Case study by FAIRR Initiative
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 2020.
Give a brief overview of your project’s objectives and how your approach to the subject matter differed from previous research
Global investors are increasingly able to quantify climate risk in high-emitting sectors like energy, transport and utilities, but there is a gaping hole on climate risk for the global meat industry. An industry that is responsible for 15% of global greenhouse gas emissions and which shows low levels of climate disclosure and governance.
The meat industry’s poor climate reporting has until now made it impossible for investors to measure and manage its climate risk. For example, research for the Coller FAIRR Climate Risk Tool found that only 5% of leading meat companies have undertaken a climate scenario analysis, compared to at least 23% of oil and gas, mining and utilities companies.
The aim of the Coller FAIRR Climate Risk Tool is to remove this roadblock and to enable investors to quantify climate risk in the meat sector.
FAIRR’s tool originally carried out a TCFD-linked scenario analysis for 35 leading meat producers. This enabled investors, for the first time, to assess the potential downside risks and upside opportunities related to animal protein companies in a two-degree world in 2050.
Another point of difference from any research that has gone before in this sector is that the Coller FAIRR Climate Risk Tool is an online research tool where investors can input their own company data to calculate impacts on profitability. Thus its universe is not restricted to the now 41 companies covered by FAIRR’s work.
Describe your methodology, including how you addressed macro trends and mechanisms for effecting systemic change.
The tool is based on scenario analysis, as recommended by TCFD, based on data from IEA ETP, WEO and the IPCC reports, combining scientific research on emissions pathways that would lead – with a likelihood of 66% - to a global warming potential of 2°C. The methodology also takes into account public policy scenarios from the PRI’s Inevitable Policy Response.
As an example, the model builds in the likelihood of a large market re-pricing event near 2025, when climate policy is assumed to start affecting the cash flows of companies. The FAIRR Initiative worked with Vivid Economics on this element of the tool. The underlying research also looked at projections of alternative protein sector futures.
The FAIRR Initiative identified six key risks that will impact the profitability of the meat sector in its scenario analysis:
- The imposition of a CO2 price on meat
- increased energy and electricity costs
- increased feed costs
- increased cattle mortality
- alternative proteins
- increased veterinary and medical costs.
The model includes the most widely-produced and consumed animal proteins globally (beef, poultry and pork) and focuses on geographies with large meat producers: Brazil, Canada, and the US. Company financial inputs are 2018 figures obtained from databases such as Capital IQ.
The Tool then identifies three climate pathways that animal protein companies could take, which present downside risk or upside opportunity compared to following a market pathway:
- Climate regressive pathway: Company mitigates climate impacts worse than its peers, and does not grow exposure to alternative proteins.
- Climate market pathway: Company mitigates climate impacts no better or worse than the overall market, limited exposure to alternative proteins.
- Climate progressive pathway: Company mitigates climate impacts better than its peers, and grows alternative proteins faster than market.
Results depend on how well each company is currently reporting and responding to climate risks. Investors can use the tool to analyse the material impacts of a 2°C temperature rise on 41 leading producers of beef, pork and chicken. Investors can also input their own company data.
FAIRR worked with over 30 investor analysts and sector experts to develop the model, including representatives from the Oxford Martin Programme on the Future of Food, Chatham House and Imperial College London. In June 2020, an update to the model will be released, to cater for investor feedback and improve functionality
Outline how your findings have been applied in a practical context and their wider benefits for investors or the financial system.
With global coverage in publications such as the Financial Times, Bloomberg, Frankfurt Allemagne and Valor Economico (Brazil), the impact and innovation of the Coller FAIRR Climate Risk Tool have been widely recognised since its launch in March 2020.
FAIRR’s membership includes over 200 investors managing $20 trillion of assets, and Google Analytics data show that the tool is regularly accessed by many of these. Early feedback since March suggests that investors are using the tool both in ESG integration and engagement programmes.
To illustrate how investors can use the tool, FAIRR undertook a pilot scenario analysis on five animal protein giants (BRF, JBS Maple Leaf, Minerva and Tyson Foods) on its launch. These companies have a combined market capitalization of $50 billion (as of Feb 2020).
The illustrative scenario, presented by this pilot found that Canadian firm Maple Leaf, could see EBITDA grow by 77% in a climate progressive pathway (versus a baseline pathway) given its significant investments in alternative proteins relative to peers and no exposure to beef. On the other hand, Brazilian beef giant BRF could see EBITDA reduce by 30% (versus a baseline pathway) if they fail to improve market share in alternative proteins and reduce exposure to beef and poultry.
The tool is being used in two practical ways:
- Risk management: Investors are being made aware that billions of dollars could be at risk, both at large meat producers and for household brands such as McDonalds, Walmart and Burger King.
- Opportunities: The tool also illustrates that companies have the potential to convert downside risk into upside opportunity by taking a climate progressive pathway. This has enormously raised awareness of opportunities for investors to engage with large meat, fish and dairy companies to encourage them to diversify their products into plant-based as well as animal proteins. Among 60 of the largest meat, fish and dairy producers (as analysed by the Coller FAIRR Index), the number investing in plant-based products tripled last year.