Livestock emissions are worth some hot air

Cattle-generated greenhouse gas is an important problem, and may catch some investors off guard. However, first movers can capitalize on efforts to manage the issue.

World leaders converged on Germany this week for the COP23 conference and talks over how to slow global warming. Just months after Donald Trump withdrew the US from the Paris Climate accord, forged during the event’s previous edition, it promises to be an awkward few days for the American delegation. But it may also put the limelight on another odd-one-out: agriculture.

Farm Animal Investment Risk and Return, an investor initiative representing more than $4 trillion of institutional money, reckons the sector is largely behind peers when it comes to cutting its contribution to climate change. In a note issued in anticipation of COP23, the group points out that not a single OECD country has a plan in place to reduce livestock emissions, despite farm animals being responsible for 14.5 percent of all greenhouse gas released in the atmosphere.

In analysis published alongside its warning, FAIRR argues that the 10 developed countries with the worst-offending agricultural sectors generate emissions equivalent to burning 1.6 billion barrels of oil – or about the amount of black stuff produced by Iraq in the whole of last year.

This, FAIRR argues, exposes investors to significant risks. As the effects of extreme climate become ever more tangible, the group believes the shift toward more sustainable protein sources may be sudden rather than orderly. Institutions attracted by the sizeable returns on offer in the meat industry could be wrong-footed, just like those that snapped up oil equities ended up bitten by the retreat of large pensions from assets linked to fossil fuels. As FAIRR director Maria Lettini told us this week, investors should think about the problem before the value of their portfolio takes a knock.

It’s hard to disagree with FAIRR’s diagnosis. Other influential market players agree that the industry is late to the sustainability game: as far as climate change is concerned, “agriculture cannot continue to be the odd one out,” World Bank risk expert Marc Sadler told us last month. Developed countries need to incentivize operators and their backers to move toward more carbon-efficient production methods, for example by paying closer attention to what cattle feed on.

But the parallel FAIRR makes between the fate of fossil fuels and that of meat production is not perfect. What ended up punishing holders of oil-related assets is a complex mix of forces, including slowing consumption in the West, a glut in crude, increased competition from shale gas and the rise of renewables. The dynamic is different in the animal protein sector. Global meat consumption is growing fast, there’s no worldwide oversupply and protein alternatives, while on the up, are not yet in a position to dictate pricing for the whole category.

For investors, FAIRR’s warning may be more prescient on the early-mover opportunity than the threat side. As Lettini told us, “energy and transport were the first movers, agriculture is next in line.” Investors that spot promising innovations – healthy grain feed, say, or new, lower-emission breeds – may well find themselves ahead of the pack.

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