The writing is on the wall with reform inevitable, says executive director of the FAIRR Initiative Maria Lettini. She is optimistic about last week’s COP26 announcements which will “have to address” animal agriculture.
Representing over 300 institutional investors whose assets combined are worth over $45 trillion, FAIRR focusses on Environmental, Social and Governance (ESG) risks in the food sector.
- Are you feeling optimistic or pessimistic about the announcements coming from COP26 in Glasgow?
- There are lots of benchmarks for more sustainable food, but is the lack of alignment a problem?
- What climate risks in food are investors starting to understand?
“We welcome the government commitments that leverage over US$4 billion of new public sector investment into agricultural innovation,” Maria Lettini says.
“We are delighted to see commitments from UK supermarkets and retailers on nature and sustainable diets. This focus will be crucial to meeting the Paris goal.
“And I’m quite optimistic about the global announcement on methane reduction by 30 per cent in 2030.
“That seems very ambitious. You’re going to have to address animal agriculture to get to that one. 2030’s only eight years away.
“In this day and age if you say something, it’s out there, there’ll be huge amounts of scrutiny”
“I’m the person who loves it when governments and companies make these public commitments. I get it.
“We need action to underpin those announcements. Everyone is going to hold them accountable. In this day and age if you say something, it’s out there. Inevitably there’ll be huge amounts of scrutiny. So, bring it; everybody make announcements!
“It only means that there’ll be more cynicism in the market to see if they can hold themselves to account.
“The same with the deforestation pledge. Fantastic. With 85 per cent of governments that have world forests making these announcements, alongside funding injections of billions of dollars, not only from the public sector but also the private sector. Alongside institutional investors making commitments that they’re going to start reducing their exposure to assets that are contributing to deforestation.
“I love the circularity of those commitments because you have government, public sector, private sector, capital markets saying we’re going to start acting on deforestation.
“If you have some kind of investment tool that incentivises farmers to move away from deforesting their land in a meaningful way, that can be positive.
“The markets are changing and they’re beginning to price in this transformation”
“Then you add third-party independent assurance, to say ‘look when we come together and collaborate this is what we can do’.
“That’s a powerful message to the global market, that if we work across party lines and economic circles, we can get something done.”
Collaboration and circularity are increasingly of interest to financial markets, as Maria Lettini says, “The markets are changing and they’re beginning to price in this transformation.”
For over five years FAIRR has pointed to the fact that agriculture contributes 30 per cent of global emissions.
“It’s a key moment for investors,” says Maria Lettini. “With agriculture and the breakdown of food supply chains making their way onto the financial agenda.
“If countries are not integrating agriculture into their emissions reductions plans, they are really missing a beat.
“Developed markets with subsidies come in and drive commodities prices down. It threatens a lot of subsistence farming”
“We have the benefit of being aligned with the former UN Secretary General Ban Ki-moon and his efforts around climate adaptation and mitigation. Investors are looking at this as a real risk to the long term value of their investment portfolios.”
FAIRR is particularly focussed on the risks in existing animal and fish protein markets and what it’s identified as opportunities in alternative or plant-based proteins.
“It’s not that we’re anti-livestock per se,” Maria Lettini explans, “But it’s safe to say that the industrialisation of the sector has translated into some serious systemic issues.
“In developing markets many of those countries have yet to be industrialised. Frankly that will be detrimental, and increase income and job inequality. In some emerging markets over a third of workers are in agriculture. With industrialisation they may lose their jobs.
“Developed markets with subsidies come in and drive commodities prices down. It threatens a lot of subsistence farming. In some countries it makes it cheaper to import some agricultural goods rather than support their own economies by growing the livelihoods there in the agricultural community.
“It’s counter-intuitive. We assume that industrialising the agriculture sector means more food for the people but the external costs that need to be incorporated lead to income inequality and job losses. The maths just doesn’t work.
“We estimate the 40 top meat companies are going to lose upwards of $11 billion by 2050”
“If we don’t understand how countries are going to address and mitigate emissions in the global livestock sector, it is a huge value at risk.
“Our ask to countries is to set clear targets for emissions reductions in all sectors but to include livestock in there as well. In the absence of policy support, what happens?
“Emerging markets continue to intensify their agricultural systems, which means job losses, which means inequitable transition.
“The global animal agriculture sector is worth over $1.6 to 1.8 trillion. In terms of the value at risk, we’re talking $6 to $12 trillion of unaccounted losses in this sector.
“In our own proprietary work, we estimated that the 40 top meat companies are probably going to lose upwards of $11 billion in EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization) by 2050 if they’re not starting to think about these impacts. That’s just on the risk side and talking about climate. Not to mention the problems we can expect from animal antibiotics and so on.
“When we start to think about the opportunity side, there’s a huge growth in alternative proteins. Plant based and alternative meat products can take, in some of the most optimistic scenarios, up to 60 per cent of the protein market out by 2050, that’s a huge opportunity.”
“Companies getting all this investor interest in sustainability are asking ‘What is the agreed market metric?'”
Although, the cynicism creeping in around metrics on what’s sustainable also needs to be addressed, she says.
“The market is trying to provide frameworks. In some ways, investment managers across the entire market are trying to do the right thing to meet the standards needed to have marketable products. That’s what’s needed, given the overwhelming interest in sustainability.
“You don’t want to put your money into a fund marketed as sustainable but in fact doesn’t have a rigorous, robust framework for stock selection.
“The market is realising that we need aligned benchmarks. We need aligned data. Companies are running around a bit saying ‘we’re getting all this investor interest, why are you asking us this? What is the agreed market metric? ‘
“A lot of work has been done on this, whether it’s a Value Reporting Initiative, the SEC and other oversight agencies looking at some metrics, as well and forcing voluntary or mandatory reporting.
“There’s a lot of benchmarks out there, FAIRR included. Some benchmarks are good enough for giving you a high-level overview of the most material risk factors. But if you’re over-exposed to agriculture or animal agriculture you’re going to need much more granular data to assess to the risk and opportunities in the sector.
“You have the IEA setting targets in energy. We need an equivalent in the food sector”
“So we’re moving in the right direction. And also, the market’s moving very quickly. We’re finding it hard to keep up with best practice. Hence the evolving nature of our Coller FAIRR Protein Producer Index. What was best practice a few years ago in some places has moved on.
“The entire market needs to be able to reflect that in order for producers to accurately value which companies have an advantage and which companies are doing better than others.”
The UN’s first Food Systems Summit failed to impress in September and Maria Lettini says, “In their defence it was unwieldy. What the Food Systems Summit needs next year are some realistic targets.
“You have the International Energy Agency doing work to set targets in the energy sector. We probably need an equivalent in the food sector.
“Thousands of people could talk about the need to catalyse finance. But we don’t exactly know where these injections will have the most impact or how we get to 1.5 degrees quickest via food, because the majority of investors will still want a return on their investment.
“We’re killing ourselves with the food we’re eating”
“So, what are the best options and what can we fast track? It’s probably in several places. In climate mitigation and adaptation and also incentivisation with tough discussions of what’s happening on the subsidy front.”
The change which Maria Lettini views as inevitable has been a long-time coming.
“Nobody really understood the impact of this one sector and that goes back to the opacity,” she explains. “This has been a protected sector. There had been very little intervention over the past 40 or 50 years. It was grown to feed the world in a post-war effort and left to its own devices in many ways.
“Industrialisation was the machine to drive costs down to produce more, which has created so many problems. We’re killing ourselves with the food we’re eating.
“There’s an intersection now of the markets starting to look at environmental and social externalities, being able to put those risks in buckets that investors understand, and then think about quantifying.”
FAIRR’s updated Protein Producer Index will be released in December.