Jeremy Coller: “animal welfare is an ESG risk” – Real Deals article

Private equity returns are at risk from exposure to factory farming, says the secondaries pioneer.

Jeremy Coller, Real Deals, 14 January 2016

Throughough 2015 the private equity industry continued to show strong improvement when it comes to managing sustainability, but new research shows that one of the most critical sustainability issues – farm animal welfare, which affects all the meat and dairy we consume – is also one of the most overlooked by private equity investors.

The world is not getting any bigger, but the number of people who live in it is. The challenge has been, and continues to be, how to feed the global population. It is this challenge, against the backdrop of an ever increasing global demand, that has led to traditional farming methods being quickly replaced by this new industrial model – the factory farm. Research shows that the rapid group of animal factory farming is a phenomenon that is set to shape investment risks and returns in a significant way in the coming years.

From pandemics to pollution, the animal factory farming sector is becoming a high-risk sector for investors, and is exposed to numerous different sustainability-related factors. In many cases these risks are already showing evidence of significant value destruction, and behind the facade are a number of inconvenient truths which investors simply can’t ignore.

There is a very real threat of increased drug resistance. Factory farming consumes 80 percent of the US’s production of antibiotics, 80 percent of which is used on healthy animals. When passed up the food chain, these antibiotics are generating highly resistant bacteria which can kill humans and animals alike. And another human health issue – in the US last year the concentrated nature of factory farming catalysed the spread of avian flu, spreading it further and faster than any other historical outbreak and causing an estimated $3bn on economic costs.

At a company level we’ve also seen how lax standards around animal welfare can inflict write downs and even bankruptcy. In 2008, evidence of animal cruelty and health concerns against California-based meat packers Hallmark/Westland forced them into the biggest meat recall in US history. They recalled more than 143m pounds of beef, costing $116m (106.9m Euro) and, with a further compensation settlement due, was forced into bankruptcy in 2012.

The power of social media and changing consumer behaviour also means that an awareness of the risks associated with animal welfare issues is on the rise, and as such is becoming increasingly effective at transforming those profitable businesses overlooking these risks into value-destroying liabilities. Smart investors will be taking note of this now as the long-term risks of animal welfare issues pose a material threat to investors and to society as a whole.

It’s not just evidence of reported animal cruelty that warrants scrutiny. In the wake of the COP21 talks in Paris emissions are another good example, and give rise to another inconvenient truth – a substantial contribution to global warming and pollution. Densely concentrated animal populations produce huge amounts of waste which has a vast adverse effect on air and water pollution. Factory farming alone contributes 30 percent of global methane emissions and 65 percent of nitrous oxide emissions. Today, livestock farming produced more global greenhouse gases (15 percent) than the transport sector (14 percent). This leaves factory farming critically exposed to potential new climate legislation as we transition to a more carbon constrained world – and with it, those investors exposed to it.

However, for private equity investors willing to explore the burgeoning meat-alternatives sector, there remains great opportunity. For example, they should take a look at alternative food tech company Hampton Creek, who are set to become the fastest growing food company in history. Similarly, companies that have led a charge towards more sustainable sourcing have tended to outperform over the last few years.

Investors are beginning to wake up to the risks and opportunities associated with animal welfare. So far, investors with almost half a trillion of assets under management have joined the Farm Animal Investment Risk & Return (FAIRR) Initiative which aims to consider these issues in more detail and, importantly, provoke more awareness amongst investors to allocate time to understanding, identifying and mitigating against the associated risks.

Investors must consider farm animal welfare issues as part of their investment research. The long-term risks of animal welfare issues pose a material threat to investors and to society as a whole, and I believe it’s an issue that we’ll see move to the top of investor agendas in the coming years.

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