Brazil’s recent ‘rotten meat’ scandal is the latest in a growing list of sustainability controversies emerging from the global livestock sector.

In March, Brazilian authorities accused two of the country’s biggest meat processors of passing off rotten and tainted meat as fit for consumption. The scandal sparked export bans across the globe and a share price collapse for the two companies concerned.

JBS, the world’s largest meat producer, was preparing for a billion dollar IPO on the New York Stock Exchange later this year when the scandal hit. Those plans have now been severely undermined as the company was forced to cease beef production at all but three of its 36 plants and looks set to face a class action lawsuit.

Brazilian president Michel Temer has argued that the ruse was generated by a “small nucleus of bad actors”. On the contrary, the Brazilian scandal is not an isolated event. JBS was found to have paid bribes to the government and health inspectors, and more widely the scandal has become only the latest in a string of supply chain issues that have rocked the global meat processing industry.

For example, earlier this year British restaurant giant Whitbread was found to have mixed pork products into over 200,000 servings of its beef lasagne. In 2014, one of China’s largest food processors, Shanghai Husi, distributed expired meat to the restaurant sector, resulting in a combined $10.8 billion loss of value for both McDonalds and Yum! Brands (owners of Kentucky Fried Chicken and other companies). In 2013, the UK horsemeat scandal highlighted the need for better governance and controls across the British meat sector.

Factory farming may be a factor in the increasing number of meat scandals

There are several explanations behind the increasing prevalence of meat scandals, including poor corporate governance, complex global supply chains and local market specific factors, such as lax health and safety or animal welfare regulation. However, perhaps the most significant driver may be the increasing reliance on factory farming – the production method that sees a large number of animals raised in closed barns with restricted movement – to meet a growing global demand for meat across a complex supply chain. Factory farms raise millions of animals in cramped spaces, often in unsanitary conditions and in a way that tends to be highly polluting. The combination of intensive methods of production and the pressure for ‘cheap meat’ have allowed a worrying culture to emerge that tolerates cut backs in areas such as corporate governance, animal welfare or environmental management.

Worryingly, intensive farming methods not only lead to potential governance issues but also to serious public health risks. In particular, the crowded and confined conditions of factory farming can act as a disease incubator, catalysing increasingly frequent livestock pandemics such as the H7N9 strain of bird flu.

In China alone, the H7N9 disease has resulted in a cull of tens of millions of birds and is responsible for the deaths of over 160 people. The outbreak follows pandemics such as H5N2 bird flu in 2015, and H1N1 swine flu in 2009 – which killed over 150,000 people and wiped billions off the value of many agriculture investments.

Investors taking action

Let’s take a step back – factory farming is a relatively new phenomenon and the first large-scale farms only appeared in the 1960s. However, as population growth and rising incomes have driven up meat consumption, the sector has shifted towards factory farming at a remarkable pace. More than 70% of global farmed animals are now raised in this system, including 99% of US farm animals.

So, it is only recently that the extent to which factory farming is negatively impacting our health and that of the environment and our animals, has been realised.

In the investment world, this has led investors with over $3 trillion of assets under management to participate in the FAIRR Initiative – an investor network created just over a year ago to raise awareness of sustainability issues in the animal protein sector. The investor network has engaged with some of the world’s largest food companies, such as Domino’s and Kraft Heinz, calling on them to consider sustainability issues such as those discussed above and, perhaps most urgently, the rise of antibiotic resistance – another sustainability concern that links back directly to the increased use of factory farms in the global food supply chain.

The rise of antibiotic resistance

The threat of antibiotic resistance is a particular concern to the investors that have joined the FAIRR initiative. The World Health Organization (WHO) has warned that irresponsible antibiotic practices are leading the world towards a ‘post-antibiotic era’ where routine operations will no longer be possible. A UK government review warned that by 2050, over 10 million people may die each year from antibiotic resistant infections – more than the number of people who currently die from cancer – and could wipe $100 trillion off the value of the global economy. Thus, investors in the FAIRR network recognize that growing antibiotic resistance poses risks to both health and wealth, and are taking action to protect their portfolios.

In a recent publication, ‘Superbugs and Super Risks,’ FAIRR analysed the connection between intensive livestock production and the emergence of new antibiotic-resistant bacteria. FAIRR argues that while sick animals must be treated, it is the routine preventative mass-medication of animals in factory farms that is a major contributor to the development of antibiotic resistant bacteria. Currently 70% of all medically-important antibiotics are used on livestock, and worryingly, bacteria resistant to Colistin, described by doctors as the ‘antibiotic of last resort, was discovered in a Chinese pig farm in late 2015 and has now been found in 19 countries including the UK.

The fact that these issues have gone from being the domain of NGOs and campaigners, to the agenda at some of the world’s largest financial institutions such as Aviva and Aegon, suggests the serious nature of the challenge now facing global meat producers. Financial institutions that hold food companies in their portfolios, increasingly want to know whether those businesses are managing the use of antibiotics in their supply chains, in order to protect their investments from reputational and regulatory risks coming down the line.

A more sustainable food system is possible

Encouragingly, progress is being made, with some large meat companies taking action to ensure that their businesses are sustainable in the long-term. Just in the last year, companies like Burger King and Kentucky Fried Chicken have promised to phase out antibiotics from their poultry supply chains.

The rotten meat scandal in Brazil has put the multitude of problems faced by the global meat industry in the spotlight and investors are increasingly looking to invest in more sustainable food. Fund managers recognise that the issues of supply chain complexity, public health and the environment all create major risks for their portfolios, and that businesses offering more sustainable alternatives need investment to take advantage of economies of scale. That shift should act as a wakeup call to both major food companies and wider society.

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