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IPE Views: Should investors be concerned about farm animal welfare?

The treatment of company staff has long been on the radar for investors. But Joseph Mariathasan says that animal welfare is just as important  

Should issues of animal welfare matter to investors? In the extreme case, the answer is a pretty clear yes. Jeremy Coller pointed out at the launch of the 2014 Business Benchmark on Farm Animal Welfare (BBFAW) last week, that as a result of Blackfish, a critical documentary on the treatment by Seaworld of a killer whale, attendance at the Seaworld amusement park fell by 30% and their share price fell by a third and has yet to recover. In contrast, he says, restaurant chain Chipotle saw a 23% increase in revenues in the second half of 2012 after it sold itself on sourcing its meat from farmers who treat their livestock humanely without the use of industrialised factory farming.

Clearly extreme cases can impact companies both for the better as well as for the worse. But apart from the purely moral arguments, which can often be controversial, there are also issues pertaining to human health. The widespread overuse of antibiotics in animals as a disease prevention measure has been an effective cost reduction strategy for the farming industry. But it creates the spectre of antibiotic resistant strains of pathogens that are potentially harmful to the human population being incubated within the food producing animal industry.

As the BBFAW report argues, such a prophylactic use of antibiotics, which accounts for nearly half of all the antibiotics produced worldwide, is used to compensate for an inherently low-welfare environment in intensive farming where animal immune systems are compromised and sickness is more likely. It is another example of an activity where economic externalities have not been priced in, so the user of antibiotics benefits by an amount which can be dwarfed by the amount that society as a whole, loses.

Proponents of better treatment of farm animals have the objective of raising standards of care throughout the industry and that is a difficult issue to get the attention of the investor community. The underlying rationale for the creation of the BBFAW is clear - what you can’t measure, can’t be managed, whether important or not.

In that respect, the BBFAW reports are an invaluable first step to analysing the issues. They assess company approaches to farm animal welfare purely on the basis of published information in three core areas: Firstly a management’s commitment and policy regarding animal welfare that includes specific policies on issues such as close confinement and long distance transport; secondly governance and management covering areas such as farm animal welfare-related objectives, supply chain management and performance reporting and, thirdly, leadership and innovation including research and development and customer engagement.

There are 80 companies within the analysis in the three sectors of food retailers and wholesalers, restaurants and bars and food producers. But as the report acknowledges, the practice and reporting of farm animal welfare remains relatively underdeveloped. 85% of the companies acknowledged farm animal welfare as an issue, but only 64% have formalised their commitment in overarching policies or equivalent documents, whilst only 33 out of the 80 companies publish farm animal welfare-related objectives and targets.

Benchmarks are useful in not only providing a measurement, but also in encouraging improvement. Positioning relative to a peer group is always of critical interest, whether to an individual or to a company. In that respect, the BBFAW reports themselves provide a catalyst for improving behaviour.

The dilemma for its proponents though, is that fund managers who can influence companies, are themselves only going to be interested in doing so when it comes to ESG issues if they are under pressure from their own institutional clients. But few pension funds would see farm animal welfare as an issue of concern. For that to change there would need to be a greater interest from their own trustees and beneficiaries.

Joseph Mariathasan is a contributing editor at IPE

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