Climate Risks Threaten Investor Appetite for Intensive Livestock Production

At first glance, investment in the meat and dairy industry looks attractive. Global meat consumption is expected to grow over the next decade to a projected increase of 14% by 2030, according to the FAO. The changing global climate, however, poses significant risks and opportunities not just to this growth trajectory, but to the fundamentals of the industry.

From the rising price of feed to desertification of grazing lands and increasing regulation to reduce greenhouse gas (GHG) emissions from livestock production, climate-related risks require an extra layer of analysis for asset allocation in the sector and present opportunities for transformative change in the decades ahead.

The Paradox of the Animal Protein Sector: Both a driver of climate change, and at risk from it

Readers of GreenMoney Journal are probably well-aware of the climate and environmental impacts of the animal agriculture sector. For instance, it releases more GHG emissions than every car on the planet combined, and the UN Food and Agriculture Organization has estimated that 14.5% of all global anthropogenic GHG emissions come from livestock production. The animal agriculture sector uses 30% of the planet’s freshwater resources and continues to be the largest driver of deforestation. It also has a large part to play in the ‘silent pandemic’ of antimicrobial resistance (AMR).

What is less well reported however, and of increasing concern to financial institutions, is that the meat and dairy industry not just contributes to climate change, but is uniquely vulnerable to its effects.

A warming world, for example, means increasing heat stress on cattle. Animals that experience heat stress may have lower productivity given reduced fertility, liveweight gain and milk yield as well as immune system problems that make them more susceptible to certain diseases. Climate change increases the probability of extremes, and these fat tails have real world impacts, as we witnessed last summer when the death of thousands of cows was reported after a weekend with extreme climate conditions.

FAIRR research on material climate-related costs shows potential increases between 4-35% by 2030 and 3-53% by 2050, relative to 2020, for livestock companies based in North America, with the largest cost driver being higher animal feed prices. Thus, damaging the profitability of many meat and dairy companies, as well as those suppliers and clients that rely on them if costs are passed on.

With many of its assets operating in already water stressed areas, the livestock industry is vulnerable to decreasing freshwater quality. The sector must manage this risk alongside those it faces from increasing AMR, carbon prices and action to reduce global methane emissions.

Investors are increasingly aware of, and acting on, these risks. It is why the FAIRR Initiative, which is focused on helping investors understand risks and opportunities related to intensive livestock production, has become one of the world’s fastest growing investor networks with supporters managing over $70 trillion of assets under management (AUM) joining the network since 2016.

Pricing in Climate Risk

Data and research conducted by FAIRR supports investors in assessing systemic risks that might negatively affect the returns of their portfolios in the long run. According to FAIRR’s Climate Risk Tool, a group of 40 of the largest livestock producers face an estimated $23.7bn total decrease in earnings in 2030 compared to 2020 due to climate factors in a ‘business as usual’ scenario – based on assumptions including that the world is on track to reach 2C of warming by 2100, and that consumption of meat and dairy continues in line with current trends as the population grows to 9.2 billion in 2050. Potential hits to profits are driven largely by an increase in climate-related costs that include higher feed prices and more expected carbon taxes on emissions from livestock production.

Regulatory Risk

One of the biggest concerns for investors is that far too few meat and dairy companies are monitoring and reporting on these risks adequately. For example, by aligning the reporting to the Task Force on Climate-Related Financial Disclosures (TCFD) framework which is now mandatory in locations such as the UK and New Zealand.

FAIRR’s research of 60 of the largest meat, fish and dairy firms shows 70% of the world’s largest meat, fish and dairy companies assessed since 2019 still do not disclose any animal-farming or feed-farming GHG emissions. This lack of carbon footprint disclosure can significantly impact the financial performance of companies given upcoming climate regulation by exposing them to litigation and reputational risk, as well as the prospect of increased carbon taxes. For example, by 2025 New Zealand plans to introduce an agricultural emissions pricing mechanism, which as FAIRR’s research found can impact the country’s livestock farmers through cost increases, higher debt, and potential curbs on production.

Preserving Long-term Value

Climate risk is becoming an increasingly material issue and it is crucial that investors and companies act now or risk losing out in the future. Livestock companies are both exposed to climate risk and are exacerbating climate challenges, impacting investors’ returns. However, only six out of 40 of the largest meat and dairy companies assessed have conducted climate risk scenario analysis. A relevant exercise that the TCFD recommends is to develop strategic corporate plans that are more flexible or robust to a range of plausible future states and help them take advantage of the opportunities and adequately manage risks.

Investors expect returns to reflect the risk held. This means companies that fail to manage risks or miss opportunities related to climate change will likely have financial impacts, such as an increased cost of capital.

What are Investors Doing About it? 

These figures highlight the urgent need for meat and dairy companies and their investors to mitigate the clear risk to the bottom line. This includes exploring decarbonization strategies, such as diversifying sources of proteins towards those that have lower environmental impacts and reducing the carbon footprint of livestock. Investors are also asking companies to share their action plans around the implementation of clean food technologies, improved farming practices and adoption of innovative solutions.

For example, a group of investors has engaged with 23 leading food manufacturers and retailers, including firms like Walmart, Conagra and Kroger, to encourage them to reduce their reliance on animal-derived products and increase exposure to more sustainable proteins (e.g., plant-based proteins). Companies are still navigating the challenges of reaching scale and reducing costs, yet alternative proteins have a key role to play, especially in the mid and long term, as the alternative protein market is forecast to grow 13%-35% by 2030 and 9%-14% by 2050 in relation to its size in 2020 in developed countries.

As a result of our engagement, eight out of 23 global food companies now have targets to increase the volume and sales of meat and dairy alternatives and/or reduce brand-level emissions. 100% of the companies in the engagement are now investing in the development of plant-based products.

Investors are also engaging to reduce the industry’s emissions. FAIRR’s Global Investor Engagement on Meat Sourcing is supported by an $11 trillion investor coalition and focused on six leading fast-food companies with a combined cap of more than $281 billion, including the likes of Chipotle Mexican Grill, Domino’s Pizza and McDonalds. The investors urged companies to de-risk their meat and dairy supply chains by setting ambitious targets to reduce GHG emissions as well as reduce water consumption.

As of June last year, all six of the fast-food companies have now publicly set, or have committed to set, science-based targets approved by the Science Based Targets initiative (SBTi). Chipotle has gone one step further by committing to reducing Scope 1, 2 and 3 emissions by 50% by 2030.

Sectorial scenario analysis and company-specific data is essential for investors to make more informed investment decisions. Such data allows deeper conversations between investors and companies which can use that dialogue to develop more sustainable practices that not only mitigate climate risks, but also enhance long-term profitability and create value for all stakeholders involved.

Ultimately, collaborative engagements, supported by data, provide a powerful platform for investors to achieve their goals. And, despite the complexities of the challenge, a well-managed transition within intensive livestock production is necessary to address climate risks that are already impacting the bottom line.

 

Article by Sofía De La Parra, Investor Outreach Manager at the FAIRR Initiative. She is responsible for strengthening and expanding FAIRR’s investor network. Sofía leads FAIRR’s outreach work in the United States and collaborates on outreach in other global markets. She works closely with investor members to integrate material ESG issues and develop sustainable food systems as a key priority. 

Prior to this, Sofia led the Sustainable Proteins collaborative engagement, which targeted 23 food companies and had 84 investor signatories with $23bn AUM. Before joining FAIRR in March 2021, she led the project finance venture at Naked Energy Ltd, a clean-tech start-up. Sofía also worked as a Rating Analyst at S&P Global, following Latin American companies across different industries, including retail, consumer products and building materials. 

Sofía holds an MSc (Distinction) in Climate Change, Management and Finance from Imperial College London and a first-class BA in International Business Management from Universidad Iberoamericana Ciudad de Mexico. She also holds a CFA certificate in ESG Investing.