There is a generation growing up in England that considers chicken tikka masala a national dish. In China, it is the same with the extra-crispy, finger lickin’ goodness of Kentucky Fried Chicken.
But for 7,000 years, chickens scratching around the edge of civilization were more of an occasional food source than a dietary staple. They were just as likely to be bred for cockfighting or to have their entrails read for omens as to be grilled, fried or boiled as a meal. How this fowl became the ubiquitous cross-cultural food of our era and the mascot of globalization is linked to factory farming.
In a short time span of decades, this has become the predominant mode of global meat production. For chickens, this means that as many as 20,000–30,000 young birds, known as broilers, are packed into windowless buildings with the space often allowed for each mature animal being far less than an A4 sheet of paper.
In the two decades from 1993, the
global chicken population grew by over 75% to 21.5 billion. There are now over three times as many chickens as there are people in the world, but chickens are not alone. In the past 25 years the percentage of factory-farmed US pigs has risen from 30% to 97%. Such exponential growth enables producers to meet the world’s growing demand for protein. However, the risks associated with the industry are posing long-term material threats to investors and to society as a whole. Emerging risks across the food value chain
The integration of environmental, social and governance (ESG) issues, such as climate change or human rights, is increasingly becoming mainstream investment practice. Yet when it comes to the integration of ESG, some issues get less attention than others.
One issue often overlooked by many is the material risk that come from poor animal welfare practices. This is an important oversight: livestock treatment, especially in the case of industrial-scale animal farming, has potentially significant implications for the environment and for human health, as well as for risk, reputation and, ultimately, financial performance.
landmark report by the FAIRR Initiative (Farm Animal Investment Risk & Return) in 2015 identified 28 environmental, social and governance (ESG) issues which can potentially affect the financial performance of companies across the food value chain – from large agribusinesses to chains of fast food restaurants.
For example, factory-farmed animals require routine treatments of antibiotics in order to remain healthy in crowded conditions. This now means that over 80% of all antibiotics in the US and 50% in Europe are used in factory farms.
This overuse is thought to be spurring the growth of antibiotic-resistant bacteria, a silent and growing threat to public health which makes common infections such as pneumonia untreatable. If not addressed, it is estimated that antibiotic resistance will cause 10 million deaths per year – more than currently die of cancer – and wipe
$100 trillion off the value of the world economy by 2050.
Emissions are another example of the unsustainable nature of factory farms. The livestock industry is responsible for 14% of the world’s greenhouse gas emissions, more than the global transport sector – yet there is no clear plan for how the sector will reform to
comply with the Paris Agreement commitments that have now been signed into law by more than 110 countries.
From the point of view of an investor or an insurer, this leaves potential unmitigated risks, such as exposure to changing regulations and possible concerns over long-term valuation as the world transitions to a lower-carbon economy.
Spurring corporate action
Recognizing both the risks and opportunities, financial institutions linked to the livestock industry must take a granular approach to assessing the ESG issues. This means looking at clients or sites to identify which operations are particularly at risk from crowded animal living conditions and considering the track-record of the client.
The risks associated with factory farming must be urgently addressed by the financial services industry. Collaborative action is needed from insurers, reinsurers, brokers, insurance associations, asset managers and regulators to ensure that the industry remains financially viable in the transition towards a low-carbon economy. Partly, this means aligning with established global policy-frameworks, but also supporting progressive investor initiatives.
Climate change and antibiotic resistance have the potential to cause value destruction on a much greater scale than anything previously seen. The financial services industry is in a key position to urge global food companies to adopt sustainable practices – helping avert an environmental and public health crisis in the process.
BELIEFS IN ACTION
Allianz is a board member of the UN-led initiative, the Principles for Sustainable Insurance. The company is also leading a global consultation on the insurance industry in 2017. This will investigate the potential for an industry standard on assessing ESG criteria in transactions. The aim is to accelerate the understanding of ESG issues in the industry, while encouraging clients towards good risk management from a financial, environmental and social perspective.
Allianz sees animal welfare as a key sensitive business area where it believes it can support clients in mitigating risk. A
sensitive business guideline applies to all Allianz insurance and investment business focusing on animal welfare. This highlights the importance of good conditions of confinement and avoiding excessive use of antibiotics, amongst others in order to screen for potential risks and if they can be mitigated.