Investment risks and opportunities

The urgency for sustainable food production

Strategy insights

The risks associated with factory farming have increased and are linked with environmental and healthcare concerns. Producers, consumers, and investors need to understand the risks and examine how food is produced. Triodos Investment Management invests in sustainable food production and in companies that offer alternatives to animal protein.

Protein is an essential part of the human diet, the source of which in most parts of the world is meat. Most of this meat – around 70% of worldwide livestock production – is produced on an industrial scale, known as factory farming.

The risks associated with this production method have increased and are linked with environmental and healthcare concerns. Producers, consumers and investors – in fact society as a whole – need to understand the risks, manage them, and examine new opportunities that arise from this urgency. Triodos Investment Management invests in food companies that offer alternatives to animal protein.

Sustainable development risks

By 2050, the world population will have risen to over 10 billion, and demand for food will have increased accordingly. Currently, much of the world relies on meat for its protein requirements. Meat production takes place on a massive industrial scale, with around 70% of livestock being produced using intensive farming techniques.

A recent study by the University of Oxford indicates that public health and environmental expenses associated with the increased demand for animal products could be up to USD 1.6 trillion globally by 2050, if the current trend continues. Other research shows that it will not be possible to limit temperature rises to 2˚C – the goal agreed at the UN Climate Change Conference, COP21, in 2015 – if livestock production and consumption are not reduced.

The next big risk

The current levels of livestock production are unsustainable, with negative environmental and social consequences that lead to financial risk. Many international media outlets all report that after fossil fuels, factory farming is the next big material risk for investors.

Fair Animal Investment Risk & Return (FAIRR), an investor initiative that aims to put factory farming on the ESG agenda, claims that there are several risks that investors need to know and manage. It claims that if a company is lagging behind on animal welfare standards, it’s likely to be a proxy for poor governance. And that can be a big concern, particularly if a company’s reputation is at risk from activist pressure and scandals.

A company also needs strong governance to steer the way through regulatory changes such as those related to taxation and quota frameworks. These developments are already on the radar of several governments – Denmark is considering a tax on red meat, whilst China is urging citizens to eat less meat, aiming to cut consumption levels in half.

Other risks raised by FAIRR include supply chain disruption, which is inherently more susceptible when reliant on exploitative and unsustainable practices, and increased capital costs, which result from increased intensity of production, and which may see more shifts to developing countries where regulation is less robust and activist pressure is greater.

The dynamics of how we consume protein are shifting – investors must manage the risks and capitalise on the opportunities to protect value.
Jeremy Coller, founder of FAIRR

Seize the opportunities

As always, however, risk goes hand in hand with opportunity. In addition to helping mitigate the risks, investors and companies can also seize the opportunities from a shift towards more sustainable production and consumption. Jeremy Coller, Founder of FAIRR says, "The dynamics of how we consume protein are shifting – investors must manage the risks and capitalise on the opportunities to protect value. "

Consumer demand for non-meat protein is increasing in many countries. Last year in the US, it grew almost 60% compared to 2011, and in Norway frozen meat alternatives grew by 77% in 2014. The trend is also visible on bottom lines. A UK sandwich chain, Pret A Manger, increased meat-free and plant-based options and saw comparative sales rise by 70%. US company WhiteWave Foods, which makes and sells plant-based alternative foods and beverages, is part of the Triodos Sustainable Investment Universe until the acquisition. The take-over of WhiteWave Foods by Danone in July this year for USD 10.4 billion is awaiting approval from regulators.

Food tech companies and start-ups are exploring substitutes, and technology is being used to develop lab-grown beef, which when compared to beef, is said to use 45% less energy, produces 96% fewer GHGs and requires 99% less land. These plant-based alternatives can also be more cost effective and drive purchase prices down, which is likely to increase consumer demand.

Engaging with supermarkets, food retailers and producers is also an opportunity. Triodos recently joined the FAIRR Initiative as part of our investment strategy to collaborate with like-minded investors. The network of 40 global institutional investors represents assets under management of more than USD 1.25 trillion and is engaging with 16 multinational food companies to highlight the material risks of factory farming, and urging them to identify their strategies to respond. Two of the companies are in our sustainable investment universe, namely Marks & Spencer and Whole Foods Markets.

The case for sustainable food production

The case for a more sustainable food production system and a change in diet is clear and so is the urgency to do something about it. Triodos encourages all investors to consider the risks of factory farming, and to develop their strategies and capitalise on the opportunities for alternatives.

*Statistics mentioned in this article have been sourced from the FAIRR and ShareAction 2016 Briefing Report, Future of Food: The Investment Case for a Protein Shake Up.

FAIRR & ShareAction: The future of food: The investment case for a protein shake-up, 2016

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