive. We are feeding the world, meat is cheaper than ever, and investments in the factory farming industry have delivered decent returns over the years. However, the risks of factory farming pose a material threat to investors and to society as a whole.
A good example of this is the routine dosing of factory-farmed animals with antibiotics. A remarkable 80% of all antibiotics in the US (and 50% in Europe) are now used in factory farms.
This overuse is likely to be catalysing the risk of drug resistant bacteria such as bacteria resistant to colistin, medicine’s ‘drug of last resort’ for serious infections in human patients.
Colistin-resistant bacteria were discovered for the first time in livestock and human patients in China in late 2015, and have now also been identified in Europe and the US.
Emissions are another example of the unsustainable consequences of factory farms. The global livestock sector is responsible for more greenhouse gas emissions than the transport sector.
From an investment point of view, this leaves the factory farming sector critically exposed to potential new climate legislation as we transition to a lower-carbon economy.
A recent study undertaken by FAIRR concluded that the current industrialised model of meat production is exposed to at least 28 ESG risks over both the short and longer term. From pandemics to pollution, the factory farming sector is becoming a high-risk sector for investors.
And it is not just about risk. There are opportunities too. The next wave of a food revolution is emerging through food technology companies that are bringing together biotechnology, sensory experience and data to create affordable, sustainable alternatives to meat.
Perhaps the best-known example is Hampton Creek, a food technology company in California that uses plant proteins instead of eggs to create products such as ‘Just Mayo’ and ‘Just Scrambled’ and which is on track to become the fastest growing food company in history.
For too long, investors have not given sufficient thought to the impacts of factory farming. They need to close that knowledge gap if they are to avoid value destruction and find emerging opportunities.