Why The Food Sector Must Respond To The COP26 Challenge

Jeremy Coller Foundation, Chief Investment Officer of Coller Capital and Chair of the FAIRR Initiative.

The COP26 summit set a challenge for the meat and dairy industry to take a lead in tackling climate change, but, in my opinion, the sector is woefully unprepared to deliver the action needed and risks a barrage of regulation to force it to act. I’ve warned before that animal protein producers are in danger of becoming stranded assets, and November’s commitments by governments in Glasgow, particularly on methane emissions and deforestation, make the need for dramatic change even more urgent.

The lack of action from leaders in the sector is staggering. Research from FAIRR, an organization of which I’m chair, shows that 82% of the world’s 60 biggest meat and dairy producers don’t even track their methane emissions, and none have plans to reduce their output of greenhouse gas. That’s despite agriculture being responsible for 44% of global anthropogenic emissions of methane, which is 80 times more potent than carbon dioxide as a contributor to global warming. As I have said before, cows truly are the new coal when it comes to impact on our climate.

World leaders agreed to cut global methane emissions by 30% by 2030, but now the devil is in the detail of execution. New Zealand, California and Ireland have already set targets to cut emissions of the gas, and they will be just the start. The regulatory impact will be felt throughout the industry: Ireland would need to cut its dairy herd by 20% to meet its goal, while producers in New Zealand say the country has reached “peak milk.”

The Cost Of Inaction

FAIRR calculates that a carbon tax of $53 a tonne by 2050 would also increase costs for beef companies up to 55% of EBITDA, making the sector increasingly unattractive to investors. If markets are to have any faith in the future sustainability of the animal protein industry, they need to see clear plans to cut emissions alongside tangible evidence of innovation and diversification. A growing number of companies are engaging with protein alternatives and sustainable sources of feed, but the movement is far too slow.

Alongside the risks from regulation, the costs of inaction are already being felt as the effects of storms, droughts and resource depletion hit the bottom line. Severe weather played a part in cutting income for U.S.-based multinational Tyson Foods by $410 million in the first three quarters of 2021, while BRF in Brazil disclosed to CDP that changes in rainfall will lead to losses of as much as $143 million a year (registration required).

Cutting Down On Cutting Down

The role of deforestation in the production of livestock and feed also came under the spotlight in Glasgow, highlighting the urgent need for meat, fish and dairy producers to dig into their supply chains, fully disclose their impact on the environment and take action to curb the cutting of trees.

Beef is the biggest driver of tropical rainforest destruction, followed by soy, 70-75% of which becomes animal feed. Most of the soy from deforested land in South America finds its way to Europe and Asia, but hardly any of the recipients declare the source of their feed to consumers or investors. Inadequate tracking of feed means as much as 90% (paywall) of deforestation is missed in assessments of indirect suppliers, demonstrating the vital need for full traceability and accountability for protein producers’ supply chains.

The pledge by more than 100 leaders at Glasgow to stop clearing forests by 2030 demands comprehensive action from meat, dairy and fish producers, but FAIRR’s research found only 7% of the top 60 have a policy to mitigate deforestation. And even those companies don’t have full traceability throughout their supply chains.

A handful of producers are waking up to the crisis and working to diversify their feed supply away from soy, both to reduce deforestation and to manage surging prices, which hit an eight-year high partly due to extreme weather. But such experiments, with insect protein, beans and peas, are the exceptions in an industry in which the vast majority are taking little action.

Alternatives Emerge

There is brighter news as the switch to alternative sources of protein gathers pace. Nearly half of the Coller FAIRR index of the 60 biggest animal protein producers now have exposure to alternatives — twice as many as in 2019 — showing a growing awareness of the importance of innovation and diversification to keep businesses sustainable and meet consumer demand. Positive role models for protein production are blazing a trail for changes in farming practice, but there is still a long way to go.

We have known about the risk to the environment posed by intensive animal farming for decades, yet producers have buried their heads in the sand. They’ve continued to buy feed grown on deforested land, failed to properly manage the massive amounts of manure produced by the sector and poisoned watercourses and fragile ecosystems.

Politicians, regulators and consumers are now waking up to the threat of intensive agriculture, and steps are being taken by governments around the world to clamp down on emissions, pollution and bad practices. If the industry is to remain investible, it must adapt and transform.

Key Takeaways

• To manage the ESG risks they face, animal protein producers should include specific targets for methane reduction within their emissions reduction plans.

• Meat companies need to go deeper with deforestation, including ensuring suppliers of suppliers are not causing illegal deforestation.

• To adapt and transform at the scale required, the meat and dairy industry should set ambitious ESG commitments including net-zero targets and specific goals for alternative protein production (including sustainable feed), with metrics to track progress against these targets. This will unlock more capital for sustainable food production.

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