Many meat companies “face ruin” by 2050 under a 2°C global warming scenario, according to new financial analysis from $20trn investor-backed network FAIRR, which warned that the meat industry has its “head in the sand” over climate risk.
Developed with the input of climate modelling experts and investors including Allianz Global Investors and Aberdeen Standard Investments, the Coller FAIRR Climate Risk Tool analyses how the world’s biggest meat companies would fare in a 2°C scenario, and finds that billions of dollars could be at risk by 2050.
Other investors involved in the development of the tool – which allows FAIRR investor members to input their own data to calculate impacts of profitability of protein producers in their portfolio – were DeGroof Petercam Asset Management, Emerging Markets Investors Alliance, Invesco, Investec, Banque Postale Asset Management, Mirova, Nuveen, Sycomore.
In a pilot test, FAIRR found that Brazilian beef firm JBS could lose up to 45% of EBITDA [earnings before interest, taxes, depreciation, and amortization] by 2050.
And the meat and dairy industry is not adequately identifying and managing these risks, FAIRR said, with only two in 43 (5%) of the world’s largest meat companies – Tyson Foods and Marfrig – having undertaken their own climate ‘scenario analysis’.
By way of comparison, at least 23% of oil and gas, mining and utilities companies have performed scenario analysis.
Jeremy Coller, FAIRR’s founder and CIO at Coller Capital, said: “The failure of the meat and dairy sector to proactively plan ahead for climate risk as suggested by the TCFD has left investors no choice but to take matters it into their own hands and do the analysis themselves.”
“It’s not an acceptable strategy when it comes to this level of climate risk for the food industry to bury its head in the sand.”
The model identifies seven key risks that will impact the profitability of the meat sector in the IPCC’s scenario of a 2°C warmer world in 2050, including the increased cost of electricity due to carbon pricing, higher costs of feed due to poor crop yields and increased livestock mortality due to heat stress.
The analysis only looked at a 2°C scenario, and did not factor in several additional downside risks, including risk of stranded assets, acute physical risk, and reputational and litigation risk.
The analysis also indicates a significant potential upside for companies that invest in plant-based proteins, with the model predicting that alternative proteins will command at least 16% of the total meat market by 2050 – potentially rising up to 62%, dependent on changes in technology adoption rates, consumer trends and a carbon tax on meat.
The report makes recommendations for asset owners. It advises them to engage with exposed companies, as well as with asset managers and service providers, to understand how they are factoring climate risk in the agricultural sector.
It also recommends using benchmarks such as the Coller FAIRR Index, to identify leaders and laggards in climate management and alternative meat investment, and reviewing equity asset allocation strategies and the proportion of passive and active mandates.
Eva Cairns, Senior ESG Investment Analyst – Climate change at Aberdeen Standard Investments, told RI the firm would use the analysis to inform its sector research and engagement with companies.
“We’ll say, this analysis suggests this – what's their view on it? How are they preparing for it, and are they doing or planning to do their own scenario analysis in line with TCFD? Then we’d ask them to provide more detail and come up with a plan to transition.”
“We need to see more transparency from the animal agriculture industry on how climate scenarios are likely to affect them and how they are managing the risks to improve resilience. Disclosure on this is pretty poor in the industry – that is why this tool is so important.”
Cairns said the tool was a “great starting point”, adding: “It absolutely needs to grow and expand in terms of scenarios, and if possible include more risks that are currently not captured.”
“The great thing about the FAIRR tool is that it is accessible to everyone. And not all investors are at the moment embarking on scenario analysis or have the resources to do that.”
FAIRR told RI it would continue to build on the model in the coming months. “We will be looking to expand the model’s coverage of protein types. Further, we’d like to consider additional risks and opportunities, from the impact of extreme weather events and risks linked to stranded assets driven by shifting land-use policies to adaptive capacity measures, ranging from increased efficiency gains and carbon sequestration.”