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Greenhouse Gases from Animal Agriculture

Why climate change poses a risk to the animal farming sector

Animal agriculture is negatively impacted by physical risks associated with climate change. It is also being financially impacted by growing climate legislation aiming to curb emissions, as animal agriculture is a key driver of global greenhouse gas (GHG) emissions. The land sector – including agriculture, forestry and other land uses – is responsible for around 25% of net GHG emissions, with emissions from global livestock accounting for 14.5%.[1],[2]

Although short-lived in the atmosphere, methane and nitrous oxide emissions are of particular concern, with 27 and 273 times, respectively, the global warming potential of CO2 emissions over a hundred years.[3] Livestock is responsible for 44% of methane emissions and 53% of nitrous oxide emissions globally.[4]

While for poultry and pork production, most of the sector’s emissions occur at the feed farming stage, cattle-related emissions largely occur during the animal farming stage.

FAIRR Supply-chain-emission-distribution

Climate change impacts on animal agriculture

Feed constitutes a significant part of protein producer costs — 47-76% depending on the protein.[5][6][7][8][9][10] Feed price volatility, partly driven by weather-related events, erodes producer margins. Indeed, the IPCC projects that climate is likely to drive declines in feed crops’ yields of between 3% and 7% for wheat, maize and soy.

Included in the FAIRR Coller Climate Risk Tool as one of the four main climate-change-related drivers of cost, heat stress is also predicted to impact company profits, particularly for cattle and aquaculture producers. Yield losses due to heat stress are forecast to be around 10% for beef producers in Latin America and Asia and up to 20% for African producers by 2045.[11] In the aquaculture industry, rising water temperatures impact the welfare, growth rates, immunity and mortality of fish, and the frequency of algal blooms, all associated with high mitigation costs.[12]

Greenhouse-Gases-12.jpg

Developments in regulation and industry standards

Several initiatives specifically target emissions from the livestock sector and methane in particular. Announced in 2021 at COP26 and led by the US and the EU, the Global Methane Pledge targets a 30% reduction in methane by 2030 compared to 2020 levels; it has more than 150 signatories,[13] and more than 50 companies have developed national methane action plans in response. Initiatives include:

  • In November 2022, the FAO announced its aim to publish a net-zero roadmap for the food sector for COP28.

  • The Republic of Ireland’s Food Vision 2030 strategy includes a reduction target of 10% for biogenic methane by 2030 from a 2018 baseline.[14],[15]

  • The UK’s National Food Strategy Report, released in July 2021, does not explicitly mention a carbon tax but recommends a 30% reduction in meat consumption to meet health, climate, and nature commitments.[16]

  • The Taskforce on Nature-related Financial Disclosures (TNFD) framework, which builds on the Task Force for Climate-Related Financial Disclosure (TCFD), unveiled the final recommendation in September 2023, aims to provide a framework for organisations to report on risks from biodiversity loss and ecosystem degradation.[17]

One such mechanism slated to be closely linked with the success of these goals in countries with large agricultural sectors is carbon taxes. For example, in 2019, New Zealand announced plans to introduce a carbon tax on agricultural emissions by 2025; agriculture is responsible for half of the country’s total emissions, with a quarter coming from the dairy sector alone.[18] The Coller FAIRR Climate Risk Tool calculates the impact of a carbon tax on meat companies by 2050. The average EBIT margin for beef companies is 12% in FY2020 and 16% in FY2021. The maximum cost increase due to the impact of the carbon tax can reach 16% in 2030 and 29% in 2050. For poultry & egg companies, the average EBIT margin in FY2020 is 7% and 5% in FY2021. The maximum cost increase due to the impact of the carbon tax can reach 1% in 2030 and 2% in 2050.[19]

There has been increased climate-related regulation in recent years, but protein producers covered by the Index are still poorly prepared to meet such demands. This exposes companies to climate-related financial risks. Since 2019, the number of governments that have set targets for net zero has risen from just two to 92, with some – including New Zealand and the Republic of Ireland – outlining a key sectoral focus on decarbonising animal agriculture.[20]

The Science Based Targets initiative (SBTi) standards used by companies have also evolved. In 2021, the SBTi released its net-zero target-setting guidance. In 2022, it released its guidance for the FLAG (food, land and agriculture) sector. These targets require alignment with a 1.5ºC warming trajectory – unlike in 2019, when targets in line with a 2ºC warming trajectory were approved[21],[22] – and include emissions associated with changes in land use. Four Index companies currently disclose full emissions from land-use change, with three more disclosing partial emissions.

FAIRR-Average Cost Increase Due to the Impact of Carbon Tax

How we evaluate greenhouse gas emissions risk

For investors to accurately assess and manage their risk exposure, companies must disclose their emissions inventories, including emissions from Scope 3. Therefore, FAIRR assesses whether emissions inventories are complete, i.e. whether they include emissions from animal and feed farming. It is also beneficial for investors when companies show historical emissions, ideally showing an improvement in absolute emissions.

In alignment with other industry bodies, FAIRR encourages companies to have an emissions reduction target; ideally, an SBTi-validated net-zero target, including a short-term emissions reduction target in line with a 1.5ºC warming trajectory.

Companies are also encouraged to conduct climate-related scenario analysis and disclose results highlighting material risks related to animal protein production and their planned risk mitigation approaches.

Finally, companies are assessed on how much they drive innovation to reduce emissions from animal farming and livestock production across the supply chain. FAIRR also assesses whether companies disclose their decarbonisation CAPEX.

Disclosure of GHG inventory

The majority (82%) of Index companies now disclose Scope 1 and 2 inventory, up from 73% last year. In addition, 62% now disclose Scope 3 emissions – an increase from 43% last year.


Climate-related scenario analysis on the rise, but mitigation plans are lacking

In the 2023 edition of the PPI, 43% of Index companies have conducted a climate-related scenario analysis, with 12% ​​conducting an analysis in line with the requirements of the Task Force on Climate-related Financial Disclosures (TCFD). This is an increase from 2022, when 23% of companies conducted an analysis. Two other companies, Minerva and Scandi Standard, are in the process of conducting a scenario analysis.

While more Index companies acknowledge the business impacts of climate-related risks, less than a third discuss risk mitigation. This should be a point to be aware of for investors given forecast declines in feed crops of between 3-7% on average for wheat, maise and soy and forecast livestock yield losses due to heat stress, which could be around 10% for beef producers in Latin America and Asia by 2045 and up to 20% in Africa.[23] Indeed, the Coller FAIRR Climate Risk Tool finds that increased feed costs and carbon taxes will be key drivers of cost increases for livestock producers by 2030.

Those that discuss risk management approaches focus on sourcing and product diversification, as well as shifts to more energy-efficient supply chains, as the table below shows.

Climate-related risk management approaches

Climate-related risk

How companies are managing risks

Feed

Sourcing bulk feed stocks, diversifying feed suppliers and regions, improving feed efficiencies, employing novel feeds

Heat stress

Temperature regulation systems, diversifying sourcing regions, diversifying to heat-resilient species, land-based aquaculture systems, disaster management plans

Carbon taxes

Reducing emissions by diversifying into plant-based products, reducing reliance on soy feed, increasing use of renewables and electric transportation, using internal carbon prices

Energy costs

Increasing use of renewables, using more energy-efficient technology

Vet costs

N/A

Source: FAIRR 2023


Innovation in GHG emissions reduction

In 2023, the Index found 22 companies discussed working with suppliers to reduce emissions (see table below). 23 are trialling innovations to cut emissions at animal-farming levels – primarily focusing on improving feed formulations to deliver feed efficiencies, enhance ruminant digestion and reduce associated methane emissions. 14 companies focus on innovations at the feed level, with some trialling the use of established cropland management practices (e.g. reduced tillage, cover-cropping, crop rotation).  

Table 2: Climate mitigation technologies at the farm level

Climate management area

Description

Protein Applicability

# of companies

Methane-reducing additives

Feed additives can significantly reduce the production of enteric methane emissions in the digestive processes of ruminants, including cattle

Livestock

Bell Food, China Mengniu, Emmi AG, Fonterra, JBS, Itoham Yonekyu

Energy-efficiency improvements

Improving efficiencies to reduce energy consumption

Aquaculture and Livestock

China Mengniu, Modern dairy, Greig Seafood, Muyuan, Mowi, Multi X

Improved feed formulations

Better formulations can improve digestion and feed efficiency, requiring lower feed volumes

Livestock

Bakkafrost, China Mengniu, Marfrig, Multi X

Recirculating aquaculture systems

Improve feed efficiencies

Aquaculture

Lerøy Seafood, Mowi

Algae-based carbon sequestration

Macro-algae can trap CO2 emissions dissolved in seawater

Aquaculture

Lerøy Seafood, SalMar

Methane-reducing vaccine

Targets the micro-organisms that convert hydrogen to methane in ruminants’ stomachs

Livestock

Fonterra

Wearable methane-reducing devices

Use oxidation technology to convert methane exhaled by cattle to CO2 and water vapour, which have lower global warming potential

Livestock

Fonterra

Source: FAIRR 2023


References

[1] Roe, S. Streck, C. Obersteiner, M. et al. (2019) Contribution of the land sector to a 1.5ºC world. Nature Climate Change.

[2] FAO (2013) Key Facts and Findings.

[3] IPCC (2021) Climate Change 2021: The Physical Science Basis.

[4] FAO (2013) Key Facts and Findings.

[5] U.S. Department of Agriculture (2021) Commodity Costs and Returns.

[6] Iversen, A. Asche, F. Hermansen, Ø. et al. (2020) Production cost and competitiveness in major salmon farming countries 2003-2018.

[7] Van Horne P L M. (2019) Competitiveness of the UK egg sector, base year 2018.

[8] Van Horne, P L M. (2020) Economics of broiler production systems in the Netherlands.

[9] Ministry of Culture, Youth and Sport (2018) Wirtschaftlichkeit der Hähnchenmast.

[10] Ministry of Culture, Youth and Sport (2021) Wirtschaftlichkeit der Legehennenhaltung in Baden-Württemberg.

[11] Thornton, Philip et al. (2021) Impacts of heat stress on global cattle production during the 21st century: a modelling study.

[12] Maulu, S. Hasimuna, O J. Haambiya, L H. et al. (2021) Climate Change Effects on Aquaculture Production: Sustainability Implications, Mitigation, and Adaptations. Frontiers in Sustainable Food Systems.

[13] BBC (2021) COP26: US and EU announce global pledge to slash methane.

[14] Ministry for the Environment (2021) About New Zealand’s Emissions Reduction Targets.

[15] Department of Agriculture, Food and the Marine (2021) Food Vision 2030 – A World Leader in Sustainable Food Systems.

[16] National Food Strategy (2021). Recommendations in full.

[17] TNFD (2023) Recommendations of the TNFD.

[18]Dairy NZ (n.d.) Climate Change and the Dairy Sector.

[19] FAIRR (2023). Coller FAIRR Climate Risk Tool.

[20] Zero Tracker (2022) Homepage.

[21] SBTi (2022) Forest, Land and Agriculture Science based Target-Setting Guidance.

[22] SBTi (2021) SBTi Corporate Net-zero Standard.

[23] Thornton, Philip et al. (2021) Impacts of heat stress on global cattle production during the 21st century: a modelling study.