Clare Pennington, Agri Investor, 17 December 2015
The head of Coller Capital argues investors should see factory farming as a risk like any other.
Jeremy Coller is not known for following the herd.
Sixteen years ago, his eponymous firm Coller Capital made history when it closed its first secondaries fund on $240 million. Some argue that only the Venture Capital Fund of America beat them to forming the first fund to buy private equity funds on a secondaries basis.
Coller is now turning a hand to what he says is another “revolution”: redefining risk in private equity to include animal welfare. Instead of convincing investors with his heart (Coller has been a vegan for years), Coller has set up the FAIRR initiative to argue the case for animal welfare with cold hard facts and numbers.
As Agri Investor reported last week, Coller launched FAIRR in June as an initiative and network for investors that agree to follow FAIRR’s principles and take stock of animal welfare issues. FAIRR has signatories including Aviva Investors and Actiam managing over $440 billion in assets, and Coller told Agri Investor that he expects signatories with more than a trillion dollars under management by the end of January 2016.
His initiative has also set up an online tool the Business Benchmark on Farm Animal Welfare, which FAIRR says is the first global measure of company performance on animal welfare for investors.
Overuse of antibiotics in livestock is causing resistance to life-saving drugs in animals and humans. But it also costs investors money, Coller argues. The US bird flu outbreak cost the US economy $3.3 billion, FAIRR research says. Climate change will make keeping animals in close confinement more expensive.
Consumers are worried that factory farming could not only have a negative impact on the environment, but also on their health. In developed and emerging markets like the US and China, consumers are increasingly thinking about nutrition.
The idea that factory farming could be a serious risk to investors is likely to have implications for a sector that is still relatively young in the consciousness of private equity investors. Reputational risk is also a big issue.
We spoke about the problems created by factory farming for investors, and the future of factory farming around the world. This weekend, I met with Jeremy Coller and Alan Briefel from FAIRR, as well as Nick Tapp and Adam Black from firms Craigmore and Doughty Hanson.
What is the story behind FAIRR and what are the key risks in factory farming?
Jeremy Coller: Two years ago, we realised that investors have just been left behind [when it comes to animal welfare].
Factory farming is a risk.
If you keep cattle and birds in such close quarters, you give them antibiotics as a prophylactic every day, because if one goes the whole lot go. [That is different from] administering it when an animal is ill. In fact 80 percent of all antibiotics in the US are used on factory farms. Jim O’Neill has gone one step further and said that 70 percent of medically relevant antibiotics are used on animal farms. And antibiotics were only introduced in the 40s.
The outbreak of avian flu in the US between February and July this year is estimated to have cost the US economy $3.3bn. Around $700m was provided by the US taxpayer to replace the flock, so it is subsidised one way or another. And I think if we could get investors to ask for key performance indicators from boards, having them report their exposure to antibiotics, that is something that could be done. I think it is important for investors to know how exposed they are to antibiotic risk.
But does animal welfare work as a business strategy?
Coller: Antibiotics were discovered in the 40s, so you could have close confinement if you gave them as a prophylactic. If you look at FAIRR’s research you can see that the number of factory farmed animals dramatically jumped up in the 1980s. It is a new phenomenon and we as investors could be forgiven for missing some of the risks till now. It has snuck up on us.
Arable land is finite, and today we are feeding [livestock] a lot of grain. Animals are outcompeting humans for grain supplies.
Since the 60s, the population has grown 2.3 times, and cereals produced for humans have grown 1.6 times, while [the amount of] cereal produced for animals has grown 3.3 times and the production of meat 4.2 times. You can see that big jump in the mid ‘80s [again].
We all became conscious of these consumer movements and business movements and we are wondering where investors are in this. Chipotle has been growing and creating much more compared with, say Yum! Foods and McDonalds. As everyone knows, not that many investors beat the market. It is because they are followers not visionaries.
We have been making a difference. FAIRR is providing tools for investors to put its principles into practice.
Nick Tapp: It is also important to consider how to define factory farming. Farming is very, very diverse. A substantial majority of the world’s dairy cattle spend part or all of the year in buildings, because the climate determines that to be necessary, and farmers have done so for generations. If you look at traditional alpine houses they were built to have animals on the ground floor for shelter and security, and people above them for warmth. Is or was that factory farming?
There is also a local perception issue. I am also a director of a farming business in central Europe. We put our dry cows out to loaf around under some poplar trees — the first time we did so, we were reported for animal cruelty. The local perception is that livestock live in sheds to protect them from the extreme climate. Appreciating the complexity around definition and the variability of local perception is important.
Alan Briefel (FAIRR): I think one of the big achievements is that a lot of the early adopters in this space have been not just joining FAIRR but also engaging with a lot of other investors on things they are doing. Things like the case studies, conferences and so on. It bridges the gap between the investment world and the whole future of food. People are coming at this from different angles and at different paces, but what is really good is that they are getting engaged. We have achieved a lot in the last six months, when we look at the collateral we’ve produced, the research we have funded, and so on, and there is a lot more to come in the next year or two.
Coller: The more sophisticated the market gets, the more we are likely to see new leaders emerge and big companies transitioning their model. There are profits to be made for investors who are ahead of the curve on that.
A private equity investment – 10-year funds where you get high internal rates of return from holding for 4 to 7 years – is very suitable to building a factory farm and then selling it. But [at the same time] private equity can be a lot more fluid than that. It should be seen also as stewardship. It’s not necessarily short-term. It can be a way to avoid being bought by a rival for a company with a long-term vision.
What about climate change?
Coller: Policy makers in COP21 hardly mentioned factory farming as a cause of climate change. I’ve spoken to a number of policymakers and there is zero interest in including factory farming because for now it is a vested interest. That needs to change and we can expect it to.
And we really don’t know what the unintended consequences of factory farming and using antibiotics are. For the first time they have found bacterial resistance to Colistin – our ‘drug of last resort’ – in animals and humans in the same place.
Adam, working in the sphere of environmental, social and corporate governance (ESG) how do you think factory farming could be tackled in this context?
Adam Black (principal and head of sustainability at Doughty Hanson): The sort of knowledge that is being promoted about what goes into food and its production is going to make the biggest difference. The impact of climate change is starting to become more acute and more visible. When people see these things happening around them and can link it up to our actions forcefully, that will be the key factor. There is no end-all solution, and even if there was one it is just too far off. So this is about changing the way that we behave and operate.
What I have seen over the last several years is the opportunity to make a real difference with the PE world simply by engaging with portfolio companies over ESG topics, of which factory farming is certainly one – because there is that lack of expertise within the GP community or they have just been asking the wrong questions. The FAIRR initiative is really bringing this to the fore, because it is important.
The closed-ended nature of private equity seems to suit fast growth, and would that not work well if you wanted to invest in, grow and then sell a factory farm?
Coller: We are asking investors to ask their ESG research providers to report on farm animal welfare risks and opportunities just as they would on say climate risk, palm oil or labour rights. Because factory farming is short sighted, it could be suited to private equity in its traditional sense.
That is why private equity is so attracted to it. We have asked private equity firms that we are invested in to sign a letter to abide by three minimal principles: to consider farm welfare in their investment processing, to monitor it and support transparency.
FAIRR has already attracted signatories with half a trillion of assets under management. By the end of January we are expecting over a trillion. The issue is gathering momentum very quickly.
Briefel: I think you need to look at where the trendsetters are – look at California as a lead case. There has been quite a change in consumers’ meat-eating patterns there. If you look at China and the demand there for protein, that has also been fuelled by a growing middle class. And that pattern could change quite a bit. A lot of the health cues come from places like California.
Nick, could you talk to us a little bit about environmental and social corporate governance. If health cues are leading businesses to distance themselves from factory farming because of market demand, where do investors stand?
Tapp: Consumers have broadly passed responsibility for food safety and sourcing to retailers and brand owners. The assumption is made that, for example, Tesco or Coca-Cola have an audit system in place, and have done the ESG due diligence on behalf of the consumer.
Most people don’t want to think about a panoply of ESG issues every time they buy something at the supermarket. And to a degree they also assume that the shareholders of these businesses have done this for them. Asset owners or investors are expected to take some responsibility.
What about factory farming in the context of food security? Factory farming produces cheaper meat for the consumer.
Tapp: There is a wide range of resource issues within agriculture globally, and some poor allocations of resource. I would include the subsidy system in North America and Europe for a lot of that poor allocation in developed world agriculture.
Pretty much any government involvement creates multiple perverse incentives. The subsidy system in much of the developed world, especially the big blocks, causes significantly poor outcomes when it comes to using resources to best advantage.
Included in the issues facing agriculture is the need to address issues of food security, climate change and animal welfare. FAIRR’s report is peeling the corner back on something that is very wide-ranging, and remarkably heterogeneous. There are no simple silver bullet solutions.
Coller: At the end of the day there have to be legislators and policy makers that control it too, because there is no such thing as self-regulation.
We spoke earlier about the trendsetters. Alan and Jeremy, could you tell us a bit about those?
Briefel: CalPERS’ investment director in global governance Anne Simpson was at the United Nations-supported Principles for Responsible Investment (PRI) event in New York this week, and her starting point was that getting policymakers to change will be very difficult – it will have to be asset owners who take the lead. A lot of them are still out in the States. If you take CalPERS and CalSTRS, who are two of the biggest asset owners there, being in California they are very focused on scarce resources, water and human health — and are very close to the centre of new food technology. They provide clues to where we might be heading.
Coller: Emerging markets bypassed fixed line telephony and have gone straight to wifi and mobile. We have the chance to do that with food technology. There is a proliferation of 21st century technology that is coming to a plate near you.
What has just started now is a food tech revolution. And that food tech revolution is fundamentally going to change everything. It sounds crazy now, but look at the car. We moved from a horse to the Tesla. With food it’s similar. If Ford had asked consumers what they wanted when they only had the horse, they would have said ‘a faster horse’, not a car. A question we can ask is how do we make the cow better? Another question we could ask, and some are asking, is how do we brew milk? Or Clara Foods which is brewing egg white. Or [Dutch scientist] Mark Post who was growing muscles for medical testing, and has been given a grant to grow chicken.
Briefel: And a lot of these companies are not focused on targeting vegetarians, they are really targeting the mainstream market. That is where they are making the progress – on taste, quality and price, not just trying to make another alternative soya milk.
Going back to the issues around factory farming, how does transparency and the demand for transparency from consumers play into factory farming risk issues?
Tapp: The FAIRR report highlights a number of the risks facing investors, and raises issues of management. Food fraud is not a result of factory farming. Food which has been deconstructed, and which can therefore be substituted fraudulently, is a result of the complexity of the food supply chain. Trading standards legislation came out of 19th century food fraud; food fraud is not new.
Transparency is enormously important, which is why somewhere like New Zealand has a particular advantage. They have very transparent food supply chains through to the end user, and not just to China, but everywhere else in the world with whom they trade. Lack of transparency makes it very hard to see what is going on, and therefore to appreciate the risks to which investors are putting their name. For many investors, reputational risk is right at the top. I am always cautious about governments getting too involved, because legislation has a nasty habit of delivering unintended consequences.
It is very difficult to push against the market. Look at drug control; drugs are illegal and yet clearly not controlled. There is a market. Totally unrelated analogy, but it shows that it is very difficult to push against the market, where there is demand.
The trajectory of meat consumption in developed countries changes. Consumption of animal protein in the developed world has plateaued and in some cases is in modest decline. As countries get richer they consume more animal protein in the early stages of income growth, but that doesn’t keep growing with income.
There is a point where you have enough, and can then begin to see some of the health issues that flow from increased consumption. You don’t keep eating more and more food as you can afford it. You buy televisions and so on. We also have to be aware of the cost of food in the developing world; price may be more important than other issues.
Who is fully aware of these issues and of the risks involved in ESG, and then factory farming within private equity?
Black: There are probably only about half a dozen truly qualified people with a decent number of years relevant experience behind them in, working in private equity as portfolio-facing ESG specialists in the whole of Europe. Ten years ago there were probably none, maybe one. Five years ago, there would have been three or four.
And sometimes your ESG specialist won’t be an expert on a particular topic, and when that happens you need someone who knows who best to call.
Coller: People are looking for leadership in this because they know something is wrong but don’t know how to address it, which is the point of FAIRR.
We have seen in other areas that consumer awareness has pushed businesses to change their practices. Policymakers are already acting and investors also need support. FAIRR is by investors for investors.
We went from a moral code to an ESG Committee in 2011 headed by our head of investor relations, which as asset owner led demand, to actually go into the operational weeds and are now hiring an ESG expert.
We just launched this network six months ago, and by the end of January we are expecting over a trillion. People are joining on.
Click here for the original interview (subscription only).