Asia's food industry poses risks to portfolios, says Jeremy Coller.
Asia's meat, dairy and seafood companies are booming, with many investors regarding them as a smart play on rising middle-class income in the region.
The OECD predicts that Asian meat demand will grow 19% between 2013 and 2025 to 144 million tonnes – equivalent to the weight of over 19 Eiffel Towers.
However, new research this summer from Farm Animal Investment Risk and Return (FAIRR), founded to highlight ESG and factory farming issues, warns investors that the sector is vulnerable to serious sustainability risks.
For example, last month marked three years since the tainted meat scandal in China, in which food producer Shanghai Husi was recorded packaging expired and mishandled meat for customers including McDonald's and KFC – causing recalls and a public outcry. The scandal saw over $10 billion wiped off the market cap of McDonald's and Yum! Foods (KFC's parent company).
Our report warns that the scandal is not a one-off. Rather, it is an example of the weak governance in Asia's meat, dairy and seafood industry that allows poor food safety and environmental standards to persist.
Perhaps the most alarming issue highlighted by FAIRR's report is the widespread and routine use of antibiotics in Asia's livestock sector.
Overuse of antibiotics in livestock has been identified as a major factor behind the emergence of antimicrobial-resistant bacteria – which the World Health Organization has identified as one of the biggest threats to global health today. UK government research estimates that such antibiotic resistance could cost the world $100 trillion in lost output by 2050.
Asia's routine use of antibiotics in livestock puts it at the epicentre of the problem. Indeed, it was on a farm in China that bacteria resistant to colistin – modern medicine's antibiotic of last resort – was first discovered.
Despite the risks, the use of antibiotics in Asia's food supply chain continues apace, with its pork and poultry sectors set to increase their use of antibiotics by more than 120% by 2030.
Put simply, Asia's livestock industry is undermining global efforts to tackle the rise of antibiotic-resistant superbugs, endangering both people and portfolios. The rapid industrialisation of the livestock sector in Asia is creating significant environmental risks alongside the health risks.
For example, preliminary analysis estimates that the 19% growth in Asian meat demand will create more than 360 million tonnes of additional greenhouse gas emissions, the equivalent of running 100 coal-fired power plants for a year.
There are also knock-on impacts such as deforestation, as China's need for animal feed is responsible for more than a third of Brazil's soybean production. Livestock is also one of the largest consumers of water in the world.
These environmental issues are a signal to investors that the sector is likely to be subject to tighter regulation going forward.
The Paris Agreement is catalysing policy action – such as the proposal to introduce a carbon-pricing scheme in China within the next year – and emission-intensive industries such as livestock are particularly exposed.
In short, it is critical that investors with a stake in the global food value chain act as responsible stewards and work to manage and reduce sustainability risks in the Asian meat, dairy and seafood sector.
One powerful way investors can respond is by engaging with companies in their portfolios and asking questions during due diligence or portfolio monitoring.
Questions should be asked on what internal governance structures and monitoring systems are in place to evaluate food safety and whether they are externally verified; what supply chain overview and control systems the company has in place to ensure traceability 'from farm to fork'; whether there are policies governing the use of antibiotics, and if they are medically important antibiotics used for non-therapeutic purposes; and whether there is an emissions mitigation policy.
By integrating these discussions into the investment processes, investors can help to protect people, the planet and their portfolios.
Jeremy Coller is CIO of Coller Capital and founder of the FAIRR (Farm Animal Investment Risk and Return) initiative
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