The Farm Animal Investment Risk and Return (FAIRR) initiative in collaboration with Asia Research and Engagement (ARE) has produced a report detailing the investment risks in the Asia-Pacific factory farming industry. Each chapter highlights how these issues can translate into risks or opportunities for companies and provides questions that investors can use to understand the ability of companies to manage those risks and opportunities.

These risks affect consumer health and nutrition, public health, environment, animal welfare, and the labour sector.

Food safety and nutrition

The report categorises food safety and nutrition as the greatest risk in this industry. Cases evaluated within the report outline numerous instances of poorly managed practices, bacterial contamination leading to illness and death, fraudulent misrepresentation of food ingredients and labelling, and irresponsible corporate decisions. These scandals critically damage company and country reputations as consumers have shown increasing demand for greater transparency, plant-based alternatives, and preference for more sustainable companies.

Public health risk

Antibiotic overuse in these industries has created a population of antibiotic-resistant bacteria capable of rendering current antibiotic medicines ineffective. This resistance has led to greater opportunities for transmission, illnesses to transit national borders, and cause harm to public health through consumption or exposure to affected animals.

Government regulation and public awareness of antibiotic resistance has pressured producers to yield to lower use. Although, with rising populations of antibiotic-resistant bacteria, producers risk culling livestock populations if illnesses are transmitted. The report expects this to invoke price and supply shocks in regional and global supply chains.

Environmental risk

The industry’s land-dwelling livestock is a large polluter of natural environments as their activities have high water footprints, emit greenhouse gas (GHG) emissions, and accelerate land degradation. Climate change also poses as an environmental risk to the industry as natural disasters can cause extensive impacts on livestock health and supply.

Given these effects, the report states that it is likely that governments will impose stricter regulation to lower emissions and pollution from livestock producers and that these changes would create price risks and cost volatility in this industry.

Animal welfare risk

Recently, there has been increasing public demand for stricter animal welfare standards. This is attributed to greater awareness of current animal welfare standards and religious and cultural beliefs. Developed countries importing products from this region have subjected producers to stricter ethical standards in recognition of these demands.

These trends are expected to strengthen over time, so it remains paramount that investors are vigilant in analysing whether these companies are committed to evolving with change or standing firm with the status quo. Companies that fail to embrace this shift in attitude risk losing customers in the long-term.

Labour risk

Infringements to human and labour rights can inflict reputational damage on companies and countries. Governments of developed countries have imposed stricter labour standards on producers to ensure compliance throughout their trading relationship.

Investors are cautioned by the report to evaluate a company’s employment policies, trading partners, compliance with local labour standards, and their responses towards any breaches of labour standards.

1. The aim of this report is to help investors and companies better assess and manage the sustainability risks inherent in meat, dairy, and seafood production in Asia.
2. The report provides key questions for investors to answer so they can effectively analyse sustainability initiatives and risks of any company operational in this industry and region. These questions are sorted into broader topics featured at the end of each chapter.
3. There are numerous case studies of companies, scandals, and market outlines featuring data that reflects the risks discussed in the chapters. Appendices feature an extensive overview of select Asian market countries detailing meat, milk, egg, and country data such as supply and per capita consumption.
4. Consumer awareness of the meat industry's sustainability issues has increased demand for plant-based alternatives. Between 2012 and 2016, new product launches with vegetarian claims increased 140% and new product launches with vegan claims increased by 440% in Southeast Asia. Plant-based protein producers such as Beyond Meat and Quorn have been instrumental in meeting consumer demands for more sustainable options.
5. The demand for animal feed in Asia is driving deforestation. This has been a major challenge in Latin America, where rapid growth in soy cultivation over the years has come at the expense of the rainforest. Asia is a major destination for this soy, with China taking 35% of Brazil’s total production for 2016, much of which is converted to feed for pork and poultry production.
6. Animal products, especially beef and lamb, have significantly higher associated GHGs than most foods. For most forms of livestock, emissions are due to fertiliser use and land use change for feed supply. For ruminants, such as cows and sheep, methane released from the animals during digestion results in a high GHG emissions intensity. Even chicken, the least carbon-intensive meat, causes 65 times more emissions per calorie produced than legumes.
7. In China 2008, melamine was added to milk and infant formula affecting an estimated 300,000 people. Melamine increases the apparent protein content of food products but also causes kidney problems: six children died from kidney damage while 54,000 children were hospitalised. The incident involved more than 20 companies and resulted in significant value destruction. Sanlu Group, the company at the centre of the scandal, went bankrupt – while dairy giant Fonterra, which held a 43% stake in Sanlu, faced losses of NZD 200 million ($144.7 million) following these events.
8. While the new wave of middle-class Asian consumers currently seem willing to spend on meat, dairy, fish and eggs, they are also better informed on the downsides of meat consumption, particularly around nutrition and food safety. An increase in such consumer awareness has the potential to significantly impact long-term demand, with several companies already diversifying into plant-based alternatives.
9. A Taiwanese start-up, Healthy Living Biotechnology Co Ltd. (HLB), has developed an entirely transparent business model in the egg production market. HLB farms has committed to producing antibiotic-free eggs featuring traceable QR codes where consumers can locate the egg's provenance and farm certification. In Taiwan 2017, a scandal involving dioxin-tainted eggs caused conventional egg sales to drop 20% while HLB sales tripled as consumers demanded safer, trustworthy products. This scandal shows how important food safety is to consumers, and how making greater efforts into increasing transparency in supply chains strengthen consumer retention and company performance.
10. A collaborative global effort involving consumers, investors, companies, and governments is needed to promote and enforce compliance with sustainability initiatives concerning global food supply chains. The factory farming industry in Southeast Asia involves countries beyond its regions that consume and import its products, so global strategies aimed at managing these five risks are required to achieve more sustainable practices.