FACTORY FARMING:
ASSESSING INVESTMENT RISKS
2016 report
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FACTORY FARMING:
KILLER STATS INVESTORS
CAN’T IGNORE
1
NO
$3.3bn
1
reason for rapid
spread of bird (H5N2)
and swine (H1N1) flu
user of
antibiotics
in the US
NO
80%
industry losses due to US bird
flu outbreak in 2015 [FarmEcon]
DOWN
INVESTORS IN
MCDONALDS AND KFC
HIT BY US$10.8BN LOSS
OF MARKET CAP IN
2014 DUE TO FOOD
SAFETY SCANDAL AT A
CHINESE SUPPLIER
of all antibiotics in the US now used
in animal factory farms [CDC]
85%
14%
of all soya
globally is used
in animal feeds,
a major cause of
deforestation [WWF]
of global GHG
emissions, more
than the transport
sector*
1
NO
[FAO]
[Pacific Institute]
*from livestock sector as a whole, with factory
farming as key component
21%
fairr.org
consumer
of water in
drought-stricken
California
$250m
rise in 'heat stress' days set to hit cattle
industry due to warming climate
and rising hit on profits of California
dairies due to drought in 2015 [UC Davis]
52.3
27.6
11.4
7.9
UP
ALTERNATIVE
FOOD TECH COMPANY
HAMPTON CREEK SET TO
BE FASTEST GROWING
FOOD COMPANY IN
HISTORY, BENEFITING
FROM IMPACT OF 2015
US BIRD FLU CRISIS
88.2
DOWN
ANIMAL WELFARE
SCANDAL LEADS TO
LARGEST MEAT RECALL
IN US HISTORY,
AND BANKRUPTCY
FOR MEAT-PACKER
HALLMARK/WESTLAND
IN 2012
39.4
DOWN
INVESTORS IN TYSON
FOODS EXPOSED AFTER
COMPANY REVEALS
ENVIRONMENTAL
VIOLATIONS.
POSSIBLE $500M OF
REGULAR GOVERNMENT
CONTRACTS AT RISK
11.4
65.3
59.9
12.7
66.2
57.1
28.4
75.5
24.9
7.9
88.2
59.9
12.7
fairr.org | 1
KEY FINDINGS
AND IMPLICATIONS
FOR INVESTORS
FOREWORD
Animal factory farming is exposed to at least 28 environmental, social
and governance (ESG) issues that could significantly damage financial
value over the short or long-term. Many of these risks are currently
hidden from investors.
This report explores the industrialisation of the
world’s meat and fish production, a relatively recent
trend, and assesses the potential risks that a range
of environmental, social and governance (ESG) issues
present to that model. Looking at the industry through an
ESG lens produces alarming results that should raise a
red flag to mainstream investors across the world. This is
the first study to undertake this important analysis.
All 28 issues can potentially affect the financial performance of
companies across the food value chain. Including large agri-business,
food retailers and restaurants.
A knowledge gap exists within the investment community about
managing these risks and opportunities. Even among those
investors who are integrating ESG issues into their investment
decision-making processes.
The window of opportunity for investors to act is finite and shrinking.
The magnitude of risks generated by animal factory farming is set to increase
through rising capital costs, the shifting gravity of production to developing
countries with less robust regulation, the impacts of climate change and
increasing social concerns over animal welfare and sustainability.
Investors should undertake additional research in a number of areas to
support the initial exploratory findings contained in this report. If they are
to close the knowledge gap and protect long-term value creation.
Research by Verisk Maplecroft
NEW TREND CREATES A KNOWLEDGE
GAP AMONG INVESTORS
Over 70% of the world’s farm animals are now factory
farmed, including an estimated 99% of US farm animals.
Cattle feedlots can hold upwards of 100,000 cattle at
any one time – equivalent to almost the entire dairy cow
population of Greece in one farm. This industrialisation
of meat and fish production is currently set to continue
at pace as prosperity in emerging economies rises.
Our research reveals the many investment risks that need
to be considered if this trend continues. Most obvious are
the short-term risks such as the threat of a reputational or
regulatory backlash against any investee company involved
in factory farming and shown to have poor ESG (including
animal welfare) standards. However this report also digs
deeper and explores, perhaps for the first time, some of
the longer-term risks that might affect value.
It identifies 28 ESG issues which can have a negative
financial impact on companies connected with animal
factory farm-related investments. These range from food
safety scandals to environmental fines and the industry’s
reliance on government subsidies, and affect companies
right through the value chain. One particularly worrying
issue is the overuse of antibiotics. Around 80% of all
antibiotics produced in the US are now used on farm
animals and there is a real risk of drug resistant bacteria
developing as a result of this. In addition, factory farms also
provide ideal conditions for viruses to develop and spread.
Increasingly, major investors
are paying attention to
factory farming’s risk and
incorporating them into
their decisions
For example there is evidence that the 2009 H1N1 strain
of swine flu, which killed over 150,000 people and wiped
billions off the value of many agriculture investments,
originated in a US factory farm. Factory farming also
catalysed the spread of H5N2 bird flu in the US this year,
estimated to have cost £3bn to the wider economy.
Increasingly, food companies and consumers are starting
to see these risks and now some major investors and asset
managers the world over are paying attention to factory
farming’s risk and incorporating them into their decisions.
But there's still a long way to go. Even many of the
investors publicly committed to taking ESG issues into
account as signatories of the UN-supported Principles
of Responsible Investment overlook this issue when it
comes to their risk management.
PROTECTING LIVESTOCK,
PROTECTING VALUE
This report does not have all the answers, but it does
highlight a knowledge gap which I urge the investment
community to address. That would not only create a
more sustainable farming industry but would also give
investors the information they need to help safeguard
long-term value.
Jeremy Coller
Founder, FAIRR Initiative
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EXECUTIVE SUMMARY
> Ignoring ESG issues associated with animal
factory farming leaves investors exposed to
significant material risks.
Animal factory farming has not historically received
meaningful attention from the responsible investment
community. However, in a relatively short period of time
it has come to dominate global meat production despite
wider risks over its potential impacts on areas such
as public health, the environment and food safety.
The available literature studied for this report shows
that these risks are material for mainstream investors,
especially those with significant exposure to the
agricultural and food value chains.
> Animal factory farming is a new phenomenon that
has established itself as the predominant mode of
livestock production.
Over the past half century drivers such as population
growth, rising incomes and urbanisation have driven
a sharp increase in meat consumption and a shift
towards factory farming as the way to meet demand.
An estimated 70% of farmed animals are now raised
in this system, including 99% of US farm animals1.
Now many Asian countries have started to industrialise
their animal farming systems at pace and scale.
> A knowledge gap exists about animal
factory farming risks among investors.
This report analysed several economic, academic and
NGO studies to understand whether there was financial
vulnerability for long-term investors due to the rise of
intensive farming. Most of these studies focused on
hile industrial farm animal
W
production has benefits,
it brings with it growing
concerns for public health,
the environment, animal
welfare, and impacts on
rural communities. 3
Pew Commission on Industrial Farm
Animal Production (US)
the sector’s vulnerability to policy and regulation and
we believe that this report is the first study to reveal
unpriced risks from the impacts of wider environmental,
social and governance issues on animal factory farms.
> Animal factory farms are vulnerable to at least
28 ESG issues that may damage their financial
performance and returns.
This diverse range of 28 issues are split into
•• Environmental – These are the most quantifiable
of the three (ESG) areas and include issues such as
climate change, water scarcity and water pollution.
For the latter the example of North Carolina is cited,
which permanently banned new pig factory farms in
2007 to protect water courses and prevent pollution.
Reports indicate that if the industry was forced to
meet the costs of its pollution, this could equate to
billions of dollars2. The chapter also cites the large
contribution of the livestock sector to climate change
(14.5% of all man-made GHGs) and shows how the
costs of ‘heat stress’ could significantly harm cattle
farmers in the next 30 years.
•• Social – The report concludes that there is a
tremendous amount of financial value potentially
at risk as a result of social issues. These include
health impacts from the overuse of antibiotics
in factory farms, pandemic risk and reputational
damage to companies due to changing consumer
attitudes. For example, it describes how the 2015
outbreak of bird flu in the US, thought to have
‘environmental’, ‘social’ and ‘governance’ risks.
The links between ESG issues and financial outcomes
can be complex and difficult to assess, but nevertheless
a hard line can often be drawn between issues such as
droughts or food contamination and financial performance.
This report has developed a framework to link ESG issues
with four key financial levers: ‘production and price’,
‘market access’, ‘reputation’ and ‘legal and regulatory’.
THAI AGRIBUSINESS CPF DOWN 15% DUE TO AVIAN FLU (2013)
4 | fairr.org
The key risks are:
been catalyzed by factory farms, caused over
$3.3bn of economic costs. The example of Yum!
and McDonalds losing US$10.8bn of combined
market capitalisation after a food safety scandal
in a Chinese supplier is also explored.
YUM! AND MCDONALD’S LOSE $10.8BN OF COMBINED MARKET CAP IN EXPIRED MEAT SCANDAL (2014)
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INVESTORS
•• Governance: There are four broad governance
issues that impact the animal factory farming
industry, with potential changes to subsidy support
from governments presenting the most significant
financial risk. For example, one study argues that
the success of the animal factory farming model
is due largely to subsidy support, including almost
US$4bn that the US industry receives in benefits
annually from subsidised grain. Shifting production
to developing countries also raises concerns for
investors due to less robust corporate governance
in these countries.
> Some leading investors have already started
to integrate animal factory farming risks into
investment processes.
Historically, investors have been largely unaware of
investor risks in this area. However in recent years
some parts of the financial community have taken
steps to improve their understanding. Some investors
have begun to consider it in both their investment
analysis and active ownership processes. This includes
development financial institutions such as the IFC and
EBRD as well as several mainstream investors such as
PGGM, BNP Paribas and Aviva Investors. In this report
we provide a list of available resources that investors
are currently using to integrate animal welfare practices
and highlight the Business Benchmark on Farm Animal
Welfare (BBFAW) – an independent benchmark that
ranks how the world’s leading food companies
are managing and reporting their farm animal
welfare practices.
ANIMAL FACTORY FARMS
> A toe in the water.
This report aims to broaden the current
understanding of risk linked to investment in
animal factory farming, but it is clear that further
in-depth research and engagement between
investors and the industry would help close the
knowledge gap that exists. Ideas for further research
and other practical steps are offered in the last
chapter of this report.
I ntensive farming practices
raise material, health,
environmental and
operational risks that
investment organisations
cannot afford to ignore.
Given that they also rely
heavily on government
subsidies the model does
not look like a sustainable
one for long-term investors
and they should take action
to manage the risks.
Alan Briefel, Executive Director, FAIRR
13 ENVIRONMENTAL ISSUES
11 SOCIAL ISSUES
4 GOVERNANCE ISSUES
Disease outbreaks | GHGs
Deforestation & biodiversity loss
Natural hazards | Climate change
Water pollution | Water scarcity
Resource scarcity
Poor animal welfare | Waste
High water use | Air pollution
Soil degradation
Excessive antibiotics | Infectious
diseases | Social backlash
Changing consumers | Poor
working conditions | Human
rights | Shrinking labour pool
Community health impacts
Loss of rural jobs | Land rights
Social licence to operate
Policy changes
Weak oversight
Corporate governance
Sustainability disclosure
CASE STUDY: A warming
climate is set to make factory
farming less financially viable.
E.g. increasing cattle ‘heat
stress days’ by 21% by 2045.
The US dairy industry already
loses US$897m/year from heat
stress on cattle.
CASE STUDY: The dense
concentration of animals in
factory farms may lead to major
health issues. E.g. in 2009 swine
flu caused the MSCI US Agri &
and Food Index to plunge 1.5%;
Smithfield Foods lost 12%. Over
150,000 people died from the virus.
CASE STUDY: Animal factory
farming is highly vulnerable
to changes in its commercial
context. For example, ESG
factors may threaten subsidy
support such as the US$4bn of
benefits the US industry receives
annually from subsidised grain.
TYSON FOODS’ $500M GOVERNMENT CONTRACTS AT RISK DUE TO RELEASE OF TOXIC CHEMICALS
6 | fairr.org
TESCO DOWN 13.7% DUE TO POOR CHICKEN WELFARE EXPOSEÉ (2008)
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REPORT PURPOSE AND METHODOLOGY
CONTENTS
This report aims to provide investors with a better
understanding of the short- and long-term financial
impacts of ESG issues on companies directly involved
in animal factory farming and indirectly linked via the
value chain. The specific objectives are to:
Key findings
2
Foreword from FAIRR Founder
3
•• Identify the key ESG issues that are relevant to
animal factory farming;
•• Establish empirical evidence of the short- and
long-term financial impacts of ESG issues on
animal factory farming;
•• Help investors to understand the key issues and
highlight where knowledge gaps exist;
•• Identify activities that could be undertaken by
interested stakeholders in the financial community
to protect investors against the risk present in
animal factory farming-related investments.
We hope investors can use this report practically as
part of their strategic decision-making and day-today operations, or to help develop lending policies or
guidelines that incorporate animal factory farming
criteria. The evidence and leading practice case studies
can also provide support for shareholder activism,
such as pressuring companies to establish better
management systems or eliminate risky practices.
Methodology and structure
This ESG analytics and research in this report were
produced by Verisk Maplecroft with the aim of identifying
current and emerging ESG risks that are relevant to
animal factory farming. This review drew on a wide
number of sources including academic journals, industry
and government publications, company documentation,
NGO reports and studies and media reports.
8 | fairr.org
The case studies on the financial impacts of ESG issues
on food sector companies and bovine heat stress were
developed through original research. The financial
analysis of company performance was undertaken
through the use of proprietary datasets and open source
information on stock prices. Bovine heat stress was
quantified by calculating the annual average Heat Stress
Days in a current (1981-2000) and future (2026-2045)
climate. This was achieved by adjusting Maplecroft’s
proprietary Country Risk Indices – specifically Heat
Stress (current climate) and Heat Stress (future climate)
2015 indices – by a common measure of heat stress, the
temperature-humidity index (THI):
THI = T – [0.55 – (0.55 x RH/100)] x (T – 58), where T is
the dry-bulb temperature and RH is relative humidity.4, 5
EXECUTIVE SUMMARY
4
CHAPTER 1: CONTEXT – PUTTING ALL
OUR EGGS IN ONE BASKET
10
1.1 Overview
10
1.2 The development and geographical
expansion of animal factory farming
11
1.3 Limited information has created a
dangerous knowledge gap for investors
12
CHAPTER 4: IMPLICATIONS AND
NEXT STEPS 45
4.1 Overview
45
4.2 Implications of the findings for investors
45
4.3 Next steps
46
APPENDIX 48
LIST OF FIGURES AND TABLES
Figure 1: A new phenomenon. Graph shows the rapid
increase in the global production of main livestock species
compared to human population growth (1963–2013).
Figure 2: ESG issues as drivers of financial performance
within the context of animal factory farming.
CHAPTER 2: 28 ESG ISSUES AND
THEIR IMPACTS
15
2.1 Overview
15
Figure 3: Future heat stress and impacts on key cattle
producing countries
2.2 From pandemics to pollution, a wide range
of ESG issues affect key financial levers
15
Figure 4: Financial impact of food safety scandal to
fast-food chains in 2014
2.3 Environmental issues and impacts
17
2.4 Social issues and impacts
24
2.5 Governance issues and impacts
32
CHAPTER 3: INTEGRATING ANIMAL
FACTORY FARMING RISKS INTO
INVESTMENT PROCESSES 35
3.1 Overview
35
3.2 Investing in food and agriculture
35
Figure 6: Major Asian poultry firms see share price
declines during avian influenza outbreak, 2013
Table 1: ESG issues that may have an adverse impact
on financial performance and returns from animal
factory farming
Table 2: Key environmental issues
Table 3: Key social issues
Table 4: Key governance issues
3.3 Integrating animal factory farming risks
into investment processes
36
3.4 Integrating farm animal welfare
opportunities into investment decisions
42
Figure 5: US pork producers see share prices plummet
following swine flu outbreak, Apr 2009
Table 5: Integrating ESG issues into equity research
fairr.org | 9
CHAPTER 1:
CONTEXT – PUTTING ALL OUR
EGGS IN ONE BASKET
1.1 OVERVIEW
1.2 THE DEVELOPMENT AND
GEOGRAPHICAL EXPANSION
OF ANIMAL FACTORY FARMING
Animal factory farming as a production process
originated in the United States and has since been
replicated in other Western nations. More recently,
animal factory farming is becoming established in
new geographies, including South Asia (India),
East Asia (China), sub-Saharan Africa and South
America. In this context, it is more important than
ever that investors understand the potential risks
associated with investment in animal factory farming
and related industries.
Over past decades, traditional livestock farming
has been largely replaced by highly industrial
production systems, or animal factory farms.
An estimated 70% of animals farmed for food
globally are raised within a factory farming system.6
Large poultry farms can contain more than
500,000 broiler chickens, pig farms can contain
more than 10,000 hogs, and cattle feedlots can
hold upwards of 100,000 cattle at any one time
(that is almost the entire dairy cow population of
Greece in one farm7).
20
PROJECTED
15
10
5
NUMBER OF ANIMALS/HUMANS (BILLION)
25
Animals
Humans
2021
2013
2003
1993
1983
1973
1963
0
Source: FAO
FIGURE 1: A new phenomenon. Graph shows the rapid increase in the global production of main livestock
species (cattle, pigs, sheep and goats, and poultry) compared to human population growth (1963–2013).
10 | fairr.org
Over the past half century, the increase in global
agricultural output has been achieved largely
through the intensification of production. The global
human population increased from 3.2 billion in 1963
to just over 7 billion in 2014. To meet rising demand,
world food production has also grown dramatically.
Increasing yields, cropping intensity and land use have
driven crop production. Greater fisheries catches as well
as the expansion of aquaculture have meant that world
fisheries production has also increased with the aim of
meeting the growing demand for food.
At the same time, population growth, rising incomes
and urbanisation (particularly in developing nations)
have resulted in a sharp increase in the demand for
meat and fish. There were approximately 7 billion
cattle, pigs, sheep, goats and poultry in 1963.8 By 2013,
their numbers had risen to more than 25 billion, with
the majority contained in factory farms. The rise in
production of key livestock species alongside
population growth is illustrated in Figure 1.
The shift towards factory farming as the predominant
mode of livestock production began in the United States
and other industrialised countries. Animal factory
farming began to emerge in industrialised countries
following the Second World War.9 This process entailed
a shift in animal production systems from smaller scale,
mixed species systems to large-scale, intensively
farmed and highly mechanised systems, focusing primarily
on a single species. There was also a marked shift in the
structure of the industry, with fewer and fewer farms
production in many of these countries is now beginning
to stagnate. For example, while major producers such as
Brazil, Argentina and Russia demonstrated rapid growth in
meat production over the past decade, this is not expected to
continue. Many key meat-producing countries and regions
will be unable to satisfy rising global demand. This is due
to a number of reasons, including: constraints on natural
resources, competition from crops for land and water, and
inadequate investment in supportive infrastructure.11
By comparison, intensive animal farming is increasing
rapidly in emerging markets. Meat production in the least
developed countries doubled over the two decades prior to
2012.12 Although this growth is likely to continue based on
current trends, there may be an increasing differentiation
in these markets between conventional industrial farming
(which we argue represent high-risk investments), more
medium-risk factory farms that take animal welfare issues
into account and non-industrial farming. In this context
providers of plant-based protein alternatives to meat also
appear as a strong growth opportunity.
Many Asian countries have already started to
industrialise their animal farming systems, with
the pace and scale of change most visible in China.
Many Asian governments are encouraging a shift from
small-scale, subsistence and non-intensive farming
towards more intensive farming systems. While animal
stocks in developed countries have been largely stable
over a 40-year period from 1963 to 2013, there has been
significant growth in countries such as China, Vietnam
and Indonesia. China is a strong supporter of the
industrial production model and this is reflected in the
tremendous growth in livestock produced in the country.
Growing Chinese livestock
producing increasing numbers of animals. As part of this
consolidation, corporations assumed a more dominant
role, with many livestock farmers functioning under the
control of larger companies. By 1997, half of the world’s
beef, and more than half of the world’s pork, poultry
and eggs, were produced by animal factory farms (or
‘concentrated animal feeding operations – CAFOs’).10
Between 1993 and 2013:
•• Head of cattle increased from 80 million to
114 million in 2013, an increase of 43%.
•• The number of pigs increased from 367 million
to 482 million, or 31%.
•• Chicken numbers increased from 2.7 billion to
5.5 billion, or 104%.13
Future growth in meat production and animal factory
farming is expected to be driven by developing countries.
Thus far, developed countries have accounted for the
majority of intensively farmed livestock systems. However,
China has become the world’s largest producer
and consumer of pork, the second largest producer
of poultry14 and the world’s third largest milk
producing nation.15
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FUTURE PROJECTIONS
Population growth, affluence and urbanisation will
continue to shape consumer preferences and drive
demand for meat or similar proteins. Key demographic
and socio-economic drivers include:
•• World population is expected to grow by a third
between 2014 and 2050, rising from 7 billion to
9.1 billion.16 The vast majority of this growth will
occur in developing countries.
•• Per capita incomes are projected to be a multiple
of today’s levels, with some emerging economies
catching up to developed nations in per capita terms.17
•• Urbanisation processes will accelerate, resulting in
70% of world population living in cities by 2050
(up from 54% in 2014).18, 19
The global demand for animal protein is expected to
increase 70% by 2050,20 largely as a result of increasing
affluence. This has already been observed in China, where
a fourfold increase in per capita income following economic
reforms in the 1970s coincided with a 30% increase in
average meat consumption per person (between 1978
and 1997).21 However the future trend towards increased
meat consumption is far from a certainty. Growth in meat
consumption has started to falter in some developed
countries, suggesting that evolving consumer preferences
could re-shape future meat demand. There is a slowly
growing trend in countries such as the US and the UK
towards more plant-based or ‘flexitarian’ diets, with meat
playing a less important role in meal planning. This has
arisen out of an increased awareness of health, animal
welfare and environmental sustainability issues, and
awareness and availability of plant-based proteins as an
alternative. Since the 1980s, for example, the consumption
of red meat has declined in the UK.22 This has been partly
attributed to a number of food-related health scares,
including the 2013 horsemeat scandal. Meat consumption in
the US has also been declining for almost a decade, largely
because of health concerns and economic constraints.23
WHO's classification of processed meat as carcinogenic in
late 2015 is likely to encourage a further decrease in red
meat consumption in these markets.
Food technology companies such as Hampton Creek
(see page 43) Impossible Foods and Beyond Meat are
also emerging which in the coming years may offer
protein-dense plant-based foods that consumers select
12 | fairr.org
as alternatives to meat, taking market share from animal
protein sources and reducing global meat demand.
1.3 LIMITED INFORMATION HAS
CREATED A DANGEROUS
KNOWLEDGE GAP FOR INVESTORS
Several economic studies have focused on the
financial vulnerability of animal factory farming
to changes in policy and regulation, suggesting
significant unpriced risks within the sector.
NGO reports and academic research argue that the
success of the animal factory farming model is due
largely to subsidy support received either via direct or
indirect channels. One landmark study provides detailed
analysis of subsidy support received by the industry
in the US, including almost US$4 billion that CAFOs
receive in benefit annually from subsidised grain.24
The industry also receives public support in the form
of funding to help prevent pollution from farms
(US$125 million in 2007) and publicly-met remediation
costs for cleaning up the land under hog and dairy
CAFOs (US$56 million just in Kansas).25 Reports indicate
that if the industry was forced to meet the costs of its
pollution, this could equate to billions of dollars.26
everal economic studies
S
have focused on the financial
vulnerability of animal factory
farming to changes in policy
and regulation, suggesting
significant unpriced risks
within the sector.
the national or regional level.28 Studies have also
downscaled the impacts of widely experienced events
to the producer level. For example, drought in 2012
led to a US$155,000 increase in feed costs for broiler
farms in Georgia.29 Livestock-related disease outbreaks
also focus attention on the impacts on key producers
or regions. During the 2009 swine flu outbreak,
Tyson Foods reported a drop in its domestic pork sales,
while industry analysts downgraded stock and lowered
annual earnings for both Tyson Foods and Smithfield
Foods.30 Meanwhile, hog producers in Indiana were
estimated to have lost US$20 a head at the peak of the
outbreak.31 There is less information available regarding
the financial impact of reduced stocks on the sector or
on individual farms, although fines for environmental
or labour law infractions are commonly available.
However, there is limited information available which
measures and quantifies the materiality of broader
ESG issues in relation to animal factory farming.
There is a growing body of academic research examining the
relationship between ESG issues and financial performance –
the majority of this research highlights a positive relationship
between ESG issues and performance.32 However, the
impacts of ESG issues can vary across sectors, meaning that
investors need detailed information relating to the specific
sector, country, or asset class, etc. that they are interested in.
There is little within the investment literature that
is targeted specifically at animal factory farming.
This contrasts with much greater focus on other
sectors that present severe environmental or
social challenges. These sectors include: clothing and
apparel due to the association with poor working conditions;
oil and gas because of the contribution to climate change;
and the mining industry because of its association with
human rights abuses and exposure to water scarcity.
This report aims to take a first step to broadening the
current understanding of risk linked to investment in
animal factory farming, by identifying and expanding
on the ESG issues which affect the sector. These issues
are listed in Table 1 and discussed in more detail in the
following section.
a rough estimate of the
…
total cost of cleaning up
the soil under U.S. hog and
dairy CAFOs could approach
US$4.1 billion. 33
Union of Concerned Scientists
TABLE 1: ESG issues that may have an adverse impact on financial performance and returns from
animal factory farming
CATEGORY
KEY ISSUES
Disease outbreaks, GHG emissions, deforestation and biodiversity loss, natural hazards,
climate change, water pollution, water scarcity, resource scarcity, poor animal welfare,
waste generation, high water use, air pollution, soil degradation and desertification.
Environmental
The strongest links between the impacts of
ESG issues on financial performance related to
animal factory farming are drawn from short-term
and anecdotal reports. There are numerous examples
of reports describing the numbers of livestock culled
across different geographical areas as a result of
drought and rising feed costs on the livestock.27
Often this is translated into economic costs at
Social
Excessive antibiotic use, spread of infectious diseases/global health pandemics, social
backlash, changing consumer preferences, poor working conditions, human rights violations,
labour availability and productivity, health impacts on surrounding communities, loss of rural
livelihoods, land rights violations, social licence to operate compromised.
Policy changes (e.g. removal of government subsidies, changes to policy, trade restrictions),
weak regulatory oversight, sustainability disclosure, corporate governance.
Governance
fairr.org | 13
CASE STUDY 1: MARKETS INFECTED BY 2015 AVIAN FLU OUTBREAK
he virus was thought
T
to have spread further
and faster than any
other historical outbreak
because of the role of
factory farms in modern
farming
The virus was thought to have spread further and
faster than any other historical outbreak because of
the role of factory farms in modern farming.
Financial costs
The financial implications of H5N2 have been
staggering. The value of the dead birds alone has
been estimated at over $190 million, with US
taxpayers asked to foot the bill of 'restocking' the
birds. 40 countries placed bans on all US poultry
and many food companies including Hormel and
Post Holdings issued profit warnings following
declining sales due to limited supplies and lost
revenue from market closures.
The crowded and confined conditions of factory
farm poultry sheds create a disease incubator,
meaning that when the virus got in it quickly
spread. Coupled with the large flock sizes of up
to five million birds in a concentrated space –
In Iowa, the largest egg producing state, egg
production dropped 21%. This contributed to
skyrocketing egg prices between January and
June which infected stocks such as food makers
like Unilever, food distributors such as Sysco, and
an outbreak of bird flu in one hen house means
you have to cull the chickens in the neighbouring
hen houses too.
fast food firms including McDonald’s whose costs
all soared.
In the first half of 2015 the US suffered the worst
outbreak on record of the deadly H5N2 strain of avian
influenza. At the time of writing it had led to nearly
50 million hens and other poultry being destroyed,
and America’s $6 billion poultry exports, suffering
dramatic falls of around 14% and rising34.
There are less than 200 commercial egg farms in
existence in the US today, compared to over 10,000
forty years ago35.
Despite significant biosecurity measures in place,
H5N2 was able to penetrate the defences on a large
number of factory farms.
14 | fairr.org
CHAPTER 2:
28 ESG ISSUES AND THEIR IMPACTS
2.1 OVERVIEW
There is growing evidence that ESG issues can
impact the performance of companies connected to
animal factory farming across the agriculture and food
value chain. The most visible financial impacts come
from short-term events, but the financial performance
of companies linked to animal factory farming is also
contingent on longer-term environmental, social and
regulatory trends and the ability for companies to
successfully anticipate and navigate these changes.
This section highlights these key changes, pointing
towards issues that responsible investors may wish
to incorporate into their investment approaches.
The animal factory farming industry can cause
significant negative environmental and social impacts,
and it is also highly vulnerable to wider ESG trends,
such as resource scarcity, consumer preferences and
regulatory changes. These risks place animal factory
farming alongside other high impact sectors such as
oil and gas, mining and clothing & apparel as sectors
that require diligent monitoring and management.
2.2 FROM PANDEMICS TO POLLUTION,
ESG ISSUES THAT AFFECT KEY
FINANCIAL LEVERS
A range of diverse ESG issues have previously
resulted in financial harm to animal factory
farming-related investments, or have the potential
to do so. However, the links between ESG issues and
financial outcomes are complex and difficult to assess
– identifying material issues remains more of an art
than a science. Nevertheless, a hard line can often be
drawn between some short-term issues and financial
performance, such as in the case of droughts or food
contamination scares.
In other cases, it is challenging to separate the impacts
of ESG issues from other drivers of long-term value.
This includes the costs to companies in dealing with
community opposition to new developments or the
effects on investor confidence inspired by robust
sustainability disclosure. Finally, ESG risks may
actually counteract one another. For example, a
concern with animal welfare would emphasise
reducing the intensity of production but potentially
increase environmental impacts on a per animal basis.
This section provides responsible investors with a
better understanding of the relationships between key
ESG issues and their financial outcomes. A framework
has been developed to link ESG issues with four key
drivers of financial outcomes (referred to here as
‘financial levers’): production and price; market access;
reputation; and legal and regulatory. This framework is
shown in Figure 2.
The cost of H5N2 to the wider economy has been
estimated to be over $3bn.
The US egg shortage also created new markets
for companies like Hampton Creek whose egg free
products became highly sought after as the outbreak
continued and led to it being christened the fastest
growing food-company in history. (See case study 9).
fairr.org | 15
FINANCIAL
IMPACTS
FINANCIAL
LEVERS
Definitions
Relationship between ESG issues and their impacts on financial outcome.
•• Production and price: refers to the impacts on production, which are determined largely by weather
conditions and disease. Price risk refers to changes in the prices of inputs and outputs and is generally
external to production processes.
•• Market access: refers to the ability of producers to sell to different markets, including national markets
and specific customers (such as government bodies and private sector firms).
•• Reputation: refers to the damage done to a company’s reputation or brand.
•• Legal and regulatory: refers to the financial impact that may arise from changes in laws and
regulations or from violations of existing laws and regulations.
PROFITABILITY & INVESTMENT RETURNS
Animal factory farming, wider food value chain (e.g. food retailers, restaurants)
PRODUCTION &
PRICING
MARKET ACCESS
REPUTATION
LEGAL &
REGULATORY
2.3 ENVIRONMENTAL
ISSUES AND IMPACTS
Animal welfare
Disease outbreaks
Disease outbreaks
Disease outbreaks
Animal welfare
Water pollution
Resource scarcity
Global health
pandemics
Animal welfare
KEY
ISSUES
Natural hazards &
weather
Climate change
Social license to
operate
Global health
pandemics
Policy changes
Changing
consumer
preferences
Policy changes
Community impacts
(health, pollution,
livelihoods)
Labour violations
Weak regulatory
oversight
Sustainability
disclosure
RISK
CATEGORIES
Corporate
governance
ENVIRONMENTAL
SOCIAL
Environmental
regulations
Animal welfare
Antibiotic use
Local health
impacts
Global health
pandemics
Social license to
operate
Policy changes
Weak regulatory
oversight
GOVERNANCE
FIGURE 2: ESG issues as drivers of financial performance within the context of animal factory farming.
16 | fairr.org
13 environmental issues impact the animal factory
farming industry
Environmental issues are the most quantifiably
material of ESG issues
Legal and regulatory impacts are the most
common ‘E’ issue
Long term production risks due to environmental
factors are likely to be highly material
ENVIRONMENTAL ISSUES CAN IMPACT ALL
FOUR FINANCIAL LEVERS: PRODUCTION AND
PRICING, MARKET ACCESS, REPUTATION
AND LEGAL & REGULATORY
events have a strong bearing on changes to production
and the price of inputs and outputs, particularly feed.
In contrast, conventional, pasture-based livestock
operations are less reliant on imported feed.
LEGAL AND REGULATORY ISSUES ARE
KEY DRIVERS OF FINANCIAL RISK
Legal and regulatory impacts are the most frequent
consequence of environmental issues, associated with
11 out of the 13 identified issues. With respect to legal
and regulatory levers, there are numerous examples of
farms being penalised for violations of environmental laws.
For example, following a 500,000-gallon manure spill in
2008, the 1,000-cow dairy operation at Teabow Farms,
Maryland, was forced to reimburse the town of Walkersville
and Frederick County for providing emergency water
supplies, testing and other costs.37
The animal factory farming industry can cause
environmental harm but it can also be negatively
affected by environmental factors. Firstly, animal
factory farming can cause significant damage to the
local and global environment, through for example,
Given the significant harm to the environment caused
by animal factory farming (e.g. water pollution), the
industry as a whole is highly regulated in developed and
developing countries. Therefore, violations of national
environmental laws and regulations can result in heavy
water pollution, greenhouse gas emissions and
deforestation – the latter either directly through land
conversion for farms or indirectly through the clearing
of land for feed production. These characteristics are
key drivers of legal and regulatory risks for the industry.
fines and other types of penalties. For example, in 1997
US-based pork producer Smithfield Foods was fined
US$12.6 million for violating the Clean Water Act.
Secondly, animal factory farming is highly vulnerable to
harm caused by environmental factors. Individual farms,
companies and the industry as a whole can suffer as a
result of natural hazards, adverse weather conditions,
animal disease, resource scarcity (including access to
water and land) and climate change. These types of
THE INDUSTRY IS HIGHLY VULNERABLE
TO THE COMBINATION OF INCREASINGLY
DEMANDING ANIMAL WELFARE STANDARDS
AND THE GROWING BODY OF STRINGENT
ENVIRONMENTAL LAWS.
There is a clear trend towards the introduction of more
stringent environmental regulations in both developed
and developing countries. This is occurring alongside
fairr.org | 17
TABLE 2: Key environmental issues
IMPACT ON
FINANCIAL LEVERS
ISSUES
Disease outbreak
Production
& price
Market
a
a
Greenhouse gas (GHG) emissions
Deforestation and biodiversity loss
a
EXTENT OF
IMPACTS
Legal &
Reputation Regulatory
Magnitude
(systemic,
widespread,
isolated) Timescale
a
a
S
a
a
L
a
a
S–L
Natural hazards (e.g.
heatwaves, drought, flooding)
and weather conditions
a
S
Climate change
a
L
Water pollution
a
a
S–M
a
M–L
Water scarcity
a
Resource scarcity/competition for
resources (e.g. land, feed inputs)
a
a
a
M–L
Poor animal welfare
a
a
a
S
a
a
S
a
S–M
a
S
Waste generation
High water use
Air pollution
Soil degradation and
desertification
a
a
M
Definitions
Magnitude
Describes the extent of impacts from ESG issues in terms of geographical spread and diffusion across the value chain:
Systemic: impacts affecting a high proportion of operations across a large and potentially non-continuous area
Widespread: impacts affecting a high proportion of operations within a particular region or country
Isolated: localised impacts to individual operations or a small number of physically proximate operations.
Time-scale
Refers to the general time horizon in which financial impacts may be experienced:
Short-term (S) = evidence of significant impacts currently being experienced or may be measurable for up to two years
Medium-term (M) = significant impacts may be measurable over two years up to five years
Long-term (L) = significant impacts may be measurable over a period greater than five years
Uncertain = significant impacts may be measurable over an uncertain time period
18 | fairr.org
the introduction of higher animal welfare standards.
More stringent environmental laws would effectively
force companies to ‘internalise’ costs that have previously
been borne by society, undermining profitability.
Regulators are unlikely to rapidly introduce measures
that would cause dramatic economic harm to the
industry, particularly in locations where it is a key
provider of jobs and tax revenue – over time however,
such changes could erode margins within the sector.
The following examples illustrate some of the sector’s
key vulnerabilities to more stringent environmental laws:
•• Greenhouse gas emissions: The livestock sector
as a whole is responsible for 14.5% of man-made
greenhouse gas emissions,38 exposing the sector
to regulatory and social pressure to reduce its
contribution to climate change and potentially
imposing costs on producers.
•• Water pollution: The geographic concentration
of animal factory farming can lead to serious
contamination of water resources. Environmental
degradation caused by the substantial growth of
industrial hog production led the state of North
Carolina to permanently ban new hog CAFOs,
while simultaneously introducing more stringent
environmental regulations to protect water courses.
•• Farm animal welfare: the European Union has
introduced the most stringent legislation on this
issue. A 2010 report found that European “animal
welfare policies increase the costs of businesses
in farming” and that more demanding farm animal
welfare standards than in international competitors
“means that there is the potential for negative
impacts in the future.”39
PRODUCTION AND PRICING AFFECTED
BY SHORT AND LONG TERM
ENVIRONMENTAL ISSUES
Short-term production risks are highlighted by the
vulnerability of animal factory farming to natural
hazards (which are likely to increase in frequency
due to climate change) and regulatory responses
to disease outbreaks. There are at least eight
environmental issues with the potential to affect
productivity at the farm level, thereby reducing
financial performance at the facility and company level.
Natural hazards, particularly droughts and
heatwaves, have led to substantial financial impacts
by affecting production. These types of events can
be experienced by actors across large geographical
areas. For example:
•• Annual losses for the US dairy industry as a result of
heat stress have been calculated at US$897 million,
or almost US$100 per cow40 (see case study 2).
•• In 1999, Hurricane Floyd hit North Carolina causing
extensive flooding and damage to local farms. As a
major livestock-producing region, a large number of
livestock were lost, including more than two million
chickens, 1,180 cattle, 28,000 pigs and 752,970
turkeys.41 The estimated cost of the damage was
over US$13 million.
In addition to the immediate impacts on animal
factory farms, natural hazards can affect input and
output pricing throughout the meat value chain.
Extreme cold weather, for example, can result in
slower weight gains and affect livestock movement,
contributing to severe escalations in the price
of beef.42 Drought, on the other hand, combined with
high feed costs, can prompt unplanned sales by
farmers, temporarily reducing prices due to the
sudden increase in meat supply.43 Price volatility
for feed and meat presents challenges for actors
across the value chain.
he impact of emerging
T
diseases and accelerating
climate change means that
livestock sector-related
investments need to tackle
an ever evolving set of
production, pest and
disease problems –
often in rapidly declining
environmental conditions. 47
Global Agenda for Sustainable Livestock
fairr.org | 19
Regulatory responses to threats posed by disease
outbreaks can also lead to sudden and severe
consequences. For example, in April 2014, Japanese
officials ordered a farm owner to cull more than 100,000
chickens following tests which confirmed the presence of
avian influenza in Kumamoto prefecture, southern Japan.42
The authorities also restricted shipment of around 400,000
chickens in the prefecture.45 In the previous outbreak in
2010–2011, nearly two million chickens were culled across
nine prefectures.46 Similarly, an outbreak of PEDv (Porcine
Epidemic Diarrhoea Virus) caused severe economic
damage to US pig farmers in 2013 with large numbers of
hogs culled and restrictions placed on sales and transport.
Medium- to long-term production risks (such as
resource scarcity and climate change) are more likely to
have gradual financial impacts. Increasing competition
for scarce resources is recognised as a threat to animal
factory farming. According to the OECD and the FAO,
competition for land and water will limit the increase
in meat production in many regions and countries.48 In
addition, by concentrating meat production into fewer and
larger facilities, the industry becomes more reliant on feed
grain inputs due to the reduced role played by pasture-fed
production. This trend increases the financial risks to the
sector stemming from high and volatile feed grain costs.
[ Meat] supply response may
be limited in many countries
and regions by constraints
on natural resources [and]
competition for land and water
from alternative crops... 49
OECD-FAO
Animal factory farming has already been affected by
extreme weather events that were consistent with the
predictions of climate change. For example, record heat and
drought across much of Australia in 2014 led to the deaths
of thousands of cattle and forced farmers to send cattle to
slaughter. According to media reports, some farmers claimed
that without significant rains their operations would be
worthless and they would need to abandon their properties.50
20 | fairr.org
Similarly, severe drought in California forced many farmers
to sell all or some of their cattle in 2014 due to increased
costs and competition for feed. As of September 2014, the
US Department of Agriculture indicated that 83% of cattle in
California were located in areas of “exceptional drought”.51
The economic impacts of future heat stress on livestock
are likely to be severe, with intensively raised animals
facing unique vulnerabilities. Discounting the costs of
adaptation and extreme weather events, by 2080 the costs
to the UK livestock industry as a result of heat stress has
been estimated at £5.8 million in production losses and
£34 million in mortality losses.52 The impacts on animal
factory farming are likely to increase over the next few
decades but do not appear to be fully appreciated by the
industry (see Case study 2).
Securities and Exchange Commission (SEC) filing that it was
being sued by the State of Missouri as a result of alleged
environmental violations. In addition, the US Environmental
Protection Agency (EPA) had launched a criminal
investigation against the company.53 Both these actions
followed the discharge of a feed supplement into a local
waterway in May 2014, which resulted in the death of a large
number of fish as well as odour problems. In addition to
direct financial penalties (fines and compensation), criminal
charges may result in “government contract suspension and
debarment”.54 Tyson Foods has reportedly received
US$4.7 billion from US government contracts since 2000,
with current contracts worth an estimated US$500 million.
ven as factory farming bears
E
significant responsibility
for planetary warming, it
also numbers among the
industries that will feel the
impact of climate change
most keenly. 55
Animals & Society Institute
CASE STUDY 2: FACTORY-FARMED CATTLE FEEL THE HEAT FROM CLIMATE CHANGE
REPUTATIONAL RISKS AFFECT FINANCIAL
OUTCOMES AT COMPANY AND INDUSTRY SCALE
Environmental issues are a key driver of reputational risks,
but the financial consequences of these risks are difficult
to assess. Reputational risks can arise from both operational
and strategic issues. Poor animal welfare, disease outbreaks,
or incidents leading to severe water pollution are often due to
breakdowns in management controls. In contrast, conflicts
over land, water, and deforestation caused by the growing
of feed grain are strategic issues that must be addressed by
the entire industry (alongside other key stakeholders such as
government and civil society).
Nevertheless, the reputational risks arising from both
company-specific and industry-wide issues can produce
negative consequences for companies. These reputational
consequences include restricted access to credit and
markets, constrained ability to operate and expand, and the
loss of suppliers or customers. For example, in January
2008, celebrity chef Hugh Fearnley-Whittingstall targeted
global food retailer Tesco over its alleged stocking of
intensively reared chickens. Through a nationally televised
show in the UK, Fearnley-Whittingstall contended that
the broiler chickens sold by Tesco failed to meet the Farm
Animal Welfare Council’s ‘Five Freedoms’ standard that the
company had adopted as its animal welfare policy. The airing
of the series coincided with a 13.7% fall in the company’s
share price between 2nd and 15th January of that year.
The economic cost of heat stress can be significant. In the
US alone, heat stress is estimated to cost the dairy and beef
industry as much as US$897 million and US$369 million per
annum, respectively.56 For dairy cattle, this figure translates
to an annual average of US$100 per cow.57 However, future
climate change will alter regional temperature regimes in
many parts of the world. The latest Intergovernmental Panel
on Climate Change (IPCC) report, released in 2013, identifies
that future increases in heat stress are a significant threat to
the health of animals and humans alike.58
In part this is because pastured cattle are able to seek
shade, water and air movement to help keep cool.
In contrast, radiant heat is increased for feedlot cattle from
the dirt or concrete surfaces on which they are housed.
Companies involved in animal factory farming can
benefit from a better understanding of future heat
stress risks. Investors can also use information
such as this to develop a greater appreciation for the
potential extent and frequency of losses from heat
stress, and how this can impact financial performance.
New data reveals extent of global heat stress change
The current and future exposure of cattle to heat
stress has been assessed using the most up-to-date
climate model data. This analysis reveals the extent
of heat stress impacts as a result of climate change
at the global, national and subnational level:
•• By 2045, each cow globally will experience on average 29
Intensively farmed cows more vulnerable to heat stress
Cattle are very sensitive to heat stress, which can have
adverse physiological effects, resulting in decreased
milk yield, breeding inefficiency, slower weight gain and
general poor health. Heat stress symptoms occur when
the cow is unable to regulate its body temperature. Severe
heat stress can cause cattle to become uncoordinated
and weak, and can result, ultimately, in death.
more Heat Stress Days per year than they do at present.
•• Across all 247 countries, the number of days on
which Temperature Humidity Index (THI) exceeds
72F (i.e. a Heat Stress Day) will increase from 49%
to 58% by 2045, equating to an increase of 33 Heat
Stress Days per year.
•• The top 10 countries with the greatest head of cattle
account for 59% of the global total. On average,
these countries currently experience 160 Heat Stress
Days per year – a number which is set to rise to
more than 193 by 2045, representing a 21% increase.
Although all cattle are vulnerable to heat stress, feedlot
cattle are typically more at risk than pastured cattle.59
In another case, in August 2014 the US-based chicken,
beef and pork processor Tyson Foods announced in a
There are concerns within the industry that insufficient
attention has been paid to the future impacts of climate
change on the industry, particularly as temperatures
become warmer and more unpredictable, and less hardy
species of cattle are being introduced to food chains.60
fairr.org | 21
1
TEXAS, USA
Head of Cattle = 1,190,000
Increase in Heat Stress Days per year =
32 (from 148 to 180)
!3
Cattle in Texas currently experience Heat Stress
Days 41% of the time, rising to 49% by 2045.
Assuming the relationship between the loss
and heat stress is static, this increase in the
number of heat stress days per year (from 148
to 180 days) translates into a 25% increase in
economic losses.
1
2
2
ETHIOPIA
Head of Cattle = 53,990,061
Increase in Heat Stress Days per year =
76 (from 248 and 324)
4
The projected increase in the number of
Heat Stress Days (76 per year) is the greatest
of any country in the 100 countries with
greatest head of cattle. This means that cattle
in Ethiopia will face heat stress conditions on
9 days out of 10 by 2045.
5
3
UNITED KINGDOM
Head of Cattle = 9,900,000
Increase in Heat Stress Days per year =
3 (from 1 to 4)
4
MATO GROSSO, BRAZIL
Head of Cattle = 28,427,059
Increase in Heat Stress Days per year =
23 (from 320 to 344)
5
QUEENSLAND , AUSTRALIA
Head of Cattle = 12,800,000
Increase in Heat Stress Days per year =
33 (from 156 to 189)
Top ten cattle producing countries
by head of cattle, 2013
!
!
HEAT STRESS DAYS PER YEAR
(2026–2045)*
DAYS INCREASE
IN HEAT STRESS
101–120
!
81–100
331–365
121–150
61–80
301–330
91–120
41–60
271–300
61–90
21–40
241–270
31–60
<21
211–240
< 31
181–210
No data
!
151–180
* Heat Stress Days are calculated as the number of days
per year that the temperature-humidity index exceeds 72.
Data sources: Maplecroft, 2014; Hadley Centre, 2014; Met Office, 2014; FAOSTAT, 2014 | © Maplecroft, 2014
FIGURE 3: Future heat stress and impacts on key cattle producing countries
22 | fairr.org
fairr.org | 23
2.4 SOCIAL ISSUES
AND IMPACTS
11 social issues impact the animal factory
farming industry.
Health impacts from antibiotic misuse and pandemic
risk show high potential for material impacts.
Social issues are challenging to measure but put large
amounts of financial value at risk.
Reputational damage due to changing
consumer attitudes present both short-term
and long-term risk.
SOCIAL ISSUES ARE A KEY DRIVER OF
FINANCIAL OUTCOMES BUT CHALLENGING
TO IDENTIFY AND MEASURE
There is a tremendous amount of financial value
potentially at risk as a result of social issues.
However, it is difficult for companies involved in
animal factory farming or linked to the wider value
chain to fully grasp the implications as the relationship
between social issues and financial outcomes can be
unclear. There is also less of an emphasis on social
issues within the available literature. Therefore, the
emergence and extent of costs due to social issues is
often hard to predict, fully recognise and account for;
costs can also unfold over a long period of time. Each of
the social issues identified in Table 3: Key social issues,
apart from one (labour availability and productivity),
includes a significant reputational component.
This alone creates additional challenges in
specifying the financial impact.
REPUTATIONAL AND MARKET
CHALLENGES ARE AMPLIFIED BY
STRENGTHENING SOCIAL ATTITUDES
Changing consumer preferences around animal
welfare standards present longer-term risks and
opportunities for investment in animal factory
farming. US surveys have found that 95% of
consumers want farm animals to be treated well61 and
more than 80% of people feel it is important that the
chickens they eat are raised humanely.62 In the UK, a
2012 report published by the RSPCA’s Freedom Food
farm assurance scheme found that for 48% of Britons
animal welfare is either ‘extremely’ or ‘very’ important’
24 | fairr.org
to them when choosing food.63 This confirms multiple
surveys indicating that UK and European citizens
would like to see an improvement in the welfare of
farmed animals.64 Companies failing to respond to
shifts in public perceptions risk missing out on market
opportunities. In contrast, companies may be able
to future-proof their investments by recognising the
importance of farm animal welfare and associated
issues such as sustainability.
Increasing public concern over farm animal
welfare and associated food safety standards
heightens reputational risks to companies and
therefore potential financial impacts. The food
sector as a whole is sensitive to changing public
sentiment as regards animal welfare issues.
For example, research by academics at Kansas State
University found that that media coverage of animal
welfare issues in the US reduced pork and poultry
demand over the study period.65 Mounting public
concern related to these issues also means that it
is more likely that companies will face scrutiny from
pressure groups and the media. There are multiple
examples from Europe, North America and Asia where
companies have been targeted because of their links
with industrial meat production:
•• In July 2014, an undercover investigation by
the Guardian newspaper revealed multiple
alleged hygiene failings in the UK poultry industry.66
The report led to questions over the auditing systems
used by leading supermarkets to ensure good
hygiene standards and prompted several of them
to launch emergency investigations into their
chicken suppliers.
•• In July 2014, an undercover TV investigation revealed
that a Shanghai meat factory was selling out-of-date
Companies implicated in poor animal welfare
scandals may face severe reputational damage
and consumer boycotts. Clients may also cancel
contracts or avoid purchasing from companies that
have been linked to these practices. Corporate
approaches to farm animal welfare are seen
increasingly by investors as an indicator of how
companies respond to shifting social attitudes and
consumer preferences, and can also reveal how well
they are positioned to manage risks embedded within
their supply chains.
e believe there are also
W
a number of potential
headline risks that could
tarnish the image of
restaurant companies,
including concerns over
animal cruelty… 70
Citigroup Global Markets
TABLE 3: Key social issues
IMPACT ON
FINANCIAL LEVERS
ISSUES
Excessive antibiotic use
a
Spread of infectious diseases/
global health pandemics
a
Market
access
Legal &
Reputation Regulatory
Magnitude
(systemic,
widespread,
isolated) Timescale
a
a
L
a
a
a
S
Social backlash against poor
animal welfare standards
a
a
a
S
Changing consumer preferences
a
a
M–L
Poor working conditions
a
a
S
Human rights violations
a
a
S
a
M–L
a
M–L
Labour availability and
productivity
chicken and beef to a number of US fast food chains,
including McDonald’s and Yum Brands, which owns
KFC and Pizza Hut. Although the chains immediately
stopped using the supplier, both experienced drops
in their share prices.
•• In 2008, evidence of animal cruelty and health concerns
were brought against Californian-based Hallmark/
Westland Meat Packing Company, prompting the US
Department of Agriculture to recall over 140 million
pounds of beef (the largest beef recall in US history).
A US$500 million court judgement was also made
against the company, and it went bankrupt in 2012.
Production
& price
EXTENT OF
IMPACTS
a
Health impacts on surrounding
communities
a
Loss of rural livelihoods
a
Land rights violations
a
a
U
Social licence to operate
compromised due to opposition
to new development
a
a
S–M
U
For definitions and colour key, refer to Table 2 on page 18.
fairr.org | 25
CASE STUDY 3: EXPIRED MEAT SCANDAL CONSUMES VALUE
OF FAST-FOOD COMPANIES ALONG SUPPLY CHAIN
On 20 July 2014, a major food safety scandal in China
broke in the local and international media. Following
a television investigation, Chinese authorities accused
Shanghai Husi Food Co. (owned by US-based
OSI Group) of intentionally selling meat beyond its
shelf life. The food manufacturer had been supplying
fast-food chain restaurants in China and Japan,
including Yum! Brands, McDonald’s and Starbucks.
In the aftermath of the news, buyers quickly cancelled
their orders from the Shanghai supplier and in some
cases the OSI Group as a whole. Within days the
OSI Group had also withdrawn all implicated products
from the marketplace. Despite this, the negative
news coverage rapidly hit fast-food sales in China,
prompting a decline in the full-year earnings of fastfood restaurants as well as a drop in share prices.
Referring to the Shanghai incident in its August
quarterly report, McDonald’s issued a warning that “As a
result of the China supplier issue, the Company’s global
comparable sales forecast for 2014 is now at risk.”67
In a financial report released just days after the incident
broke, Yum! Brands stated that “The result has been
a significant, negative impact to same-store sales at
both KFC and Pizza Hut in China over the past 10 days…
it is too early to know how quickly sales will rebound
in China and the corresponding full-year financial
impact to Yum! Brands. However, if the significant sales
impact is sustained, it will have a material effect on
full-year earnings per share.”68 In its October quarterly
report, Yum! said that “since July 21st, China Division
has experienced a significant, negative impact to sales
and profits at both KFC and Pizza Hut. While sales are
rebounding, same-store sales continue to be negative.”69
Financial analysis for July to October (see Figure 4)
shows that the fall in sales had a substantial impact
on the company share prices of Yum! and McDonald’s.
The companies recorded a fall in share price of 8.29%
and 7.4%, and a drop in equity of US$3.6 billion and
US$7.2 billion, respectively, between 18th July and
20th October 2014.
By November 2014, the value of Yum! and McDonald’s
share prices and equity had risen again, although
they still remained lower than that recorded before
the scandal broke. Comparably, Starbucks, who were
less visibly associated with Shanghai Husi Food Co.,
reported a less significant drop in equity of US$2.4 billion
between 18th July and 20th October 2014. Furthermore,
by November 2014, Starbuck’s equity value had risen to
levels almost matching that prior to the scandal breaking.
130
125
120
20 July 2014: Major food safety
scandal breaks, implicating
several US fast food chains
SHARE PRICE
115
110
McDonalds
105
YUM! Brands
100
Starbucks
95
90
18 July–20 October: Yum! Brands share price
falls 8.29%, McDonald's share price falls 7.4%
85
80
May
Jun
Jul
Aug
Sep
Oct
DATE (2014)
FIGURE 4: Financial impact of food safety scandal to fast-food chains in 2014
26 | fairr.org
In the case of animal
welfare, failure to keep pace
with changing consumer
expectations and market
opportunities could put
companies and their investors
at a competitive disadvantage
in an increasingly global
marketplace. 71
Source: Bloomberg
International Finance Corporation
HEALTH IMPACTS, PARTICULARLY
FROM ANTIBIOTIC USE AND POTENTIAL
PANDEMICS, POSE SECTOR-WIDE
REPUTATIONAL AND REGULATORY RISK
Global health pandemics and public concerns over
animal welfare have resulted in clear financial
impacts to the agricultural sector as a whole and
to individual companies. Animal factory farming has
been implicated in a number of global health scares.
There is evidence that the 2009 H1N1 strain of swine
flu – which the CDC estimates resulted in between
151,700 and 574,400 deaths globally72 – first originated
in US factory farms in 1998.73 In addition, poultry factory
farming was implicated in the emergence and spread
of bird flu (or avian influenza) in both 2015 and 2003.
The large number of densely confined birds facilitates
the mutation of viruses into harmful strains and
international trade contributes to the global spread.
The industry at both a national and regional level is
highly exposed to negative financial consequences in
the event of disease outbreak. According to one study,
the H1N1 outbreak led to an 11% drop in global pork
trade.74 In the US, farmers were estimated to be losing
US$30 to US$35 on every sold pig. Major producers
such as Tyson Foods and Smithfields Foods were
reducing their herds and selling assets, and thousands
of producers were predicted to be put out of business.75
The sudden reduction in consumer demand saw pork
prices drop in many countries. Market access was also
restricted for many producers as major importers such
as Russia and China introduced import bans on pork
from the US (see Case study 4 for further information on
the financial impacts of global health pandemics and
food safety scandals at a sector level.).
esistance in the
R
foodborne zoonotic
bacteria Salmonella and
Campylobacter is clearly
linked to antibiotic use in
food animals, and foodborne
diseases caused by such
resistant bacteria are well
documented in people. 76
World Health Organization
The animal factory farming industry may suffer
reputational impacts and is subject to unforeseen costs
due to impacts to human health arising from excessive
antibiotic use. According to estimates, approximately
50% of all antibiotics used in the UK and 80% of all
antibiotics sold in the US are given to farm animals.77
Moreover, farm use of antibiotics has increased over
the past decade while human medical use is declining.78
Antibiotic resistance presents an increasing human
and animal health risk globally, linked to a higher risk
of death and more severe illness. The additional costs
of healthcare associated with antibiotic resistance
are huge – estimated costs to the US economy reach
as high as US$20 billion in direct healthcare costs.79
There is substantial debate over the use of antibiotics
within animal factory farming, particularly those
considered critically important for human and animal
medicine. The debate is driven by concern over the
development of drug-resistant bacteria in humans, such
as E. coli, Salmonella and MRSA, which can be linked
to high antibiotic use in farm animals. In June 2015 an
investigation by the Guardian newspaper in the UK found
that the livestock-associated MRSA CC398 virus, which
is linked to the intensive farming of pigs, had spread to
humans. In Denmark 1,271 people contracted the CC398
bug as a result of the infection80.
fairr.org | 27
Some companies within the industry are beginning to
address reputational risks presented by antibiotic use.
In the last two years, a number of large food producers
that operate animal factory farms have taken significant
steps to reduce the amount of antibiotics they use.
In September 2014, Perdue Farms, the third largest
chicken producer in the US, announced that it had
stopped using antibiotics at its chicken hatcheries.81
The following month Tyson Foods – the second
largest producer of chicken, beef and pork globally –
announced it was no longer using antibiotics in its
35 chicken hatcheries.82 Changing consumer attitudes
towards antibiotic use are also presenting commercial
opportunities. Despite the risk of increased production
costs, sales of antibiotic-free meat are growing quickly
– indicating increased consumer demand. According to
market research, the value of US sales of antibiotic-free
chicken rose by 34% in 2013.83
Regulatory restrictions on the use of antibiotics in
farm animals will result in financial harm, as animal
factory farming is dependent on high use of antibiotics
as a main driver of profitability. Within the industrial
model, antibiotics are used for both prevention and
treatment of disease and for growth promotion.
Restrictions on prophylactic antibiotic use could
undermine productivity due to the increased prevalence
of disease and sickness in densely packed facilities.
More comprehensive bans on antibiotics that constrain
drug use in the entire chain of chicken production
(including parent birds) would cause more significant
financial harm, as they would require a complete
restructuring of the infrastructure of the animal
factory farm model.
antibiotics in the US would cost producers US$4.50 per
animal during the first year and cost the industry over
US$700 million over a 10-year period (at 2003 prices).
However, these European bans remain limited as they
only cover drugs deemed presently valuable for humans
and treatment of birds for direct human consumption,
rather than addressing the full chain of chicken production
(including parent birds). Therefore, this negative impact
on industry may be minimal compared to what could be
on the horizon in the regulatory future, as consumers
and governments begin to demand more meaningful
elimination of drugs from the production system.
Some European countries, including the Netherlands
and Denmark, have banned the use of preventative
A related investment risk stems from trade
restrictions arising over the use of antibiotics in
animal feed. For example, in 1989 the EU banned
the import of beef from animals raised using growth
antibiotics in farming, while it is still legal in the UK
and the USA (with antibiotic use for growth promotion
also legal in the USA). There is mixed evidence relating
to the economic impact of these bans, as they do not
apply to the whole supply chain and only cover certain
antibiotics. For example, according to the World Health
Organisation (WHO), Denmark’s 1998 ban on use of
some antibiotics for broiler chickens and swine did
not significantly affect farmers’ incomes; in contrast
industry-funded research found that several large
producers experienced severe health problems and
large costs. It has been estimated that a similar ban on
hormones – the move was in response to concerns
about the addition of six hormones to the vast majority
of American beef. Now rising fears over antibiotic
resistance are prompting many jurisdictions, including
the EU, New Zealand and South Korea, to introduce
restrictions and bans on the import of livestock and
poultry products grown with antimicrobial drugs.
The introduction of these measures can have a negative
impact on producers in countries with more lax
regulations. While it is difficult to predict or quantify the
aggregate magnitude of impact to affected producers, it
is an area that investors can readily monitor and assess.
28 | fairr.org
LOCAL IMPACTS UNDERMINE THE
INDUSTRY’S REPUTATION, JEOPARDISING
SOCIAL LICENSE TO OPERATE
There are multiple social issues linked to the impacts
of animal factory farming on those working in the
industry and on surrounding local communities.
Social issues include impacts on rural livelihoods and
health, poor working conditions, and human rights
and land rights violations. Where adverse impacts are
experienced by workers – including illegal, migrant or
seasonal workers, those on low wages, and child,
forced or trafficked workers – costs to the company
are likely to arise in the form of fines, compensation
or legal fees, and reputational harm.
In 2005, Human Rights Watch found that in the US,
“meat and poultry industry producers set up the
workplaces and practices that create [health and
safety] dangers, but they treat the resulting mayhem
as a normal, natural part of the production process,
not as what it is – repeated violations of international
human rights standards”. In response to a high number
of fatalities and injuries on Wisconsin dairy farms, the
Occupational Safety and Health Administration (OSHA)
established a more rigorous inspection regime in 2012.84
Approximately 40% of the state’s 34,000 dairy farm
labourers are immigrants, the implication being that
they are less likely to be familiar with health and safety
rights and responsibilities than domestic workers.
As animal factory farming becomes more dominant
in Asia, low labour standards and enforcement
regimes are likely to pose increasing reputational
risks to investors.
Another often cited example of mismanaged social
risks is AgriProcessors slaughterhouse (now AgriStar)
in Postville, Iowa. In this case, a 2004 undercover expose
into animal cruelty prompted investigations into worker
rights abuses and the use of undocumented workers.
In 2008 the plant was subject to the largest singlesite immigration raid in US history and the plant went
bankrupt as a result85.
When animal factory farms impact on local
communities, costs borne by companies are likely to
arise as a result of conflict. Issues such as the loss
of rural livelihoods or health impacts may become
intertwined with environmental concerns and result in
community opposition to proposed or current facilities.
Examples of community opposition to factory farms
exist in multiple jurisdictions, in both developed and
developing countries.
In 2014, community opposition was mobilised against
a proposed 25,000-pig factory farm near Foston, in the
county of Derbyshire, UK. The concerns cited by the
opposition group included: animal welfare; the use of
antibiotics, and their potential impact on human health;
air pollution and bad odours; the economic effects on
smaller producers, and increased traffic.86 The strength
of opposition contributed to lengthy delays in the
approvals process for the Foston Farm. The farm was
first proposed in 2009 and had still not been approved
as of November 2014.
In Germany, civil society halted the development of 11
factory farming operations within a four-month period87
while in the Netherlands, a judge ruled against what
would have been the country’s first animal factory
farm – a proposed development for housing 1.1 million
chickens and 35,000 pigs.88 There is very limited
empirical evidence as to the economic costs of these
events to the affected companies. However, it is likely
that costs will emerge as a result of delays during
the approval or construction process, extra staff time
required to manage conflicts, and reduced productivity
due to work disruptions.
fairr.org | 29
CASE STUDY 4: RISK OF PANDEMIC DRIVES UNDERPERFORMANCE OF FOOD COMPANIES
Global health pandemics – such as swine flu,
avian influenza (bird flu) and Bovine Spongiform
Encephalopathy (BSE) – pose a major financial risk
to investments in companies linked to animal factory
farming, including those in the wider meat supply chain.
It is difficult to disentangle the financial impacts on
companies arising from pandemic outbreaks from other
factors that can affect performance. However, analysis of
the US swine flu outbreak of 2009 and the China avian flu
outbreak of 2013 indicates a correlation between these
events and the underperformance of companies with
significant exposure to the pork and poultry sectors.
US-based Smithfield Foods, Tyson Foods and Hormel
Foods were three of the world’s largest pork producers.
As illustrated in Figure 5, each company suffered a drop in
share price following initial confirmation by US authorities
of several human cases of swine flu in April 2009. Between
14 April and 28 April, Smithfield Foods experienced the
greatest decline, with shares dropping 12.8%. The company
was linked to the initial disease outbreak at a Mexican
subsidiary. Tyson share prices declined by 5.6% over the
period and Hormel shares dropped by 3.1%. In comparison,
the MSCI US Agriculture and Food Chain Index – which
includes US listed companies operating across the
agriculture food chain – fell by 1.5% over the period.
SWINE FLU (2009)
The 2009–2010 H1N1 strain of swine flu began in
spring 2009, spreading to the US via Mexico. As the
outbreak unfolded in April 2009, investors responded
by moving money from exposed sectors, with shares
in pork producers, airlines and hotel firms suffering
as a result. The outbreak forced major US producers
to reduce their swine herds and sell assets, while the
viability of thousands of smaller producers was also
threatened.89 By January 2010, there were confirmed
cases in 171 countries and 14,738 deaths attributed to
the virus (although the true figure is likely to be much
higher90&91). The US experienced more deaths than any
other country (2,328).
Tyson Foods and Hormel Foods make reference to
swine flu in their financial reports for 2009, outlining
the risk to business from impacts on production,
export restrictions and changing demand for pork
products. Smithfield stated that the company’s first
quarter 2009 loss “reflects the continuing adverse
business environment in the hog production segment …
the sharply lower hog prices reflect the impact of the
(H1N1) outbreak at the end of the prior quarter…”92
the easing of concerns over the pandemic and a better
understanding of the risks presented by the virus, as well
as a general improvement in economic conditions.
is involved in the manufacture and distribution of
feedstuffs, and meat and milk products. The company
was China’s biggest poultry supplier in 2012.
AVIAN FLU (2013)
Between 29 March and 31 December 2013, the share
prices of both companies underperformed relative to many
industry peers and the MSCI Asia Agriculture and Food
Chain Index for large periods. Over these months shares
in CPF fell by 15%, reducing its market capitalisation by
US$1.23 billion. It was not the first time the company had
been adversely affected by the virus. During a bird flu
outbreak in 2003–04 the company’s shares experienced a
sudden 6.5% drop after Thailand confirmed its first human
deaths from the virus and Japan and the EU imposed bans
on Thai chicken products.94
The H7N9 strain of bird flu was first recorded in China in
March 2013. According to the World Health Organisation,
most cases of human infection were reported following
exposure to live poultry and contaminated environments.
The virus spread prompted culling and restrictions on live
poultry markets in China, resulting in significant economic
impacts. A 2014 study of the February to May 2013 outbreak
estimates poultry industry losses of US$1.24 billion in
the ten affected provinces and US$0.59 billion across
eight neighbouring, unaffected provinces, with lost sales
accounting for the majority of the losses.93
Several large poultry producers have been adversely
affected by the most recent outbreak, including
Thai-based Charoen Pokphand Foods PCL (CPF)
and Chinese company New Hope Liuhe Co Ltd.
CPF is Thailand’s largest agribusiness, operating in
12 countries including China where they are heavily
involved in swine and poultry production. New Hope
Liuhe operates across multiple countries in Asia and
Although the impact on share prices was significant, it was
also short-lived and these large companies performed
well over the course of the year. In part this was due to
200
Although the share price of New Hope Liuhe increased by
20% between March and December 2013, between the end of
March and 26 July the share price declined by 23%. According
to Forbes Asia, as a result of bird flu net profits at New Hope
Liuhe dropped 15% in the first half of the year to US$141
million.95 The company’s Chairman Liu Yonghao stated
that bird flu had “tremendously impacted” Chinese poultry
farmers96 and that in response to the virus he was looking to
invest outside of China, mainly in developed countries.97
29 March to 31 December: CPF and New Hope Liuhe share prices
underperform against MSCI Asia Agriculture & Food Chain Index;
180
Source: Bloomberg
160
SHARE PRICE
160
140
SHARE PRICE
120
120
100
100
80
80
40
20
Jan
Feb
Mar
Apr
May
Jun
Jul
Aug
Sep
Oct
Nov
40
Jan
Hormel foods
Smithfield foods
MSCI US Agriculture & Food Chain Index
Feb
Mar
Apr
29 March to 26 July: New Hope
Liuhe share price falls 23%
May
Jun
Jul
Aug
Sep
29 March to 31 December: New
Hope Liuhe share price falls 15%
Oct
Nov
Dec
2013
New Hope Liuhe Co Ltd
Dec
2014
Tyson foods
March 2013: H7N9 strain of
bird flu first recorded in China
60
US authorities confirmed several human cases of swine flu in
April 2009. Following these announcements between 14 April
and 28 April, Smithfield's shares dropped 12.8%, Tyson's
dropped 5.6% and Hormel dropped by 3.1%. The MSCI US
Agriculture & Food Chain Index fell by 1.5% over this period.
60
Source: Bloomberg
Charoen Pokphand Foods Public Co. Ltd
MSCI Asia Agriculture & Food Chain Index
Shanghai Greencourt Investment Group
Henan Shuanghui Investment & Development
Shenzhen Agricultural Products
Beijing Shunxin Agriculture
Jiangxi Huangshanghuang Group Food
Jiangxi Huangshanghuang Group Food
Chuying Agro-Pastoral Group
Guangdong Guanghong Holdings
FIGURE 6: Major Asian poultry firms see share price declines during avian influenza outbreak, 2013
FIGURE 5: US pork producers see share prices plummet following swine flu outbreak, Apr 2009
30 | fairr.org
140
fairr.org | 31
2.5 GOVERNANCE ISSUES
AND IMPACTS
4 broad governance issues impact the animal
factory farming industry
Animal factory farming vulnerable to changes to
the commercial context in which it operates
Changes in government policy, particularly subsidy
support, present significant financial risk
Shifting production to developing countries
presents strong longer-term risk due to less
robust corporate governance in these countries
GOVERNANCE ISSUES DETERMINED BY
CORPORATE AND POLITICAL DECISION MAKING
Within this report, governance refers to both internal
corporate management activities and the external
commercial context as defined by politics and regulatory
decisions. Like most industries, animal factory farming
is highly vulnerable to changes to the commercial context
in which it operates. Strong evidence suggests that the
future success of the industry is dependent on continuity
in government policy. This is particularly true with respect
to direct and indirect subsidy support. There is also
growing recognition among corporations and investors that
companies which can show they are more prepared for
the ESG issues they face are better positioned to manage
them. In turn, enhanced disclosure on ESG issues can
help to attract investment and drive long-term value.98
POLICY CHANGES COULD
DRAMATICALLY AFFECT PRODUCTION,
PRICING AND MARKET ACCESS
In the US, the animal factory farming industry receives
public support in the form of funding (US$125 million in
2007) to help prevent pollution from farms, and publicly
met remediation costs (US$56 million just in Kansas)
for cleaning up the land under hog and dairy CAFOs.99
In China, animal factory farming has received government
support via various subsidies and land access.100
IMPACT ON
FINANCIAL LEVERS
Academic research shows that changes to the Farm Bill
saw the US broiler industry gain average monetary
benefits of US$1.25 billion per year between 1997 and
2005.104 The research concluded that although the
Farm Bill was designed to support family farmers,
agribusiness and industrial livestock operations are major
beneficiaries. Furthermore, it found that government
policies were effectively driving industrialisation in the
livestock production system by “making factory farms
appear more cost efficient than diversified, independent
operations that grow their own feed.”
Changes in government policy, particularly
subsidy support, present significant financial risks to
animal factory farming. The industry receives subsidy
support in both developed and developing countries.
The majority of attention has focused on the US, where
the animal factory farming industry receives direct and
indirect government support. Direct support includes
insurance payments, which protect farming operations
from income losses stemming from weather-related
disasters or reduced revenue. Indirect support arrives
via the purchase of subsidised grain (or policies which
result in crop overproduction), and public funding to
help prevent pollution and remediate polluted land.
The range and significance of ESG issues related to
animal factory farming underscores the importance
of strong corporate sustainability disclosure.
The evidence presented above includes multiple
examples of how ESG issues have impacted financial
performance. However, animal factory farming is exposed
to ESG issues that can result in financial impacts over
medium and longer term horizons. Disclosure and
transparency can provide investors with insight into
how companies are managing their ESG exposure.
Additionally, although not specific to animal factory
farming, there is evidence showing that a strong ESG
Production
& price
Market
access
Policy changes (e.g. removal of
government subsidies, changes
to policy, trade restrictions)
a
a
Weak regulatory oversight
a
a
ISSUES
Feed prices often account for the largest proportion
of operating costs. Therefore, increasing feed costs
are likely to have a material impact on financial
performance. Evidence indicates that grain subsidies
created over a number of decades indirectly benefit
CAFOs in the US by almost US$4 billion annually.101
As a result of the US Farm Bill (1996), commodity
prices dropped to 26% below production costs,
thereby dramatically reducing feed costs for industrial
operations.102 This decline reduced hog CAFO operating
costs by 15%, saving these types of operations
US$947 million annually between 1997 and 2005.103
GOOD CORPORATE GOVERNANCE
REQUIRED TO MANAGE EMERGING
ESG RISKS AND OPPORTUNITIES
32 | fairr.org
TABLE 3: Key governance issues
EXTENT OF
IMPACTS
Legal &
Reputation Regulatory
a
Sustainability disclosure
a
Corporate governance
a
Magnitude
(systemic,
widespread,
isolated) Timescale
a
M
a
S
S–M
a
S–M
For definitions and colour key, refer to Table 2 on page 18.
reputation can help to shield companies from financial
harm.105 Overall, evidence suggests that companies
with high ratings for corporate social responsibility (CSR)
and ESG issues enjoy a lower cost of capital.106
Such companies are also a lower risk to investors.107
Large corporations with significant exposure to animal
factory farming (either directly through ownership of
operations or indirectly as a result of their position with
the wider value chain) have begun to focus on improving
their sustainability reporting. Smithfield Foods released
an integrated report in 2013, fulfilling the application level
A from the Global Reporting Initiative for the first time.
The company’s “reputation for quality and safety” was a
cited as a key factor in Chinese pork producer, WH Group’s
US$4.7-billion acquisition of Smithfield in 2013.108
Good corporate governance is also likely to become
an increasingly important factor due to the exposure
of animal factory farming to ESG issues and high
levels of industry growth in developing economies.
There is strong empirical evidence that good corporate
governance affects overall company performance,109
although there is little information specific to animal
factory farming. It is also recognised that a key function
of corporate governance is, according to the OECD, to
ensure that “risks are understood, managed and, when
appropriate, communicated”.110 The substantial
and potentially material financial risks presented by
ESG issues underscore the importance of strong corporate
governance with respect to animal factory farming.
hina’s food industry
C
has faced a real crisis
of confidence over
the past seven years.
Despite government
efforts, the number of
scandals continues to
keep coming. [Should the
US trust Chinese food
processing given] China’s
poor enforcement of their
own laws and rampant
corruption? 113
Chris Smith (US Republican politician)
fairr.org | 33
Furthermore, animal factory farming is assuming a more
dominant role in developing countries, where corporate
governance is less robust than in developed countries.
Less developed countries are expected to account for
77% of additional meat output growth between 2012 and
2021.111 Despite being lauded for ‘quality and safety’,
corporate governance concerns were among the reasons
why the China’s WH Group’s initial IPO was cancelled in
April 2014.112 In contrast, UK poultry producer Moy Park
demonstrates a robust approach to corporate governance
and a progressive attitude towards sustainable meat
production. These factors have contributed to a positive
outlook and keen investor interest in the company’s
potential IPO (see Case study 5).
Legal and regulatory frameworks and government
oversight is also generally weaker in developing
countries, increasing the potential risks associated
with many ESG issues. For example, the explosion in
pig production in the Chinese city of Jiaxing in Zheijiang
province has led to severe environmental damage,
improper production and processing practices, and a
black market meat trade. The severity of the problem
was brought to international attention when, in
March 2013, more than 16,000 dead pigs were found
in the region’s waterways, threatening drinking supplies.
In locations such as these there will be a greater onus
on companies to ensure they are mitigating risks to
their own operations and in their supply chains.
CASE STUDY 5: STRONG GOVERNANCE OF FARM ANIMAL
WELFARE ISSUES BOOSTS REVENUE AND INVESTOR INTEREST
UK poultry producer Moy Park, was purchased by
Brazil-based chicken giant JBS in June 2015, for a
reported $1.5bn.
Moy Park’s progressive strategy to focus on marketing
its high-quality, high-welfare chicken appears to
support strong sales and the company’s continued
development. The company has not been implicated
in recent food safety scandals involving the UK poultry
industry. In the second quarter of 2014, Moy Park’s
revenue rose by 0.6% to £356.4 million.114
Moy Park was the first company in the UK to introduce
free range and organic birds. The company is now the
largest producer of organic and free range chicken
in the UK and Ireland.115 Although the company’s
chickens are raised using in a variety of ways – organic,
free range, indoors – all methods aim towards higher
welfare standards. For example, Moy Park has
stringent stocking density standards and antibioticuse policies.116 According to Moy Park’s principles, it is
committed to working with its farmers to ensure
that the best welfare conditions are provided for
all of its birds.117
34 | fairr.org
The company’s animal welfare programme is based on
the concept of the Five Freedoms, in which all Moy Park
farmers must be trained. Furthermore, the company
has a fully traceable supply chain in place and actively
works to reduce its carbon footprint. It also operates
an ‘Antimicrobial Stewardship Forum’, which aims to
educate poultry producers in antimicrobial resistance
and best practice to reduce usage of antimicrobials.
Sustainability disclosure is supported through a
plethora of literature, including Moy Park’s ‘Farming
Way’ booklet and Corporate Responsibility brochures,
as well as the company website. Moy Park’s clear
commitment to corporate responsibility and
responsible farming has been awarded in several
ways. The Business Benchmark on Farm Animal
Welfare (BBFAW), which assesses companies on their
approach to managing farm animal welfare, recognises
the efforts of Moy Park (under the Marfrig Group).
In 2013, Moy Park reached Tier 2 (‘Integral to Business
Strategy’) of the BBFAW, improving from Tier 4 (‘Making
Progress on Implementation’) in 2012. Moy Park was
also the first poultry company to be recognised in the
Business in the Community’s Corporate Responsibility
Index. This was improved upon in 2014, when the
company was awarded a ‘3 star’ rating in the index.
CHAPTER 3:
INTEGRATING ANIMAL FACTORY FARMING
RISKS INTO INVESTMENT PROCESSES
3.1 OVERVIEW
The food and agriculture sector presents significant
investment opportunities with a growing world
population driving ever-increasing demands for more
food. However there are signs of growing recognition
amongst stakeholders, including many in the financial
sector, that investments in agriculture should not
negatively affect people, livelihoods and the natural
environment.
Within this context, animal factory farming is under
increasing scrutiny and some leading investors are
looking more carefully at risks associated with the
sector including development finance institutions
and those who define themselves as mainstream
responsible investors.
3.2 INVESTING IN FOOD AND
AGRICULTURE
The food and agriculture sector presents significant
investment opportunity. Overall food production
must increase by around 70% between 2005/07 and
2050 to meet rising global food need.118 This is being
driven by population growth and, currently, by greater
demand for animal protein as a result of rising wealth.
Meanwhile, there has also been an upward trend
in food prices in recent years. On the back of these
fundamentals, appetite for agricultural investment
is strong and can be met through several options
including commodity futures, equity in farming and
food production companies, and agricultural ETFs.
For many investors the sector is attractive because of
the significant potential for positive returns or value
preservation. It also provides an opportunity to diversify
portfolios, manage inflation risks and provide exposure
to emerging markets.
usinesses that address
B
or enhance animal welfare
are likely to win or retain a
competitive advantage in the
global marketplace 119
International Finance Corporation
However, there are signs that the financial community
is beginning to recognise the need to ensure that
investments in agriculture, including meat production,
are responsible and do not negatively affect people,
livelihoods and the natural environment. In response,
a number of instruments – guidelines, compacts,
principles, standards, etc. – have been created to help
inform responsible investment across the agricultural
sector and specific sub-sectors, such as livestock
production. For example, the International Finance
Corporation (IFC) issued voluntary guidelines and
recommendations for clients on how to incorporate animal
welfare considerations in intensive livestock operations.
Instruments such as these are increasingly being used
by investors to help improve financial performance,
manage risk and contribute to the economic, social and
environmental sustainability of the agricultural sector (see
Case study 6: International financial institutions get on the
front foot to monitor factory farms).
There is also growing engagement by investors on
ESG concerns specifically related to animal factory
farming. Led by the international financial institutions,
a small group of private investors are now looking
more carefully at risks associated with poor animal
welfare which primarily stem from the proliferation of
animal factory farming. Awareness of the additional
ESG challenges that are linked to the intensification
fairr.org | 35
of livestock production is also rising. Largely within
the context of responsible investment, animal factory
farming risks are:
•• Being integrated into ESG research
and decision making;
•• The focus of engagement and active
ownership; and
•• Providing the basis of greater
demands for disclosure.
3.3 INTEGRATING ANIMAL
FACTORY FARMING RISKS INTO
INVESTMENT PROCESSES
INTEGRATING ANIMAL FACTORY
FARMING RISKS INTO ESG RESEARCH
AND DECISION MAKING
Integrating animal factory farming risks into ESG
research and decision making helps investors to
CASE STUDY 6: INTERNATIONAL FINANCIAL INSTITUTIONS
GET ON THE FRONT FOOT TO MONITOR FACTORY FARMS
Several international financial institutions (IFIs) have
established policies, guidelines and tools to ensure
that they do not fund projects that would result in
significant environmental or social harm, including
those that would be considered animal factory
farming. Pressure from outside stakeholders
(such as NGOs) has encouraged financial institutions
to consider the environmental and social dimensions
of their investments. These same pressures are
helping to driving improved practice within the
financial sector, such as how issues such as
animal factory farming should be treated.
Key examples of how IFIs have sought to influence
investment in animal factory farming include:
World Bank: A 2001 World Bank report
recommended that the organisation “avoid funding
large-scale commercial, grain-fed feedlot systems
and industrial milk, pork and poultry production
except to improve the public good areas of
environment and food safety.”120
International Finance Corporation (IFC):
In 2006, the (IFC) incorporated the issue of animal
welfare in intensive livestock operations into its
investment decisions through a Good Practice
Note (GPN) on animal welfare. The GPN provides
voluntary guidelines and recommendations for
IFC clients, rather than compulsory requirements.
In 2007, the IFC published environmental, health
and safety guidelines for intensive poultry
36 | fairr.org
production121 and mammalian livestock production.122
In 2013, the IFC commissioned an update of the
2006 GPN to reflect emerging best practice and
thinking on the issues.123
European Bank for Reconstruction and
Development (EBRD): In May 2014, the EBRD
revised its Environmental and Social Policy (ESP)
to guarantee agribusiness clients’ compliance with
EU animal welfare laws.124 This is the first time that
an IFI has introduced compulsory animal welfare
standards for investments. The revision followed
the publication by Humane Society International,
Compassion in World Farming and Four Paws of a
report in 2013 in which the EBRD was criticised for
providing loans to non-EU companies using extreme
farm animal confinement practices.
manage key factors driving risk and returns and
select the best-positioned companies. The integration
of animal factory farming risks also recognises that
negative impacts from the sector may affect long-term
sustainable returns by undermining social, environmental
and economic systems. Integrating the risks from animal
factory farming depends on creating the appropriate
policies and associated documentation and then
implementing these into the investment process.
Financial institutions have developed policies,
guidelines and position statements to steer and
explain their activities in relation to animal factory
farming. Rabobank, reportedly one of the world’s
largest investors in factory farms,126 has established
livestock farming position papers127 and a separate
animal welfare statement.128 Triodos Bank excludes
(animal) factory farming from financing due to increased
sustainability risks, unless firms can demonstrate
that they are proactively attempting to prevent
controversies.129
A number of ethical investment funds include
factory farming as a negative investment screening
criteria, excluding companies involved in the rearing
of animals in intensive conditions.130 For example,
ethical funds sold by Standard Life Investments
avoid investments in companies that use intensive
ne of the key elements
O
of our research process
is what we call ‘horizon
scanning’, that is looking
out for those issues and
risks that may not be
material today but that may
significantly impact on our
investments in the future.
One such issue is farm
animal welfare. 134
Equator Principles (EPs): Eighty financial
institutions located in 34 countries have adopted
the Equator Principles (EPs), a risk management
framework to provide environmental and social
due diligence for certain project finance advisory
services, project finance, project-related corporate
loans and bridge loans.125 The identification of
projects requiring environmental and social review
and due diligence is based on the IFC performance
standards and would be applied to animal factory
farming projects.
BNP Paribas
CASE STUDY 7: LEADING
INVESTORS PUTTING ANIMAL
FACTORY FARMING
ON THE ESG AGENDA
There are a number of different investors that are
integrating ESG risks associated with animal factory
farming into their investment processes. These
include asset owners and investment managers,
retail and institutional investors, those with a specific
ethical mandate and mainstream investors. There are
also a wide range of ways in which investors, or their
service providers, are approaching this challenge,
including via use of ESG research, engagement and
active ownership, and encouraging greater disclosure
with respect to animal factory farming risks.
In one of its first documents the FAIRR Initiative
published case studies from nine investors or
investment agencies to show how they are taking
these issues into consideration. The featured
investors are:
FA RMING
The case study book can be accessed via the
FAIRR.org website or by clicking here
fairr.org | 37
farming methods.131 Ethical funds offered by Kames
Capital do not include companies that have any
involvement in intensive farming.132 Firms such as
PGGM, a Dutch pension fund service provider, have
he key risks from the
T
stock sheet drew on ESG
analysis, highlighting that “crop
failure due to climate change
impacts on feed prices. Feed
costs are a very significant
part of the livestock producers’
P&L and disruptions to
the supply chain caused by
climate change would impact
on farm profitability with a
consequential knock-on to
[the company]”. 136
The Co-operative Asset Management
decided not to adopt specific policies on animal
welfare or factory farming although it does continually
monitor and report on both issues.133 However, PGGM
recognises that animal welfare can be a material factor
in investment decisions.
There are a number of practices that investment firms
are using or could use to integrate animal factory
farming risks into ESG research and decision-making.
Investors are utilising the available evidence to support
investment objectives with respect to animal factory
farming. Key stages where these activities are taking place
include: due diligence, such as screening and company
investigation; investment decision; and the investment
agreement.135 Table 5 illustrates ways to integrate ESG
issues into equity research and the variety of resources
that are available to support these activities, such as the
Business Benchmark on Farm Animal Welfare (BBFAW),
which provides a tool for investors to assess corporate
animal welfare policies and performance.
ENGAGEMENT AND ACTIVE OWNERSHIP
ON ANIMAL FACTORY FARMING RISKS
Investors are engaging with their portfolio
companies to encourage improved performance on
farm animal welfare and broader sustainability issues.
There are varying approaches that an investor can take
to engaging with portfolio company management –
these approaches are contingent on factors such as
investment strategy and governance models.
The amount of influence that an investor bears will
also reflect the level of investment and the culture of
the portfolio company or region it is based in.137
Examples of active engagement and ownership on
animal factory farming risks include:
•• Proxy voting: A number of investment firms –
such as JP Morgan, Russell Investments, First
Affirmative and AllianceBernstein (part of AXA) –
include animal welfare within their proxy voting
procedures and guidelines.
•• Shareholder resolutions (animal welfare):
Ethical engagement policies have also provided
the basis for investors to discuss animal factory
farming production systems with companies they
hold equity. In 2014, Wespath co-filed a shareholder
resolution (alongside the Humane Society of the US
and Green Century Capital Management) with Tyson
Foods that encourages the company to consider and
report on the reputational, financial and regulatory
risks associated with its use of gestation crates.
A coalition of US SRI investors filed a shareholder
resolution in 2007 with US-based Dean Foods over
the company’s organic milk claims despite operating
factory farming conditions. In 2008, a shareholder
resolution was filed against Tesco over its animal
welfare practices.
•• Shareholder resolutions (sustainability):
Since 2011, there have been 39 shareholder
resolutions filed by members of the CERES
investor network with companies in the food and
beverage sector over sustainability-related issues.138
Even Chipotle Mexican Grill, with its sustainability
and animal welfare policies, has come under
fire from shareholders over its failure to produce
an annual sustainability report and validate
its credentials.139
•• Monitoring: Responsible investment policies
can also help investors prioritise which ESG issues
they should focus on in the short and medium-term
with their portfolio companies. For example,
Co-operative Asset Management encourages
companies to shift from intensive farming systems.140
The Co-operative has written to Kellogg’s regarding
its use of animal factory farming systems, including
barren battery cages.141
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ENCOURAGING GREATER CORPORATE
DISCLOSURE ON ANIMAL FACTORY FARMING
Food companies and agribusiness are increasingly
expected to report on their performance with respect
to farm animal welfare and material sustainability
issues. Citigroup cites animal cruelty as a ‘headline
risk’ that can impact companies, while investor support
firm Glass Lewis believes that a ‘high-profile [animal
welfare] campaign launched against a company could
result in shareholder action, a reduced customer base,
protests and potentially costly litigation.’ These positions
are situated within a broader consensus that companies
that address ESG issues achieve better growth, cost
savings, and profitability.142 Therefore, improved
disclosure in farm animal welfare and sustainability
issues provides investors with the information they
need to manage their exposure to risks of investing in
companies linked to animal factory farming.
With investors and NGOs working together on issues
related to farm animal welfare and sustainability,
demand for action on animal factory farming could
significantly increase. From an investment perspective,
there have been largely separate debates over the
exposure of animal factory farming to farm animal
welfare and sustainability risks. However, these appear
to be converging as long-term sustainability issues
provide greater justification for re-evaluating how food
animals are raised. The business case for corporate
disclosure on sustainability issues has been established
– 89% of the more than 160 academic studies, research
papers and meta-studies showed that companies with
high ESG performance ratings exhibit market-based
outperformance compared to industry peers.143
The evidence base specific to farm animal welfare
is less mature.
However, there is growing awareness within the
financial sector of the risks associated with farm
animal welfare. Multi-stakeholder initiatives such as
the Business Benchmark on Farm Animal Welfare
have developed to provide firms with the information
they need to understand the business implications of
farm animal welfare for the companies in which they
are invested. This information is used to provide
investors with reassurance that these types of issues
are being effectively managed across their operations
and supply chains.
fairr.org | 39
TABLE 5: Integrating ESG issues into equity research
INVESTMENT
ACTIVITY
PURPOSE
TYPES OF RESOURCES
AVAILABLE
EXAMPLES
Industry analysis
To enable a better
understanding
of the sensitivity
of animal
factory farming
as a whole to
particular ESG
issues
There are studies revealing the
risks associated with changes in
particular parameters, such as
resource availability, temperature
and government subsidies.
•• Agricultural Policy Monitoring and
Evaluation 2013 (OECD)144
•• OECD-FAO Agricultural Outlook
2014–2023145
•• Beyond Factory Farming:
Sustainable Solutions for Animals,
People and the Planet (Compassion
in World Farming, 2009)
•• Livestock’s Long Shadow:
Environmental Issues and Options
(FAO, 2006)
Analysis also highlights the
‘hidden costs’ associated
with animal factory farming,
demonstrating the industry’s
sensitivity to key issues (e.g.
greenhouse gas emissions).
Macroanalysis at
the country level
To enable a better
understanding of
ESG issues that
are likely to affect
animal factory
farming within a
particular country
Research highlights the impacts
•• CAFOs Uncovered: The Untold
of evolving regulations or subsidy
Costs of Confined Animal Feeding
regimes on animal factory farming
Operations (Union of Concerned
and long term constraints on
Scientists, 2008)
growth, such as land or water
•• Costs of compliance with EU
availability.
regulations and competiveness of
the EU dairy sector (Bezlepkina, I.V.
There is extensive information
et al, 2008146)
available that can be used to
•• Assessing the economic cost of
assess country-level factors which
endemic disease on the profitability
can impact the industry, such as
of Australian beef cattle and sheep
levels of government investment
producers (Meat and Livestock
in supportive infrastructure
Australia, 2008147)
and long-term economic or
•• International Monetary Fund (IMF)
demographic trends.
regional and country reports148
Analysis of
company strategy
To enable a better
understanding of
how companies
are managing
ESG risks and
opportunities
related to
animal factory
farming and
the subsequent
impact on key
performance
metrics
Corporate documentation
and third party information
demonstrates corporate
awareness and management of
ESG issues.
40 | fairr.org
INVESTMENT
ACTIVITY
PURPOSE
TYPES OF RESOURCES
AVAILABLE
Analysis of
financial reports
To enable a better
understanding of
how companies
are managing
ESG risks and
opportunities
related to
animal factory
farming and
the subsequent
impact on key
performance
metrics
Governments provide early
warning or consultation
opportunities regarding proposed
changes to legislation or
regulations.
EXAMPLES
•• Economics of Heat Stress:
Implications for Management (De
Vries, A., 2014)150
•• Intergovernmental Panel on Climate
Change: Impacts, Adaptation and
Vulnerability (2014)151
There are multiple datasets
•• PreLex: monitoring of European
and tools available to model the
Commission proposals152
impacts of key climate parameters •• Attitudes of EU citizens towards
on operational performance.
Animal Welfare (EC, 2007)153
Surveys are regularly published on
changing consumer attitudes and
buying preferences.
•• Business Benchmark on Farm
Animal Welfare (2012, 2013)149
•• Company CSR/Sustainability reports
fairr.org | 41
3.4INTEGRATING FARM ANIMAL
WELFARE OPPORTUNITIES INTO
INVESTMENT DECISIONS.
By integrating farm animal welfare issues into their
investment process, investors are also becoming
aware of opportunities around the potential changes
in the market. This is because as food safety scandals
and other risk from factory farmed meat appear to be
changing consumer behaviour, companies with high
animal welfare standards are positioned to benefit.
The case study of American fast food chain Chipotle is
a good illustration of this trend. Chipotle used ethics
and good animal welfare standards as part of their
marketing in 2012 and saw revenues rise 23%.
CASE STUDY 9: EGG SUBSTITUTE COMPANY SET TO BECOME
FASTEST GROWING FOOD COMPANY IN HISTORY
There are also exciting opportunities to invest in
companies developing plant-based alternatives to
satisfying the world’s growing demand for protein,
including companies related to the technology and
infrastructure of those more sustainable alternatives.
The case study on the growth of Hampton Creek is
a good example of this, as are US food technology
company Impossible Foods which uses specific
proteins and nutrients from greens, seeds, and
grains to recreate the complex taste of meat
and dairy products.
Established in 2011 Hampton Creek is a US based
food tech company built on the belief that there are
more sustainable, humane and cheaper ways to feed
the planet than animal factory farms. Based in San
Francisco, the company has analysed thousands
of plant proteins to find low-cost, environmentally
friendly and healthy alternatives to animal-based
proteins to use in a range of products, such as a
Canadian yellow pea protein as a substitute for
egg. Its current products include: ‘Just Mayo’,
‘Just Cookies’ and ‘Just Scrambled’.
Growing and harvesting plant protein is less
resource intensive and expensive than egg production.
This means Hampton Creek products are cheaper
than equivalent products containing eggs. Just Mayo
the company’s first product for example can be
supplied to supermarkets for about 10% less than
the normal cost of regular egg based mayonnaise.
In terms of resource use, Hampton Creek estimates
it has saved over one billion gallons of water in the
last year157, an issue that is becoming increasingly
critical to business – no more so than in California
where the company is based.
CASE STUDY 8: TASTY FINANCIAL RESULTS FOR US RESTAURANT THAT
PUTS HIGH ANIMAL WELFARE STANDARDS AT HEART OF ITS BUSINESS
US restaurant chain, Chipotle, has a history of increasing
sales and share prices by recognising the importance
of animal welfare. After a visit to an animal factory farm
in 1999, Chipotle’s CEO Steve Ells implemented a new
sourcing policy for ‘natural’ pork. Under the Chipotle
policy, ‘natural’ refers to animals that are:
•• Fed a vegetarian diet
•• Not given growth hormones or antibiotics in
their feed
•• Allowed to roam free in a pasture and are
treated humanely.
Following the switch towards sustainable sourcing
efforts in 2000, Chipotle was forced to raise the price
of its pork burrito by US$1. Typically, sales would be
expected to drop following a price increase, however
Chipotle saw sales increase sharply as a result of its
commitment to better welfare pork. Since then, Chipotle
has broadened its natural sourcing policy to include
chicken and beef where possible. Chipotle is now
reported to be the largest restaurant buyer of naturally
raised meat in the US. Other sustainability efforts,
such as sourcing local and organic produce, support
Chipotle’s commitment to ‘food with integrity’.
"Food with Integrity" is our commitment to always look
closer, dig deeper, and work harder to ensure that our
42 | fairr.org
actions are making things better, not worse. It’s our
promise to run our business in a way that doesn’t exploit
animals, people or the environment. ”
Steve Ells154
In recognition of the low awareness among consumers of
farm animal welfare and factory farming issues in the US,
Chipotle has invested in awareness-raising campaigns
over a number of years, including an award-winning
animated film in 2014, to support their sustainability
strategy. Industry metrics following Chipotle’s ‘Cultivate
a Better World’ marketing campaign showed improved
customer loyalty.155 Social media activity during the
campaign reportedly contributed to a 23.2% increase in
Chipotle’s revenue during the first half of 2012.
In just four years of operation, Hampton Creek has
attracted a number of large customers. Such as
Compass Group, a global catering company who supply
over 4bn meals a year to schools and hospitals across
the US. and UK and the convenience store 7/11. Hampton
creek estimates the switch to Just Mayo in 7/11 products
will save 81m gallons of water and 191m grams of CO2
each year158.
The 2015 outbreak of Avian flu crisis in the U.S has shown
both the vulnerability of current egg production models
and the potential of companies such as Hampton Creek.
The outbreak led to the death of more than 45m birds
(80% of which are egg laying hens in factory farms) in the
first half of 2015159. The Avian flu outbreak has led to an egg
shortage in the U.S with egg prices more than doubling.
Since the avian flu crisis hit, Hampton Creek reports
receiving enquires from most major fast food chains and
predicts its revenue run rate will from $48m to $120m
by next January. The company looks on track to become
the fastest growing food company in history160.
Chipotle’s initial public offering in 2006 rose 100%
during its first day on the New York Stock Exchange, with
share prices rising from US$22 to US$44 per share.156
The company’s announcement in 2013 that it will strive to
remove GMO ingredients from its products was followed
by a 15% increase in stock prices. Chipotle’s share price
sat at US$619.25 (as of 23 June 2015). The share price
remained relatively high compared to historic levels even
after an E.coli outbreak in late 2015 offered a reminder
that managing potential health risks is an ongoing
challenge for even progressively-minded food retailers.
fairr.org | 43
CASE STUDY 10: HEINZ – GLOBAL FOOD GIANT IMPROVES
PRACTICES FOLLOWING POOR BBFAW RANKING
Heinz is a global food processing company, which has
plants on six continents and products for sale in 200
countries and territories. In the 2013 edition of the
Business Benchmark for Animal Welfare (BBFAW),
the company was named and shamed as a company
in the bottom tier (tier six) of the benchmark.
A tier six ranking on the benchmark means that
animal welfare does not appear to be an issue on
a company’s business agenda and is the lowest
possible benchmark ranking.
A number of publications including the Financial
Times reported on the results of the benchmark and
Heinz received negative publicity for the poor score.
Heinz has since acknowledged that consumers have
concerns about animal welfare and has worked to
improve and publicly disclose its animal welfare
policies for its operations and throughout its
supply chain. With help from the Humane Society
of the United States Heinz has introduced a new
sustainability procurement policy and an animal
welfare programme based on the principles of the
five freedoms for animal welfare. Under the policy,
all Heinz suppliers are required to adhere to the five
freedoms and can be audited to ensure compliance.
Other animal welfare policy commitments introduced
by the company include a commitment to work with
suppliers across the globe in order to reduce the use
of battery cages for laying hens and to work with pork
supplier to phase out gestation crates. Already in the
UK Heinz uses free-range eggs in its mayonnaise,
whilst in the US the company aims to source 20% of
its eggs from free-range facilities by the end of 2015.
These efforts and improved transparency on policies
were enough for Heinz to improve by two tiers to tier
four in the 2014 benchmark. There remains room
for improvement in Heinz’s policies and practices.
However this is clear evidence that investor tools like the
benchmark can lead to improvements at companies.
CHAPTER 4:
IMPLICATIONS AND NEXT STEPS
4.1 OVERVIEW
This report draws on a wide range of sources to assess
the potential material risks of animal factory farming
from an ESG perspective. A strong case is made for
responsible investors to incorporate these risks into
their investment approaches. However, the limited
extent to which investors have engaged with animal
factory farming historically indicates a need to raise
more awareness of the financial risks associated
with the sector.
A number of activities can be undertaken to help
address existing knowledge gaps and provide the
investment community with a better understanding
of the risks associated with animal factory farming.
These activities include:
•• Further in-depth research, which explores in more
detail the connection between the issues and
financial returns and distinguishes animal factory
farming from traditional livestock production.
•• Analysis of the effect of strong ESG management
(including high animal welfare standards) on the
long-term financial performance and investment
returns of the animal factory farm sector.
•• Increased engagement with stakeholders in
countries that are expected to see the highest
future growth in animal factory farming.
•• Deepening understanding and raising awareness
of how investors are engaging with animal factory
farming and shifting investment to less intensive
production systems or plant-based agriculture.
These activities will also help to build the
momentum around responsible investment
and animal factory farming.
44 | fairr.org
4.2 IMPLICATIONS OF THE
FINDINGS FOR INVESTORS
The social and environmental impacts of animal
factory farming identified in this report support
the case for greater scrutiny of the sector as part
of responsible investment practice. Animal factory
farming is associated with severe environmental
and social impacts, which can be experienced at
local, regional and global scales. This places animal
factory farming alongside other high impact sectors
including oil and gas, mining, and clothing and apparel.
Environmental and social risks can have a significant
financial impact on investments, including reducing
the value of the asset or diminishing dividends as a
result of changes in the operating costs. The reputation
of investors may also be at stake if stakeholders
associated them with environmentally or socially
damaging investments.
The negative financial impacts of ESG issues on
animal factory farming highlight the importance of
integrating analysis of these issues into investment
research and decision-making. ESG issues can affect
financial outcomes through a range of pathways,
including production and pricing, market access,
legal and regulatory and reputation. The manner in
which ESG issues affect these financial levers can be
relatively straightforward, such as in the case of shortterm events like natural hazards or food scandals.
However, the magnitude and time-scales over which
effects are felt can vary tremendously. Disentangling
the longer-term effects of ESG issues from other
drivers of company and investment performance is
more challenging.
fairr.org | 45
Investors that integrate analysis of ESG issues into
their investment approach must look across agriculture
and food value chains, particularly as the magnitude of
financial risks is likely to increase over the long term.
Companies directly involved in animal factory farming are
most exposed to key ESG issues. However, consumerfacing companies at the end of the value chain – such
as food retailers and restaurants – are also exposed to
financial harm. The magnitude of risks to companies
involved in animal factory farming and industrial
food production are likely to increase as a result of
rising capital costs, the shifting gravity of production
to developing countries with less robust regulation,
the impacts of climate change and increasing social
concerns over animal welfare and sustainability.
There is a need to raise awareness of ESG issues
related to animal factory farming and the financial
risks they present to more investors, and to
companies with links to the sector. Outside of a few
far-sighted institutions there is a general lack of
awareness among the wider investment community of
the short and long-term risks that are inherent to the
continued growth of the animal factory farm industry.
Finally, there is a clear need for additional research
in a number of areas to support the initial exploratory
findings contained in this report. The bulk of the
evidence for this report has been drawn from
a) academic, government and industry studies on
short-term events that are well recognised by the
livestock industry; b) pressure group reports, with
some lacking the perceived rigour of objective, peer
reviewed research; and c) anecdotal media stories.
However, there is still a significant knowledge gap with
respect to the financial implications of ESG issues for
companies associated with the animal factory farming
industry. Suggestions for further research are included
in the ‘Next Steps’ section below.
4.3 NEXT STEPS
Greater scrutiny of animal factory farming by a wide
range of stakeholders has highlighted the need
for further research and engagement on critical
ESG issues. Governments, civil society, the public,
companies and financial institutions would all be wise
46 | fairr.org
to take a closer look at the negative impacts of animal
factory farming and how the industry may potentially
be affected by external changes to the operating
environment. These stakeholders can ask challenging
questions to help them write laws and regulations,
mobilise support for opposition campaigns, buy
goods, develop business strategies and to help
inform investment decisions.
CASE STUDY 11: SHARE PRICE TANKS AFTER ANIMAL WELFARE REVELATIONS
Events at SeaWorld in Florida over the last two years
perfectly demonstrate the material impact that poor
management of animal welfare issues can have on
investment value.
$38
$34
$28
$24
$20
SeaWorld in Florida, part-owned by private equity group
Blackstone, has suffered plummeting stock prices and
attendance figures since the release of independent
documentary Blackfish in 2013, a film cataloguing
alleged mistreatment of whales at SeaWorld’s parks.
For example, the film claims that the company’s
treatment of whales provoked violent behaviour in the
animals, contributing to the deaths of three people.
Despite increasing interest and momentum, many of
these questions remain unanswered. A number of
steps would help to address these knowledge gaps.
These include further research that may include:
•• Research to clearly distinguish between the effects
of ESG issues on animal factory farming and
traditional (or ‘smaller scale’) production.
•• Research which more clearly identifies the
specific effects of ESG issues on different types
of animal factory farming, such as cattle, poultry
and pig production.
•• More detailed analysis of the extent to which strong
ESG management (including high animal welfare
standards) in the farming sector could improve longterm financial returns. This should include a clear
definition of the animal farming universe and how
the performance of these companies would compare
to those with poor ESG management.
•• Research to establish practical steps that can best
retool and improve industry practices so that the
sector can both help meet the demand for global
meat while exhibiting strong ESG management
Between the release of that documentary and the time
of writing (Nov 15) SeaWorld’s shares have lost over half
of their value. The company also saw the CEO resign
at the end of 2014 and has seen attendance at its orca
theme parks in San Diego and San Antonio continue to
fall. Figures from San Diego authorities showed a 17%
drop in attendance at the park in 2014 from 4.5 million
to 3.7 million161.
The original Blackfish film is thought to have cost just
$76,000 to produce and originally played in only five
movie theatres yet its financial impact on SeaWorld
Entertainment continues to be felt. In November 2015,
investors were warned that full-year profits will fall by
a further $10m.
$16
2014
2015
Representation of SeaWorld Entertainment share
prices drom December 2013 to November 2015.
eaWorld’s shares have
S
lost over half of their value
following the release of a
film alleging mistreatment
of animals
FAIRR founder Jeremy Coller commented,
"SeaWorld is not part of the factory farming universe
but I think the harsh financial lessons its investors have
learnt since the release of Blackfish shows the dangers
of not acting to manage animal welfare risks. We live in
an age where the power of social media and changing
consumer behaviour can quickly combine to transform
profitable businesses into value-destroying liabilities.
Smart investors will take note."
There has also been regulatory backlash. In October
2015, California authorities banned SeaWorld from
attempting to breed new whales in a planned $100m
Practical steps to close the knowledge gap can
also include:
extension to its whale tanks in San Diego.
•• Increased engagement from investors with animal
factory farming stakeholders in countries that are
expected to see the highest growth in animal factory
farming over coming decades, particularly China
and India.
•• Publishing more case studies that demonstrate
how private investors are engaging with animal
factory farming (including shifting investment
towards less intensive production systems or
plant-based alternatives to meat) and the results
that have been achieved.
SeaWorld have clearly recognized the long-term
damage done to their reputation. It has reportedly
spent $15m on a TV and social media campaign to
counter negative sentiment and promote the work
it does to protect and care for whales and other
animals. In November 2015, SeaWorld in San Diego
responded to the ongoing pressure by announcing
that they would end live killer whale performances
at the park.
fairr.org | 47
APPENDIX
DEFINITIONS
Animal factory farming – This report does not seek to
define animal factory farming using specific criteria or
thresholds. Instead, it considers animal factory farming
to be operations which exhibit certain characteristics
that differentiate it from traditional, non-intensive
livestock production. These are:
•• The large scale of the operations in terms of
animal stock numbers;
•• Confinement that undermines the five
animal welfare freedoms;162
•• Management and husbandry practices which may
compromise the health and safety of workers,
surrounding communities and the environment;
•• Highly mechanised production methods, such as
the use of hardware and automation for tasks such
as feeding and cleaning.
There is no universally agreed definition of ‘animal
factory farming’. The term has been used mainly by
NGOs or pressure groups to refer to livestock
production systems that demonstrate the above
characteristics. Alternative terms include ‘industrial
livestock production’ and ‘intensive animal farming’.
Various definitions are provided by government
regulators. The term ‘Concentrated Animal Feeding
Operations’ (CAFO) is commonly used by industry
and external interests to describe animal factory
farming. The term originates from the United States
Environmental Protection Agency which defines
CAFOs as farm operations that exhibit particular
characteristics. These include the confinement of
animals for at least 45 days per year, and the absence
of grass or other vegetation from the confinement area
during the normal growing season.163 In the US, CAFOs
can be classed as large, medium or small, depending
48 | fairr.org
ENDNOTES
1.
According to the American Society for the Prevention of
Cruelty to Animals (ASPCA)
2.
Union of Concerned Scientists, April 2008, CAFOs Uncovered:
The Untold Costs of Confined Animal Feeding Operations.
Available at ucsusa.org/assets/documents/food_and_
agriculture/cafos-uncovered-executive-summary.pdf
[Accessed on 11 September 2014].
3.
on the number of animals that are confined, how
wastewater is managed, and whether the operation
is a significant contributor of pollutants.164
In the European Union (EU), ‘intensive’ is defined as
an operation which may rear, or be designed to rear,
40,000 poultry, 2,500 production pigs (over 30kg), or
750 sows.165 The EU recognises that “intensive farming
is likely to result in worse conditions for the animals
than low intensity, ‘natural’ or organic farming”.165
The Canadian province of Saskatchewan defines an
‘intensive livestock operation’ as one where the space
per animal unit, in which livestock is confined, is less
than 370m2.166
The US-based Pew Commission on Industrial
Farm Animal Production has developed a more allencompassing term, Industrial Farm Animal Production
(IFAP). This refers to highly intensive production practices
regardless of the size of the facility.168 IFAP “encompasses
all aspects of breeding, feeding, raising and processing
animals or their products for human consumption”,
with a focus on a small number of species.
Animal factory farming can also be differentiated
from traditional or conventional farming, although
the distinctions may not always be entirely clear cut.
Generally traditional or conventional farms are often
considered to be family owned and operated, smaller
in scale, use less chemicals, antibiotics and feed
inputs, raise a range of animal breeds and treat
animals more humanely.
This report focuses on primary livestock species
associated with animal factory farming: cattle, poultry
and pigs. Globally, however, there are a large number
of livestock species, including rabbits, ducks, and
buffalo that are raised in conditions consistent with
the characteristics of factory farming.
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54 | fairr.org
fairr.org | 55
ABOUT US
The FAIRR Initiative is a collaborative investor
network that aims to raise awareness of the material
impacts farm animal welfare issues can have on their
portfolio. It helps investors share knowledge and form
collaborative engagements on the issue.
Signing up as either a signatory or supporter
is simple and free and gives you access to:
Launched in summer 2015 the FAIRR network
welcomes both institutions who wish to become
signatories and individual supporters.
•• A global network of investors working to
integrate animal welfare issues into their
investment process;
•• A range of publications including our
‘Case studies and guidance’ booklet;
•• Regular updates including our quarterly
FAIRR newsletter.
Find out more, or join us, at: fairr.org
ACKNOWLEDGEMENTS
The research for this report was conducted by
James Allan and his team at Verisk Maplecroft.
We would also like to thank all those who
reviewed the report including individuals from
Compassion in World Farming, ShareAction,
Ownership Capital, Farm Forward and
Humane Society, US. Many thanks also to
ESG Communications for their work on refining
and designing the report.
56 | fairr.org
Research by
Follow us: @FAIRRinitiative
CONTACT
Alan Briefel
Executive Director, FAIRR Initiative
T: +44 7770 681333
E: alan.briefel@fairr.org
Rosie Wardle
FAIRR Initiative
T: +44 7525 434162
E: rosie.wardle@fairr.org
Help us close the knowledge gap. Join FAIRR, at: fairr.org
Follow us: @FAIRRinitiative