Cows with identification tags attached to their ears poke their heads through a fence in a barn at a dairy farm operated by Kalm Kakuyama K.K. in Ebetsu, Hokkaido, Japan. (Photographer: Tomohiro Ohsumi/Bloomberg)

A Private Equity Veteran Wants to End Animal Factory Farming

(Bloomberg Businessweek) -- The first investor network dedicated to alerting the financial community of the risks and opportunities stemming from intensive livestock production has seen its assets under management nearly double in the past five months, to $9 trillion spread across 90 members.

Industrial-scale livestock producers’ greenhouse gas emissions now exceed the transport sector’s. They use 80 percent of the antibiotics sold in the U.S., driving growth of “superbugs,” which Dr. Margaret Chan, former director-general of the World Health Organization, has warned could lead to an “end to modern medicine as we know it.” In a world with a ballooning population and increasing water scarcity in many food-producing areas, livestock companies are less efficient at converting water into calories and protein than many plant foods.

Jeremy Coller, a former head of equity research at Fidelity and founder of Europe’s first private equity secondaries fund, launched Farm Animal Investment Risk & Return (Fairr) two years ago. A vegan from his necktie to his shoes, he says he hoped “to show that factory farming could be a stranded asset and make those risks transparent to investors.” Then “they’d start being concerned that it could go the same way as coal, or as sugar is starting to go now,” he says.

Coller, 60, wants to bring this notion into the mainstream of environmental, social, and governance (ESG) concerns, which measure the sustainability of companies in three broad areas and are increasingly seen as a proxy for good management—and a harbinger of superior performance. The environmental and social impact of large-scale meat production, he says, “is a forgotten ESG issue. Factory farming is cheaper for the consumer but really bad for investors.”

The past six years have seen an uptick in shareholder resolutions in the food and ag sectors, according to sustainable investment group Ceres, which tracks such votes. Industrywide, says Todd Cort, co-director of the Yale Center for Business and the Environment, “we’re seeing a lot of the same movement and trends in the protein industry” as have occurred in oil and gas over the past few years.

Fairr’s concerns started to gain traction among ESG investors in early 2013, according to Abigail Herron, global head of responsible investment at Aviva Investors. The first global report on companies’ performance on animal welfare, the Business Benchmark on Farm Animal Welfare had just been released, detailing the business case for managing farm animal standards. A month later a horse meat scandal rocked the U.K., with equine DNA found in products labeled as beef. Coller’s group later “provided the big picture of all the negative risks associated with factory farming,” Herron says. “Presently, the valuation of companies don’t take those risks into account, so the concern is these companies could become uneconomical because of changes in regulations or market sentiment.”

Younger consumers are already turning away from meat. Thirty-nine percent of Americans are trying to eat more plant-based foods, according to a 2017 report from Nielsen; and 30 percent of millennials eat meat alternatives every day.

Companies are responding with more plant-based protein products. Tyson Foods Inc., the top meat and poultry producer in the U.S., now declares on its website that it’s “a protein-focused food company,” and it recently led an investment round in Beyond Meat, a company that  makes a burger from pea protein. Impossible Foods’ “Impossible Burger” is now in 1,300 restaurants nationwide; the company opened a facility last year with the capacity to produce 1 million pounds per month.

“Call it the Shake Shack factor,” says Jim O’Neill, former chief economist at Goldman Sachs, who in 2014 led the Review on Antimicrobial Resistance, commissioned by then-U.K. Prime Minister David Cameron to look into the growing problem of drug resistance and then recommend solutions. Plant-based foods “appeal to the younger generation, and taking some market share from bigger players, has awoken U.S. food retailers.”

Whether risks such as regulators raising producers’ costs by cracking down on antibiotic use—as O’Neill’s task force recommended—awaken mainstream investors remains to be seen. Coller is keeping the pressure on with reports such as February’s Plant-Based Profits, which chided Costco Wholesale Corp. and—perhaps surprisingly—Whole Foods Market Inc. for not providing investors with sufficient data on plans to diversify their protein offerings. In August a call for zero deforestation in Brazil’s Cerrado savannas drew support from Tesco, Walmart, and even McDonald’s.

“The big trend for Big Meat,” says Yale’s Cort, “will be which of these issues that [companies] are putting into [their] sustainability report—antibiotic resistance, [greenhouse gas emissions], or water intensity—is material enough that it should be in the financial statements.”

©2018 Bloomberg L.P.