Category: ESG Research Report of the Year (shortlisted)
In the spirit of showcasing leadership and raising standards of responsible investment among all our signatories, we are pleased to publish case studies of all the winning and shortlisted entries for the PRI Awards 2019.
Project overview, objectives and why the research breaks new ground
The responsible investment sector has a dangerous blind spot when it comes to the ESG risks of the animal agriculture sector. Few ESG research providers offer any data or analysis on the sector, despite the fact that agriculture is responsible for 14.5% of the world’s greenhouse-gas emissions - a large share of which is from the livestock sector - and exposes investors to considerable risk.
While other emissions-intensive industries including oil and gas, extractives and the auto sector have plans in place to transition to a low-carbon economy, the animal agriculture sector is well behind the curve.
The Coller FAIRR Protein Producer Index (Coller FAIRR Index) aims to close this knowledge gap for responsible investors. It is the world’s first source of comprehensive ESG data on 60 of the largest livestock and fish farming companies, with a combined market cap of close to US$300bn. It assesses these companies across nine ESG criteria including:
- greenhouse-gas emissions;
- deforestation & biodiversity loss;
- water scarcity and water use;
- waste and water pollution;
- working conditions;
- food safety;
- sustainable proteins;
- animal welfare.
In addition to providing investors with valuable data to measure their exposure to these ESG risks, the index seeks to generate a deeper, positive dialogue on the way forward. That’s why the index also provides valuable information to the market on best practice in the management of these key ESG risks. In turn, FAIRR anticipates that this will encourage companies to establish the policies and processes required to improve oversight and performance across each issue.
To be published annually, the index will provide investors with a much-needed tool to measure which animal agriculture companies are addressing their ESG risks.
The index methodology is informed by FAIRR’s internal research on nine critical risk factors and feedback from key investors and ESG stakeholders.
For company selection, FAIRR used the Bloomberg Industry Classification System to identify publicly listed companies with material exposure to the following industries: animal production and processing, dairy and egg products, meat products and aquaculture. Whether the company controls the full extent of their value chain, from animal feed manufacturing to the sale of proteins was a consideration.
Listed companies with market capitalisation in excess of US$450m were then selected. For Shanghai-listed companies, market capitalisation was in excess of US$750m (FAIRR used a higher baseline due to limitations in disclosure or translation).
The nine critical risk factors in this index were produced through consultation with a range of stakeholders including investor groups, NGOs and companies. The risks are representative of the key sustainability issues facing the animal protein production industry, including macro trends such as the emergence of antibiotic resistance.
FAIRR used three primary approaches to identify the nine material risk factors and 22 key-performance indicators (KPIs) for the intensive livestock farming industry.
FAIRR’s approach included a review of seven top-down analyses by investor groups and NGOs and a bottom-up analysis identifying risk factors and KPIs currently acknowledged in public lings by a representative sample of companies. FAIRR worked on the assumption that disclosure is a proxy for companies’ focus on these issues.
To understand relative performance, given the different locations, proteins produced and business models of the companies, FAIRR devised a simple assessment and scoring system to develop a final score for each company across the risk factors.
It rated each company on a scale of 0–5 based on their commitments, policies and disclosure against the risk factor KPIs. All risk factors and KPIs were weighted equally. The ‘sustainable proteins’ risk factor was not scored in the pilot assessment in 2018, but scoring has been introduced in 2019.
FAIRR sent all companies their preliminary assessments in November and December 2017 for their feedback. Company responses were integrated into assessments. In the last quarter of 2018, FAIRR consulted over 40 experts, investors and companies on the index methodology.
The updated methodology is harmonised with existing sustainability standards and frameworks, including CDP, SASB, SBTi and many more. In 2019, FAIRR plans to send all companies their preliminary assessments for the next iteration of the Index.
How the findings have been applied and the wider benefits to investors
Since its launch the index has attracted wide-ranging attention. A large number of FAIRR members (and PRI signatories) have told FAIRR of their plans to use the index in both their ESG integration and active ownership strategies.
Aviva is one example. Arisaig Partners also cited plans to use the index. Most investors are using the index as an engagement tool with companies it holds, using specific insights and data points as priority topics for engagement.
One very practical example of how the index is being used came less than a month after its launch from the European Bank for Reconstruction and Development. Ukrainian food company Myronivsky Hliboprodukt (MHP) was determined by the Coller FAIRR Index to be of ‘high risk’ to investors on a number of material risk factors including food safety, water risks, animal welfare, greenhouse gases, water scarcity and deforestation. As a result of the findings the EBRD, which funds the food company, launched an investigation into MHP’s practices.
At the request of the bank, scientists and environmental experts investigated the company’s poultry farm in the Vinnytsia region and concluded that the unauthorized mass burial of poultry corpses had led to soil pollution within a radius of several kilometres, directly affecting the fruits and animal feed grown on this land as well as the water in the wells. Similar findings were confirmed by soil studies in the area of a poultry farm owned by the company in the Cherkasy region. Based on the final results of the investigation, the EBRD is keeping its shareholding in MHP under review.
ESG research providers have shown an interest in the index and the data it provides, as it’s clear that there was a real need for a more comprehensive understanding of how 60 of the world’s largest meat and fish producers were managing their material ESG risks.