This amorphous term ESG encompasses a wide spectrum of information and considerations but is so often assumed to mean something it does not. To paint a better picture of what the term ESG actually means, each month we will be outlining examples of what ESG integration looks like in practice across a variety of sectors, through the lenses of risk, opportunity, and impact.
ESG in Action: September 2023
- Sector: Consumer Staples
- Industry: Food Products
- ESG Issue: Climate Change
Risk: Weather disruptions
It should come as no surprise that extreme weather events and changing climates have an impact on animals raised for slaughter, much like they have an impact on human beings. Extreme temperatures have been found to stunt animal growth and development, resulting in slower growth rates, and ultimately lower overall weights.1 Less meat per animal raised means less profit for the meat farmer, despite requiring the same resources to raise the animal. In fact, a one day increase in the frequency of heatwaves every 100 days reduces cattle weights by about 200 g.2
Animals raised for consumption are also highly resource dependent, requiring mass amounts of land, water, and feed. Beef requires more feed per unit of meat compared with pigs or poultry and 20 times more land per gram of protein compared with plant proteins, like beans.3 And just like the animals themselves, extreme weather events and changing climates have a negative impact on these resources. Pastures affected by weather may reduce a farmer’s profit margin as they are forced to purchase supplementary feed— which also faces price volatility as the changing climate disrupts growth. In the first three quarters of 2021, Tyson Foods reported its operating income decreased by $410 million compared to 2020 as a result of increased feed costs, declines in hatch rates, and disruptions caused by extreme weather.4 While we may still be in the early stages of impacts that climate change has on the meat industry, these risks are only expected to increase for meat farmers as more extreme weather events become commonplace.5
Some good news for farmers is that research has found that investing in hedges and trees around pastures provides cover to the animals that may reduce some of the impacts that extreme weather has on them. Farmers that likewise invest in more substantial shelter, including better ventilation, could negate the impacts of heat stress.6
When risk becomes impact
Every year, 3.1 billion tonnes of livestock manure are produced. A lack of proper waste management can lead to nutrient imbalances in fields, as well as soil and water contamination. All of this not only impacts crop yields, but poses regulatory risks for farmers who may then be required to pay for soil remediation and water treatment. "Manuresheds" are areas located near animal feeds where surplus manure nutrients can be redistributed to fertilize crops and enhance soil health. The use of manuresheds not only improve soil health, but also reduced fertilizer costs for animal farmers.
Opportunity: Where’s the lab-grown beef?
Despite the risks posed to the meat industry, demand for beef globally grew 25% from 2000 to 2019, and demand for animal-based foods is projected to grow 79% by 2050.7,8 With a growing global population in need of low cost, nutritious protein options that can be produced at scale, and with the risks associated with meat industry’s high-resource dependence, it seems everyone is in search of the best alternative. While plant-based meats had a moment in the sun between 2019 and 2021, between the high exposure the sub-industry has to ESG risks and a decline in stock prices from the triple digits into single digits, the better meat-alternative investment might actually be investing in the (sort of) real thing.
Earlier this year, the U.S. Department of Agriculture approved the sale of lab grown meat, produced by two privately-owned, California-based companies, GOOD Meat and UPSIDE Foods.9 Lab grown meat, known as cell-cultured meat, is slaughter free and grown from the stem cells of a live animal. Although the result looks, feels, and tastes the same as traditional meat, and offers the same nutritional value, the production process is significantly less resource intensive and results in fewer pollutants and emissions.
By the end of 2022, $2.6 billion had been invested in the cell-cultured meat industry.10 The industry may still be in its infancy but the lack of resource demands to produce lab grown meats and the ability to produce it with fewer environmental impacts, may provide the best path to address meat demand in the future.
Impact: Meat = greenhouse gases
An irony in the risks posed by climate change to the meat industry is the cycle of impact created by the industry. The meat industry itself contributes to climate change through its practices, but as climate change worsens, so do the risks and challenges to the meat industry, thus self-reinforcing the loop of negative consequences.
The meat industry today contributes 15% of global carbon emissions, which perpetuate the changing climate and rise of extreme weather events. Sources of emissions include crop production for feed as well as methane emitted by the animals themselves throughout the digestion process.12
Did you know?
Beef, which requires 20 times the amount of land required for plant proteins like beans, also emits 20 times more greenhouse gases per gram of edible protein.
Today, 38% of the world’s land is used for agriculture, and two-thirds of that land is used for livestock which has degraded 20% of the world’s grasslands.11 Deforestation, which releases carbon dioxide into the atmosphere, is also a significant contributor as more and more land is cleared to make room for more pastures.
When considering the opportunity that exists in the alternative, a study released in 2021 found that cultivated meat produced with clean energy emitted 92% less greenhouse gases than traditional meat. Not only does lab grown meat require significantly fewer resources to produce, but its carbon footprint is significantly less detrimental—which ultimately impacts the meat industry’s own bottom line.
Questions an analyst might ask:
- What measures have you taken to ensure cattle in your pastures are protected from extreme weather, such as heat and rain?
- Have you invested in ventilation systems for animal shelters?
- Do you have emissions reduction targets, and what is your strategy to meet those targets?
- How do you ensure proper management of manure? Have you invested in reuse of excess waste?
The bottom line
Feed price volatility, operational disruptions from extreme weather, and animal growth rates all impact not only the quality and amount of meat produced, but also the farmer’s bottom line. If Tyson’s reported decrease in operating income as a result of the changing climate’s impact is any indication, without serious disruptions to business as usual, the meat industry will only continue to face greater risks ones that they themselves perpetuate.
Learn more
To learn more about supporting your clients with sustainable investing solutions, reach out to our team at sustainable@envestnet.com or visit envestnet.com/sustainable/.
The information, analysis and opinions expressed herein are for informational purposes only and do not necessarily reflect the views of Envestnet. These views reflect the judgment of the author as of the date of writing and are subject to change at any time without notice. Nothing contained in this piece is intended to constitute legal, tax, accounting, securities, or investment advice, nor an opinion regarding the appropriateness of any investment, nor a solicitation of any type.
Investments that utilize an environmental, social and governance (¨ESG¨) strategy carry specific risks that investors should consider before investing in ESG portfolios. Pursuing an ESG investment strategy may limit the types and number of certain issuers for nonfinancial reasons, as a result, may lead to underperforming other funds that do not have an ESG focus. A fund’s ESG investment strategy may result in the fund investing in securities or industry sectors that underperform the market as a whole or underperform other funds that are not ESG integrated or screened for ESG standards.
FOR INVESTMENT PROFESSIONAL USE ONLY ©2023 Envestnet. All rights reserved.
1 https://www.sciencedirect.com/science/article/pii/S1751731122002142#ab010
2 https://www.sciencedirect.com/science/article/pii/S1751731122002142#ab010
3 https://www.wri.org/insights/6-pressing-questions-about-beef-and-climate-change-answered
4 https://www.fairr.org/news-events/insights/how-climate-change-will-impact-animal-protein-companies-5-key-findings
5 https://www.sciencedirect.com/science/article/pii/S2211912420301413
6 https://www.sciencedirect.com/science/article/pii/S1751731122002142#s0055
7 https://www.wri.org/insights/6-pressing-questions-about-beef-and-climate-change-answered
8 https://www.responsible-investor.com/esg-frontiers-meat/
9 https://apnews.com/article/cultivated-meat-lab-grown-cell-based-a88ab8e0241712b501aa191cdbf6b39a
10 https://gfi.org/science/the-science-of-cultivated-meat/
11 https://www.fao.org/3/ar591e/ar591e.pdf
12 https://www.fao.org/news/story/en/item/197623/icode
