Coller FAIRR Protein Producer Index in Asia

Coller FAIRR Protein Producer Index in Asia

Benchmarking Asia’s meat, fish and dairy sector on environmental, social and governance issues

www.fairr.org http://index.fairr.org @FAIRRinitiative

Animal welfare

Sustainable proteins

Antibiotics

Waste & pollution

Deforestation & biodiversity loss

Greenhouse gases

Water scarcity & use

Working conditions

Food safety

Coller FAIRR Protein Producer Index

The Coller FAIRR Protein Producer Index is the world’s first comprehensive assessment of how some of the largest (by market capitalisation) global intensive livestock and fish farming companies are managing the sector’s critical environmental, social and governance (ESG) risks. It is primarily a resource for institutional investors and other actors interested in the livestock sector.

The companies selected for the Index are involved in breeding, processing, distributing and selling meat, dairy and/or aquaculture products. The 60 Index companies have a combined market capitalisation of $297 billion (as of 28/03/18). Almost all of the companies’ revenues are derived from producing and processing intensively farmed livestock and fish. Their consolidated revenues cover approximately 20% of the global livestock and aquaculture market and they dominate their regional markets. The 17 Chinese companies in the Index, for example, represent nearly 30% of the Chinese market for animal proteins, including 100% of the domestic dairy market. They also supply some of the world’s biggest food companies, including McDonald’s, Walmart, Nestlé and Danone.

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Greenhouse gas emissionsDisproportionate amount of GHGs generated by livestock makes companies engaged in factory farming vulnerable to regulatory and social pressures to reduce emissions

Deforestation and biodiversity lossGlobal movements tracking forest loss target factory farming companies and can lead to shareholder divestment and/or weaken customer loyalty

Water scarcity and water useBeef, pork, dairy, and poultry companies consume large quantities of water both directly and indirectly via their purchase of animal feed

Waste and water pollutionCompanies are facing greater scrutiny about the impact of waste on surrounding communities and the environment, meaning potential fines and regulation

Antibiotics Drug-resistant infections are a serious public health threat which will likely impact productivity on a national scale

Animal welfarePoor animal welfare presents operational and reputational risks for companies

Working conditionsOperational risks, which can involve worker injuries and reputational risk, as well as food products contaminated by sick workers

Food safetyA series of high profile food safety incidents across the globe have focused consumer concerns on the threat of food contamination and foodborne illnesses in the protein sector

Sustainable proteinsProtein companies can hedge risk and drive growth by reducing reliance on animal proteins and developing a strategy for protein diversification. This risk factor is assessed as part of the Index, but is not scored.

Environmental, social and governance issues

* SDG 2: Zero Hunger, SDG 3: Good Health and Well-being, SDG 6: Clean Water and Sanitation, SDG 8: Decent Work and Economic Growth, SDG 12: Responsible Consumption & Production, SDG 13: Climate Action, SDG 14: Life Below Water, SDG 15: Life on Land

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Meat

Company Country/Region

Main protein

category

Beijing Shunxin Agriculture Co Ltd

China Pork

Charoen Pokphand Foods PCL

Thailand Multiple

Chuying Agro-pastoral Group Co Ltd

China Pork

COFCO Meat Holdings Ltd China Pork

Fortune Ng Fung Food Hebei Co Ltd

China Beef

Fujian Sunner Development Co Ltd

China Poultry

GFPT PCL Thailand Poultry

Great Wall Enterprises Co Ltd

Taiwan Multiple

Guangdong Wens Foodstuffs Group Co Ltd

China Multiple

Henan Shuanghui Investment & Development Co Ltd

China Multiple

Inti Agri Resources Tbk PT Indonesia Aquaculture

Japfa Ltd Singapore Multiple

Muyuan Foodstuff Co Ltd China Pork

New Hope Liuhe Co Ltd China Multiple

NH Foods Ltd Japan Multiple

Nippon Suisan Kaisha Ltd Japan Aquaculture

Prima Meat Packers Ltd Japan Multiple

QAF Ltd Singapore Pork

QL Resources Berhad Malaysia Multiple

San Miguel Food and Beverage Inc

Philippines Multiple

Shandong Oriental Ocean Sci-Tech Co Ltd

China Aquaculture

Thaifoods Group PCL Thailand Pork

Venky's India Ltd India Poultry

WH Group Ltd China Pork

Dairy

Company Country

Beijing Sanyuan Foods Co Ltd ChinaChina Mengniu Dairy Co Ltd China

China Modern Dairy Holdings Ltd China

China Shengmu Organic Milk Ltd ChinaInner Mongolia Yili Industrial Group Co Ltd ChinaVietnam Dairy Products JSC Vietnam

For the complete index, including results for all 60 companies, visit https://index.fairr.org

2 COLLER FAIRR PROTEIN PRODUCER INDEX (ASIA) REPORT COLLER FAIRR PROTEIN PRODUCER INDEX (ASIA) REPORT 3

A focus on Asia This report is a summary of the Index results for the 30 companies based in Asia. They represent 50% of the companies assessed in the full Coller FAIRR Protein Producers Index.

The FAIRR Initiative has developed an index to analyse the largest global meat, dairy and aquaculture producers by combining nine ESG risk factors with the Sustainable Development Goals (SDGs).

The benchmark will be primarily a resource for institutional investors and other actors interested in the livestock sector.

KPIs

Largest global

companies22

risk factors9

Table of contents

5 Foreword

6 Introduction Context and background

7 Key takeaways

8 About the Data and scoring Summary of findings

12 Results by Indicator

14 Focus: The question of financial materiality

17 Sustainable proteins

18 References

This report is an abbreviated version of the full Coller FAIRR Protein Producer

Index report. The full report and data are only available for members of the

FAIRR investor network.

© 2018 Coller Capital Ltd. All material contained in this report is rights re-

served. For more information contact the authors of the Coller FAIRR Protein

Producer Index via [email protected].

In my 30 years as an investor, I have witnessed many examples of megatrends like globalisation or technology disrupting sectors, and making leading companies quickly seem outdated and unattractive.

Today, modern methods of intensive farming have helped the meat, fish and dairy sector become a profitable part of the global food supply chain. Investors know that this reality is changing as trends like climate change, food technology and a broad consumer shift towards healthier food gather pace.

The new Coller FAIRR Protein Producer Index assesses 60 of the largest livestock and aquaculture companies, with a combined market cap of close to $300bn, on behalf of the world’s largest investors. Over half of these are based in Asia. With environmental, social and governance (ESG) policies having rapidly become a vital part of investors’ toolkits, it’s significant that we now have the first ever Index to look holistically at the animal protein sector through the lens of ESG issues.

ESG is the investment communities equivalent to corporate social responsibility. The first set of results for the Coller FAIRR Index, captured in this report, show the enormous risks and opportunities that are building in this area.

Meeting the challengesThe Index identifies a growing suite of best practices and some remarkable innovations by meat, fish and dairy producers to meet ESG challenges. From greenhouse gas inventories to a ground-breaking fund in alternative proteins, antibiotics stewardship to water management, there are best in class practices emerging in each of the nine sustainability risk factors analysed by the Index.

However, it is also clear that, too often, this leadership is not being followed. Overall, 60% of the meat and fish producers in the Index – 36 large companies worth $152 billion – are categorised as ‘high risk’ for investors. On the issue of antibiotics alone, three in four companies display inadequate polices or have no measures in place to reduce their excessive use of antibiotics – despite emerging regulation and public and investor pressure for them to do so.

Furthermore, 72% of Index companies performed poorly on management and disclosure of greenhouse gas emissions, putting the implementation of the Paris Agreement in jeopardy. Investors need ESG data and transparency to enhance shareholder value, this index helps bridge the knowledge gap.

Furthering a dialogueThis is the first iteration of the Coller FAIRR Index. It aims to be a useful starting point and the FAIRR team, who are to be enormously commended for their efforts putting this Index together, invite feedback from all those involved with the aim of improving the criteria, data limitations and methodology over time.

I hope the Index furthers a dialogue between investors and these important food suppliers to help both harness the upside of disruption and to manage the challenges ahead.

Jeremy Coller Founder, FAIRR Initiative and Chief Investment Officer of Coller Capital

Foreword

“ Investors need ESG data and transparency to enhance shareholder value. This index helps bridge the knowledge gap.”


Our findings show that nearly all (94%) of the Asian companies in the Index are either not managing critical risks or are failing to disclose basic information.

• In general, Asian dairy companies score higher than any other protein category. This differs from the global index where European aquaculture companies lead the sector.

• 26 Asian companies, worth $120 billion, rank as ‘high risk’ on overall management of ESG risks.

• Even Charoen Pokphand Foods PCL, the highest scoring firm among the Asian companies, is ranked as ‘medium risk.’.

• Only four Asian companies score high enough to be considered “medium risk”. These are Charoen Pokphand Foods PCL, China Shengmu Organic Milk Ltd, Vietnam Dairy Products JSC and WH Group Ltd.

• Only three Asian companies disclose across all eight scored risk factors (Charoen Pokphand Foods PCL and China Shengmu Organic Milk Ltd).

• Antibiotics management is the most poorly addressed risk, in an industry that is the primary global consumer of antibiotics.

• No Asian company has a zero deforestation or zero net deforestation target even though rising animal protein consumption is one of the and largest drivers of deforestation and biodiversity loss.

• Of the nine risk factors in the Index, Asian companies perform best on waste and pollution. More than a third of companies (37%) are assessed as ‘low risk’and half (50%) are assessed as ‘medium risk.’

• Only two of the 30 Asian companies account for the emergence and growth of the alternative (non-meat) proteins sector. Our Index also seeks to examine the exposure of these companies to opportunities in the alternative protein market, particularly given its rapid growth. The market is expected to reach $5.2 billion by 2020.

Key takeaways

is the most poorly addressed risk, in an industry that is the

primary global consumer of antibiotics

Antibiotics mismanagement

Asian companies, worth

of Asian companies account for the

growth of alternative (non-meat) proteins

7%Only

rank as ‘high risk’ on overall management

of ESG risks

26$120

billion,

Context and backgroundToday, intensive livestock production methods are the dominant system of livestock farming. Farmed poultry currently makes up 70% of all birds on the planet, and 60% of all mammals on Earth are livestock, mostly cattle and pigs (Yinon M. B. et al., 2018). This trend is increasing with many Asian countries, including China, consolidating farming operations to reduce fragmentation and increase production efficiencies.

Combine this growth in intensive livestock production with current forecasts for global population rise, increasing urbanisation and a burgeoning middle class that demands more animal protein, and it seems that meat, dairy and aquaculture companies are favourably positioned for capital investment. However, the dramatic expansion of this industry has also exacerbated climate change impacts, water scarcity, food insecurity, human health risks, biodiversity loss and antimicrobial resistance (AMR).

In a resource-constrained world, there is growing recognition of the inefficiencies of meat and dairy production. An analysis found that the production of animal-based foods accounted for more than three-quarters of global agricultural land use and around two-thirds of agriculture’s production-related greenhouse gas emissions in 2009, while only contributing 37% of total protein consumed by people in that year (World Resources Institute, 2016).

Further, the rapid increase in animal protein consumption is leading to human health risks. While this is predominantly a problem in Western markets, a diet heavy in processed animal proteins is increasingly an issue for emerging markets. Consumption of meat products in East Asia has increased by more than 500% over the last 50 years (FAO, 2017). Meanwhile, several Asian countries are facing rising obesity: within one generation, the percentage of Chinese children who are overweight or obese has risen from 5% to 20%. In response to both health and environmental concerns, in 2016, the Chinese government released dietary guidelines that recommend reducing the lower daily value from 50 grams to 40 grams – limiting meat, poultry, fish and dairy consumption to 200 grams daily (US Centers for Disease Control and Prevention, 2018).

The growth of intensive livestock production is also fuelling food safety and health risks. According to the US Centers for Disease Control and Prevention, chicken is ranked as the most dangerous food, with the highest rates of foodborne illness. The majority of human cases of influenza A (H5N1 and H7N9) virus infections have been associated with direct or indirect contact with infected live or dead poultry. The FAO has warned that increasing demand for, and consumption of, meat and other products of animal origin in East and Southeast Asia will threaten the health of millions of people and livestock (FAO, 2017).

These issues pose significant challenges to achieving the Sustainable Development Goals (SDGs), and also present risks to capital investment.

“ More than 70% of all transmittable human diseases are contracted from animals (zoonosis), and as animal production for human consumption increases in East Asia, so too does the threat of newly emerging pathogens that can spread between animals and people and cross borders even before symptoms begin to appear.”

Food and Agricultural Organization (FAO)

Introduction


African swine fever outbreak shows potential costs of intensive farming practices

The recent outbreak of African swine fever (ASF) in China – and more recent cases in Belgium – is a timely reminder of the risk faced by large-scale intensive farms as they seek to curb a serious infectious disease that is exacerbated by the size of the farms and poor animal husbandry practices.

ASF is the worst form of a virus that can afflict pigs, with symptoms ranging from haemorrhaging to breathing problems. There is no vaccine to protect animals from the highly contagious lethal virus; the only measures to control its spread is to destroy stock, restrict transport and increase biosecurity measures (Politico 2018).

With the most recent outbreak, as many as 40,000 pigs in China and 4,000 in Belgium have been culled (CNN 2018), causing a supply gap. The supply gap, exacerbated by restrictions on the movement of live animals by the Chinese government, has seen the index of national pig prices increase 6.4% since the first case was reported (Bloomberg 2018).

Beyond the effects on the pigs and individual farms, these measures have a significant impact on trade flows: demand for Chinese pork exports is expected to reduce and this may work in favour of other pork exporters, including from North and South America (Rabobank 2018). While any major shifts in supply relations may take some time, the financial and economic implications of ESG risk mismanagement in the farm animal industry is clear. To build a resilient food system, investor engagement is crucial for companies to demonstrate how their processes and policies effectively manage these risks.

This report focuses on the 30 Asia-based meat, fish and dairy companies in the Coller FAIRR Protein Producer Index. They represent 50% of the companies assessed in the full Index. For details on the complete index results, a full company list, methodology, data assessment, limitations and scoring visit index.fairr.org

Companies were assessed against relevant KPIs and rated on a scale of 0–5 based on their commitments, policies and disclosure. Only publicly available information was used for assessment. This included company websites and reports, CDP disclosures, and news articles.

The final company score is an average of scores across all KPIs and risk factors (out of 100). A high score indicates better disclosure and management, and thus a lower risk. For this iteration of the pilot Index, all risk factors and KPIs are weighted equally. Unless indicated otherwise, all assessed data and revenues stated in this report are as of 31 March 2018. All market capitalization figures are as of 28 March 2018.

Risk factor colours:

signifies basic management of the risk

signifies that some steps have been taken towards basic management of the risk

signifies little or no action or disclosure

“Low Risk”

“Medium Risk”

“High Risk”


Charoen Pokphand Foods PCL

0

100

WH Group Ltd

NH Foods Ltd

New Hope Liuhe Co Ltd

GFPT PCL

QAF Ltd

COFCO Meat Holdings Ltd

Nippon Suisan Kaisha Ltd

Great Wall Enterprises Co Ltd

Henan Shuanghui Investment & Development Co

Shandong Oriental Ocean Sci-Tech Co Ltd

Muyuan Foodstuff Co Ltd

QL Resources Berhad

Fujian Sunner Development Co Ltd

Guangdong Wens Foodstuffs Group Co Ltd

Prima Meat Packers Ltd

Japfa Ltd

Fortune Ng Fung Food Hebei Co Ltd

Chuying Agro-pastoral Group Co Ltd

Thaifoods Group PCL

Beijing Shunxin Agriculture Co Ltd

Venky's India Ltd

San Miguel Food and Beverage Inc

Inti Agri Resources Tbk PT

FAIR

R In

dex

Scor

e

Cranswick PLC

Benchmark

Figure 1: FAIRR Index league table of Asian meat companies (all factors): final company scores (out of 100)

Meat

Summary of findingsOur findings show that nearly all (94%) of Asian companies in the Index are either not managing critical risks or are failing to disclose basic information.

0

100

China Modern Dairy Holdings Ltd

FAIR

R In

dex

Scor

e

Fonterra Co-operative Group Ltd

Vietnam Dairy Products JSC

China Shengmu Organic Milk Ltd

Inner Mongolia Yili Industrial Group Co Ltd

China Mengniu Dairy Co Ltd

Beijing Sanyuan Foods Co Ltd

Benchmark

Figure 2: FAIRR Index league table of Asian dairy companies (all factors): final company scores (out of 100)

Dairy

DAIRY

Company Names Country

Market Cap

($bn) 28/3/18 GHG

Defores- tation Water Pollution Antibiotics

Animal Welfare

Working Conditions

Food Safety

Final Score

Fonterra Co-operative Group*

New Zealand 6.88 69

Vietnam Dairy Products JSC Vietnam 12.94 46

China Shengmu Organic Milk Ltd China 0.87 38

Inner Mongolia Yili Industrial Group Co Ltd China 27.03 32

China Mengniu Dairy Co Ltd China 18.56 28

Beijing Sanyuan Foods Co Ltd China 0.94 27

China Modern Dairy Holdings Ltd China 1.05 12

Low Risk (score of 67-100) Medium Risk (score of 34-66) High Risk (score of 0-33) *Included as benchmark dairy company

About the data and scoring

MEAT (China)

Company NamesCountry/

RegionMain Protein

CategoryMarket Cap ($bn)

28/3/18 GHG Deforestation Water Pollution AntibioticsAnimal Welfare

Working Conditions Food Safety

Final Score

Cranswick PLC* UK Pork 2.12 65

WH Group Ltd China Pork 15.63 36

New Hope Liuhe Co Ltd China Multiple 4.87 30

COFCO Meat Holdings Ltd China Pork 0.63 27

Great Wall Enterprises Co Ltd Taiwan Multiple 0.84 24

Henan Shuanghui Investment & Development Co Ltd China Multiple 13.37 22

Shandong Oriental Ocean Sci-Tech Co Ltd China Aquaculture 0.91 20

Muyuan Foodstuff Co Ltd China Pork 8.70 19

Fujian Sunner Development Co Ltd China Poultry 2.70 18

Guangdong Wens Foodstuffs Group Co Ltd China Multiple 17.54 17

Fortune Ng Fung Food Hebei Co Ltd China Beef 1.32 14

Chuying Agro-pastoral Group Co Ltd China Pork 1.11 14

Beijing Shunxin Agriculture Co Ltd China Pork 3.62 10

MEAT (Rest of Asia)

Cranswick PLC* UK Pork 2.12 65

Charoen Pokphand Foods PCL Thailand Multiple 6.96 65

NH Foods Ltd Japan Multiple 4.39 31

GFPT PCL Thailand Poultry 0.53 30

QAF Ltd Singapore Pork 0.42 28

Nippon Suisan Kaisha Ltd Japan Aquaculture 1.61 25

QL Resources Berhad Malaysia Multiple 2.10 19

Prima Meat Packers Ltd Japan Multiple 1.41 17

Japfa Ltd Singapore Multiple 0.58 16

Thaifoods Group PCL Thailand Pork 0.71 10

Venky's India Ltd India Poultry 0.83 7

San Miguel Food and Beverage Inc Philippines Multiple 2.30 5

Inti Agri Resources Tbk PT Indonesia Aquaculture 0.53 0

Low Risk (score of 67-100) Medium Risk (score of 34-66) High Risk (score of 0-33)


For the complete index, including results for all 60 companies, visit https://index.fairr.org

Summary of findings

*Included as benchmark meat company

GHG emissions Only one company qualifies as a low risk - Charoen Pokphand Foods PCL. Companies primarily report on their energy consumption and some key emissions (nitrogen oxides or sulphur dioxide), as required by state or national laws. Only two companies – Charoen Pokphand Foods PCL and NH Foods Ltd – report on their GHG emissions inventory (Scope 1 & Scope 2), but with limited detail. They are also the only companies with partial emission reduction targets. Encouragingly, Charoen Pokphand Foods PCL and Vietnam Dairy Products JSC have both managed to achieve a reduction in emission intensity (not solely due to revenue).

Deforestation and biodiversity Asian companies do not address deforestation or biodiversity issues actively. No company has a zero deforestation or zero net deforestation target. While most companies may not have direct deforestation risks, they are exposed to these risks in their feed supply chains. Only two companies have a supplier code, albeit a weak one. No aquaculture company has a policy or strategy in place to manage escapees from fish farms.

Water scarcity and use Nearly 50% of companies report on water use management, though freshwater consumption is reported by only a few companies. One of these is Beijing Sanyuan, a vertically integrated dairy company. The company reports on freshwater use as well as detailing its water recycling initiatives. The majority of water footprint occurs in feed production – in general, this is an issue that is barely addressed by intensive farming companies, including those in Asia. Vietnam Dairy Products JSC is the only company with a relevant target. Charoen Pokphand Foods PCL is the only company with any specific requirements for suppliers on water use and management.

Waste and water pollution This is the best performing risk factor for Asian companies. On average Asian companies outperform the average performance of companies from other regions. Over 50% of Asian companies reference manure and manure management – possibly a consequence of regulatory intervention. In contrast, no North American company in our Index mentions manure management. An example of reporting is from Inner Mongolia Yili, which has installed rainwater and sewage diversion systems as well as manure drying systems to ensure zero discharge of manure and sewage. These systems allow water and waste to be recycled and reused as resources for the farms. However no aquaculture company has a waste management strategy.

Antibiotics Few companies mention antibiotics or animal drugs. One company, China Shengmu Organic Milk Ltd, has a policy addressing no routine use while another (Charoen Pokphand Foods PCL) has a policy addressing only routine use of medically important antibiotics. The average score for the risk factor is below one.

Animal welfare While awareness of farm animal welfare is increasing, the concept remains relatively new in China. Most companies do not address animal welfare beyond a husbandry perspective. QAF Ltd is the only company with a comprehensive animal welfare policy. It is the top performer for this risk factor in the global Index. QAF Ltd’s farms are however located in Australia.

Working conditions Only three companies reference long term injury rates (with two reporting that none had occurred). Two companies have a policy that specifically calls out the four safe and fair working conditions: (a) freely chosen employment; (b) no child labour; (c) health and safety training; and (d) no discrimination. Child labour and discrimination are generally not mentioned, nor is a freely available policy on the freedom for employees to form worker’s associations. In the global Index, only 10 meat companies are assessed as “low risk” in this risk indicator. Charoen Pokphand Foods PCL is one of them.

Food safety Food safety is a key concern for the Asian food industry, given the number of scandals in recent years especially in China. Not surprisingly, most companies address the issue, and 11 companies report full traceability systems. However, transparency remains an issue. While 10 companies disclose food recalls, only two companies disclose the number of their food recalls and their food recall management process in detail – Charoen Pokphand Foods PCL and Inner Mongolia Yili, which is also the top performers in this category.

Results by Indicator

0 4020 10060 80

GHG Emissions

Animal Welfare

Deforestation & Biodiversity

Antibiotics

Water

Working Conditions

Food Safety

Pollution

Rest of World Asia

Figure 3: Average company scores across all scored risk factors for 30 Asian companies versus companies from the rest of the world

(out of 100)

0 2010 30

Antibiotics

Animal Welfare

Working Conditions

Food Safety

Pollution

Water

Deforestation & Biodiversity

GHG Emissions

Low Risk (score of 67-100)Medium Risk (score of 34-66)High Risk (score of 0-33)

Figure 4: Number of Asian companies out of 30 assessed as high, medium and low risk across all risk factors


Focus

For the intensive livestock sector, the common perception is that most ESG risks will not impact income statements or balance sheets in the near term but could prove significant in the long term. Based on our knowledge of the sector, we highlight the following signposts as possible indicators of financial materiality:

Short term The following risks could become financially material in the short term because of their significance as reputational risk drivers.

Risks Reason

Food safety For livestock companies, food safety outbreaks and scandals can lead to large-scale animal culls, recalls, a steep drop in demand and price volatility, all in the space of a short time. In 2014, Chinese authorities accused Shanghai Husi Food Co. (owned by US-based OSI Group) of intentionally selling meat beyond its shelf life. Shanghai Husi Food Co. had been supplying fast-food chain restaurants Yum! Brands and McDonald’s in China and Japan. The fast-food 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 (FAIRR, n.d.). Shanghai Husi Food Co and its US parent OSI Group were fined more than 24 million yuan ($3.6 million). In 2016, a Shanghai court further fined Shanghai Husi Food Co and another OSI unit 2.4 million yuan and 10 employees were imprisoned (Reuters, 2016).

Animal welfare Because of its link to food safety and drug use, animal welfare is a critical component of a comprehensive operational risk management framework for food companies. It can also rapidly evolve into a magnified reputation risk. For example, undercover investigations exposing animal abuse can quickly become corporate global crises through rapid social media sharing. In most cases, these may not impact the share price – but there is always the threat of the ‘Blackfish effect’ – a reference to the film that devastated Seaworld’s profits by 84% in three months (Time 2015). For livestock producers, an added risk is the loss of corporate customers who may terminate contracts under pressure from consumers.

Medium term The following risks could become financially material in the medium term because of their significance as business and reputational risk drivers.

Risks Reason

Antibiotics China is the largest consumer of veterinary antibiotics. A recent study found bacteria in the country that had developed resistance to a key antibiotic of last resort: Colistin, which is widely used in Chinese farms, despite a ban (Van Boeckel et al., 2017 & Branswell, 2017).

In the medium term, depending on the operating context, companies phasing out the routine use of antibiotics may see some cost increases, but failure to act presents a larger risk. As more food companies transition to responsible antibiotics use, livestock companies continuing to routinely use antibiotics may lose out on valuable contracts. They are also more exposed to regulatory changes, as more governments develop action plans to manage growing antibiotic resistance.

In India, the Bombay High Court in Mumbai has ordered veterinary drug stores across the state to stop selling antibiotics for use on livestock without a valid prescription. It follows a report by The Bureau of Investigative Journalism that highlighted widespread use and marketing of antibiotics to enhance weight gain in poultry and pigs. One of the highlighted companies in the report was Index constituent Venky’s, one of India’s leading poultry companies and supplier to KFC, McDonald’s and Pizza Hut in India (The Poultry Site, 2018).

Waste and pollution Manure can be an important source of soil nutrients, but the scale of intensive farming today produces quantities in significant excess of what can be absorbed by the surrounding environment. Across geographies, livestock companies are facing increasing community advocacy and litigation on poor waste management – resulting in fines and curbs on business expansion.

In 2018 Smithfield Foods, the largest pork producer in the world and subsidiary of China’s WH Group, was told to pay nearly $100 million (reduced from $594 million) in damages across three lawsuits due to the nuisance caused by the odour and noise of its pig farms where urine and manure are stored in open pools. (Wall Street Journal, 2018).

Water scarcity Water is a critical ingredient for food production and meat and dairy companies require significantly more water than plant-based foods. As global pressures on freshwater sources increase, including from droughts exacerbated by climate change, companies that derive revenues primarily from water-intensive proteins like beef and dairy are exposed to feed price volatility, regulation and community protests. While this may be a medium term risk for many companies, for some it is already a reality. In South Africa, 5% of livestock and 22% of sheep herds were slaughtered in the Western Cape in early 2018 due to a drought (Business Day, 2018).

Working conditions Unlike other industrial activities such as mining, the intensive farming sector has enjoyed limited scrutiny of its labour practices. However, as scandals in the Thai shrimp (Financial Times, 2018) and US poultry (The Guardian, 2016) sectors demonstrate, there is growing recognition on the potential for worker abuse in this industry, both at the meatpacking and processing level and deep in company supply chains. Companies that have limited focus on labour issues not only risk low productivity, but also face the heightened reputational threat of a publicised scandal.

Sustainable proteins There is growing demand among consumers to better understand the provenance of their food and to avoid products deemed unnatural or unhealthy. These ‘clean’ eating trends, driven primarily by millennials, favour foods that are healthy, ethically sourced and less processed. Increased plant-based food consumption is a direct consequence of this shift.

For animal protein producers, failure to increase exposure to ‘sustainable proteins’ thus presents the risk of not keeping up with changing consumer demand and losing an important growth opportunity. Currently, growth of plant-based meat alternatives is about twice the rate of processed meat, with annual sales of about $2 billion (Bloomberg Intelligence, 2017). An additional long-term threat is the risk of disruption from new food technologies such as advanced plant-based protein and animal cell culture technology that are developing at a rapid pace.

China’s vegan market is expected to rise by more than 17% between 2015 to 2020. Demand for pork, beef and poultry, has shown a decline in recent years with vegetarianism on the rise as more Chinese turn to fruits and vegetables (Euromonitor International, 2017).

Long term The following risks could become financially material in the long term because of their significance as reputational risk drivers.

Risks Reason

Deforestation and biodiversity

Deforestation is a direct risk for companies that source from or operate in ecologically sensitive areas like the Amazon biome. Global movements employing satellite imagery and social media can target companies perceived as having a detrimental impact on biodiverse areas, prompting a loss in supply contracts, brand damage and even regulatory fines. While the financial impact of these may be limited in the short term, livestock companies whose business models are dependent on land use changes will face constraints in the long term due to increased competition for land and growing food security concerns.

China primarily produces its own animal proteins but relies on imports for feed ingredients such as soy. By 2026, China’s meat (poultry, pork, beef and sheep) consumption will be 27% of the world’s total meat consumption. Its soybean imports will increase by 143 million tons – 48% more than the amount the current leading soybean producer (Brazil) is expected to export (FAO-OECD and USDA, 2018).

Greenhouse gas emissions

Livestock farming is responsible for 14.5% of global GHG emissions, and cattle are responsible for around 65% of these emissions. Companies with carbon-intensive portfolios - i.e., ruminants such as beef and dairy - are most at risk of potential regulation or taxation targeting the livestock sector. However, all livestock companies will also increasingly face physical risks linked to climate change impacts: from lower forage quality and more droughts to negative impacts of rising temperatures on animal health and productivity. These will present long-term growth constraints for the sector.

The question of financial materiality


Sustainable proteins

It is evident that traditional meat, dairy and aquaculture producers are under considerable sustainability pressures, and these are likely to intensify as demand for protein grows around the world. Some of the risks assessed in this benchmark can be mitigated with the appropriate technology or change in management practices. However, resource constraints such as freshwater and arable land availability will eventually curtail the sector’s expansion.

Diversification into producing alternative (i.e. non-animal) proteins is key to managing the risks of resource-constrained supply chains and seizing opportunities for market growth.

FAIRR identifies four key drivers that will shift the food system from its dependence on animal proteins towards alternative protein sources:

• growing market opportunity to meet demand for plant-based foods,

• accelerated innovation in food technology,

• increasing awareness of ESG impacts linked to intensive livestock production; and

• advocacy and regulation to moderate growth in the animal protein sector.

Market analysts expect that alternative protein is a medium to long term opportunity. In 2017, a market survey found that annual global sales of plant-based meat alternatives had grown on average 8% a year since 2010 (Nielsen, 2017). Market research firm Lux Research suggests that sustainable protein is poised to make up a third of the broader protein market by 2054 (Lux Research, n.d.). This year in Hong Kong, Right Treat launched Omnipork - a plant-based product ground pork alternative. The company expects to start selling Omnipork in mainland China before the end of the year (CNN Money, 2018).

Mainstream meat and dairy companies in North America have taken steps to hedge against the risk of being disrupted by the alternative proteins market. For example, companies like Tyson, Cargill and Maple Leaf have invested in or acquired plant-based protein brands. Tyson has invested in Memphis Meats Inc., a company in San Francisco developing lab-grown beef, poultry, and fish that is also funded by Bill Gates.

Leading investors, including in Asia, are paying attention to this growing market. Singapore state fund, Temasek Holdings and Chinese private equity firm Sailing Capital have invested in Impossible Foods, a California-based company that makes plant-based burger patties (AgFunderNews, 2018). The company has ambitious expansion plans in Asia.

Company performance on alternative proteins

For this iteration of the Index, we did not formally evaluate the 60 companies in this area beyond an assessment of any product exposure to alternative protein sources. Our analysis shows that only five of the 60 companies account for the emergence and growth of the alternative proteins sector. Two of those are based in Asia.

• China Mengniu Dairy In 2013, WhiteWave Foods, a plant-based and organic dairy milk producer now owned by Danone, announced a joint venture agreement with China Mengniu Dairy to produce and sell plant-based and organic dairy products in China (WhiteWave Foods Company, 2013). The joint company has since launched a range of plant-based beverages, and the new segment accounts for around 1.1% of Mengniu’s total revenue (China Mengniu Dairy Company Ltd, 2017).

• Vietnam Dairy Vietnam Dairy is active in the plant-based protein market, producing three different types of soy milk, some of which are fortified with calcium and other nutrients.

It is evident that mainstream companies are taking meaningful steps towards producing more sustainable proteins, but these product ranges continue to remain minuscule relative to conventional protein-based revenues. The relative paucity of companies publicly exploring alternative proteins may indicate that they are yet to view sustainable proteins as a disruptive risk.

“ We look for opportunities to support growth across our portfolio. This includes technology pioneers and disruptors, and in the case of Impossible Foods – food security.”

Temasek, Forbes 2017


AgFunderNews, 2018. ‘UPDATE: Impossible Foods Adds $114m in New Financing, Bringing Total to Nearly $400m.’ https://agfundernews.com/impossible-foods-snags-75m-series-e-from-singapore-state-fund-temasek.html

Bloomberg Intelligence, 2017. Substitute Meat Market Poised for Growth.

Bloomberg, 2018. ‘There’s a Mystery Threatening China’s $128 Billion Pork Industry’ https://www.bloomberg.com/news/articles/2018-09-17/swine-fever-mystery-threatens-china-s-128-billion-pork-industry

Branswell, H., 2017. ‘Superbug Resistant to Last-Resort Antibiotic Arises in China,’ in Scientific American. https://www.scientificamerican.com/article/superbug-resistant-to-last-resort-antibiotic-arises-in-china/

Business Day, 2018. ‘Farmers lose R14bn as Cape drought bites.’ https://www.businesslive.co.za/bd/economy/2018-02-05-farmers-lose-r14bn-as-cape-drought-bites/

Centers for Disease Control and Prevention, 2018. ‘Surveillance for Foodborne Disease Outbreaks — United States, 2009–2015.’ https://www.cdc.gov/mmwr/volumes/67/ss/ss6710a1.htm

China Mengniu Dairy Company Ltd, 2017. ‘Announcement of the interim results for the six months ended 30 June 2017.’ http://www.hkexnews.hk/listedco/listconews/sehk/2017/0830/LTN201708301586.pdf

CNN Money, 2018. ‘This vegetarian company wants to disrupt China’s pork industry’ https://money.cnn.com/2018/04/23/smallbusiness/meatless-pork-china/index.html

CNN, 2018. ‘Health officials ‘very worried’ as African swine fever spreads in Europe and Asia’ https://edition.cnn.com/2018/10/02/health/african-swine-fever-europe-china-spread-intl/index.html

Euromonitor International, 2017. ‘Plant-based Protein: Assessing Demand for Sustainable Alternatives’

FAIRR, n.d. ‘Expired meat scandal consumes value of fast-food companies along supply chain.’ http://www.fairr.org/expired-meat-scandal-consumes-value-fast-food-companies-along-supply-chain/

FAO, 2017. ‘The rise of unregulated livestock production in East and Southeast Asia prompts health concerns – UNFAO‘ http://www.fao.org/asiapacific/news/detail-events/en/c/469630/

Financial Times, 2018. ‘Thai Union: cleaning up an abusive supply chain.’ https://www.ft.com/content/225ad6d0-3be3-11e8-b7e0-52972418fec4#

Gerbens-Leenes, P.W., Mekonnen, M.M. & Hoekstra, A.Y., 2013. ‘The water footprint of poultry, pork and beef: A comparative study in different countries and production systems.’ Water Resources and Industry 2013, 1–2: 25–36. https://doi.org/10.1016/j.wri.2013.03.001

Global Meat News, 2018. ‘Chinese businesses link up to create pig farm.’ https://www.globalmeatnews.com/Article/2018/03/19/China-processors-create-giant-pig-farm

Lux Research, n.d. ‘Demand for Alternative Proteins Set to Double by 2024.’ http://www.luxresearchinc.com/news-and-events/press-releases/read/demand-alternative-proteins-set-double-2024

Nielsen, 2017. ‘Plant-based proteins are gaining dollar share among North Americans.’ http://www.nielsen.com/us/en/insights/news/2017/plant-based-proteins-are-gaining-dollar-share-among-north-americans.html

Politico 2018. ‘African swine fever: Everything you need to know’ https://www.politico.eu/article/african-swine-fever-all-you-need-to-know-belgium-hemorrhagic-fever/

Rabobank 2018. ‘African swine fever shifts global protein picture’ https://research.rabobank.com/far/en/sectors/animal-protein/African_Swine_Fever_Shifts_Global_Protein_Picture.html

Reuters, 2016. ‘Shanghai watchdogs fine OSI and unit over meat scandal.’ https://www.reuters.com/article/us-china-osi-fine-idUSKCN1230AK

The Guardian, 2016. ‘US poultry workers wear diapers on job over lack of bathroom breaks – report.’ https://www.theguardian.com/us-news/2016/may/12/poultry-workers-wear-diapers-work-bathroom-breaks

The Poultry Site, 2018. ‘Bureau story triggers historic decision to cut antibiotic use in Mumbai’ http://www.thepoultrysite.com/poultrynews/40222/bureau-story-triggers-historic-decision-to-cut-antibiotic-use-in-mumbai/

Time, 2015. ‘Seaworld’s Profits Drop 84% After Blackfish Documentary’ http://time.com/3987998/seaworlds-profits-drop-84-after-blackfish-documentary/

Van Boeckel, Thomas P. et al., 2017. ‘Reducing antimicrobial use in food animals.’ Science 357, 6358: 1350–2. http://science.sciencemag.org/content/357/6358/1350.full

Wall Street Journal, 2018. ‘Smithfield Foods Ordered to Pay North Carolina Residents Near Hog Farm.’ https://www.wsj.com/articles/smithfield-foods-ordered-to-pay-north-carolina-residents-near-hog-farm-1533334862

WhiteWave Foods Company, 2013. ‘The WhiteWave Foods Company to Form Joint Venture with China Mengniu Dairy Company.’ https://www.whitewave.com/wp-content/uploads/2016/03/PressRelease_1.5.pdf

World Resources Institute, 2016. ‘Animal-based Foods are More Resource-Intensive than Plant-Based Foods.’ http://www.wri.org/resources/charts-graphs/animal-based-foods-are-more-resource-intensive-plant-based-foods

Yinon M. B. et al., 2018. ‘The biomass distribution on Earth.’ Proceedings of the National Academy of Sciences. https://doi.org/10.1073/pnas.1711842115

References


About FAIRREstablished by the Jeremy Coller Foundation, the FAIRR Initiative is a collaborative investor network that raises awareness of the material ESG risks and opportunities caused by intensive livestock production.

FAIRR helps investors identify and prioritise these factors through cutting-edge research that investors can integrate into their investment decision-making and active stewardship processes. FAIRR also runs collaborative investor engagements with global food companies to improve performance on selected ESG issues in intensive livestock production.

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Coller FAIRR Protein Producer Index in Asia