The horse-meat scandal has alerted investors to the importance of animal welfare in the supply chain, finds Nina Röhrbein

The horse meat scandal that gripped most of Europe earlier this year drew attention to the lack of transparency in food supply chains. But with the spotlight firmly on transparency another issue remained in the background – animal welfare. It has been similarly neglected by investors.

“To date, farm-animal welfare has received little or no attention from ethical funds,” says Rory Sullivan, strategic adviser to the Business Benchmark on Farm Animal Welfare (BBFAW), which was launched earlier this year to help raise standards from the world’s leading food businesses. “Moreover, mainstream investors have never viewed it as a material issue. They have seen farm-animal welfare as, at most, a stock-specific issue and certainly not something that warrants systematic attention.”

Tracey Jones, director of food business at the NGO Compassion in World Farming, agrees. “Farm-animal welfare is currently not a core criteria in the environmental, social and governance (ESG) model of investors,” she confirms. “Historically, it has been considered a nice-to-have or a niche market. However, large corporates increasingly understand that it is a business risk not to have animal welfare in their portfolio. It can also present an opportunity as consumers become more aware of the issue.”

In fact, farm-animal welfare could be seen as a consumer-led issue that affects corporate and investor value chains alike. Even during a recession, surveys consistently demonstrate that some 70% of UK, US and Australian consumers are concerned about farm-animal welfare, according to Martina Macpherson, vice-president at MSCI ESG Research. “All the signs are positive that we are close to a tipping point in how investors view farm-animal welfare issues,” she says. “Regulation is tightening, the costs of poor performance are becoming clear and NGOs are starting to focus on the role that investors can play in encouraging higher standards. Two major animal welfare organisations – Compassion in World Farming and the World Society for the Protection of Animals – recently initiated a programme of dialogue with investors to increase awareness and encourage them to exert positive influence on the companies in which they are invested.”

However, investors’ ability to make robust company comparisons or to use farm-animal welfare-related performance in their investment decisions is limited. Research organisation EIRIS identifies two reasons: a lack of robust reporting by companies and a general absence of tools that facilitate quick, easy and consistent company comparisons.

The BBFAW was designed precisely to help investors identify the leaders and laggards – in areas such as company policy on long-distance transportation, confinement and the use of antibiotics – among listed and non-listed food businesses, including producers, processors, manufacturers, food retail and service companies. It looks at the management process and responsibility at the board and senior management level, objectives and targets, reporting, monitoring and training. With regard to leadership, it analyses whether the company has been involved in public policy work or has demonstrated some form of innovation. The aim is to review the benchmark on an annual basis, to help investors identify those companies that are moving forward and those that are not.

Despite some leaders and best practices, the overall conclusion of its report was that approaches to farm-animal welfare lag significantly behind other corporate responsibility issues. While over 70% of the companies covered by the assessment acknowledged farm-animal welfare as a business issue, only 46% had published a formal farm-animal welfare policy and only 41% described how their board or senior management oversees their approach to farm-animal welfare. And just 10 of the 68 companies stated that they included farm-animal welfare in contractual conditions, while one-third described their supply-chain auditing processes.

 “The one limitation of the benchmark is that it does not measure performance outcomes in terms of the welfare of the animal. This reflects the lack of consensus around what good outcomes look like and on how these outcomes might be reported,” says Sullivan. “The intention is to look more closely at performance outcomes over the next few years. First, however, we need companies to have basic understanding of farm-animal welfare and have basic management controls in place.”

The main concerns with the welfare of animals used in food production are about the conditions in which they are kept and transported, mutilations, and breeding and slaughter methods. But Compassion in World Farming argues that the mental and behavioural wellbeing of an animal should also be considered.

Bad welfare standards can result in bruised, poor-quality meat – but there are also concerns about food contamination, such as BSE in beef and salmonella in eggs; antibiotic residues; the use of growth hormones and pesticide; and high CO2 emissions from intensive farming.

Animal welfare is important first and foremost for the animal. However, better management and care for livestock can improve productivity and food quality, which benefits the entire supply chain, according to EIRIS, whose database of more than 3,000 businesses includes 59 involved in intensive farming.

Opinions differ as to whether producers with better welfare standards can compete with those upholding poorer, intensive-farming standards.

But Abigail Herron, corporate governance manager of the responsible investment team at Co-op Asset Management, contends that there is a strong and clear business case of the link between farm-animal welfare and financial performance, including reputational risk and supply chain disruptions.

“We have seen obvious reputational risk on the back of the horse-meat scandal,” she says. “Another example of welfare laggards leading to supply-chain disruption is the caged-egg example. EU legislation banning caged eggs was 12 years in the making but many egg producers who only began preparations for the ban at the eleventh hour went out of business, impacting both upstream and downstream. The price of eggs rose by 40% shortly after the EU Directive was enacted in January 2012. Those companies that already sourced free-range eggs in their supply chain were able to mitigate against such disruption.”

But Jones admits that better standards can come at a price. “Price is a sensitive point but it is important to bear in mind that we pay less for our food in terms of our disposable income now than ever before,” she says. “Maintaining artificially low prices comes at the expense of both the animal and the producer  –  operating at low margins or below cost of production, leads to animals being pushed harder and harder, their life is valued less, and producers are susceptible to small increases to their costs –  which is not sustainable in the long term.

“Overconsumption and wastage of meat is a problem in the developed world – if we ate less meat, grown to higher welfare standards businesses would make a profit and produce better quality meat. In the case of pigs and chickens it is possible to make improvements to welfare in indoor systems with some companies  already delivering high standards at large scale.”

But Isabelle Reinery, senior analyst at Munich-based Oekom Research, where farm-animal welfare can make up to 10% of the final rating of companies in the food and beverage sector, warns against assuming that real animal welfare can exist in factory farming.

“To talk about animal welfare would mean significantly changing to a much less intensive model resulting in higher prices,” she insists. “Small-scale farmers with fewer animals, however, are struggling to survive. In the end it all comes down to whether companies are willing to pay higher prices and are able to reduce their intake of animal ingredients. So far, this has hardly ever been the case.”

Investor pressure is needed because EU legislation – although regulating welfare standards for chickens and pigs – is not comprehensive.

“Inevitably, there will be gaps in legislation, particularly in an area such as animal welfare given the multiple species and complex issues,” says Sullivan. “Legislation is not the only driver for higher standards. Retailers are increasingly using their influence to encourage their suppliers to higher standards because they know that consumers will pay a premium to buy products from companies with higher welfare standards.”