Animal welfare: an emerging investor issue

Animal welfare has surfaced as a material consideration for investors, as they increasingly turn their attention towards environmental, social and governance (ESG) issues when determining assets in which to invest.

When examining animal welfare risks, fundamental analysts look at future earnings growth and future earnings risk. This includes the external environment to which the company is subjected, as well as its capability to manage and navigate external sustainability drivers, recognising they may represent opportunities and headwinds to the business model.

As such, animal welfare is one of a range of ESG factors on which investors are more closely focusing. Its prominence will, however, depend on the industry in which the business operates. For instance, it will be a salient issue for a supermarket business, albeit just one of a range of ESG factors analysts consider.

Animal welfare as a public issue

Increasingly, animal welfare is a public issue, one that has political influence and affects public sentiment. It’s also a public health issue and a potential regulatory risk to companies.

Consumers appear to be increasingly focused on eating healthy foods, for instance free-range eggs and hormone-free meat. So, strong animal welfare credentials are becoming a way for businesses to differentiate themselves in terms of the product they provide, which can translate into sustainable returns.

Product differentiation is becoming increasingly important for a segment of the market and so this presents a business opportunity. Part of this is changing expectations about how companies manage their supply chain, including animal welfare.

As a result, animal welfare is becoming an increasingly important, albeit emerging issue, for investors.

Benchmarking the risk

The Business Benchmark on Animal Welfare is helping to guide investor thinking around this complex issue. It’s a critical tool for investors assessing the risk of animal welfare issues affecting returns. The benchmark measures food companies’ farm animal welfare policies, practices and disclosures on this topic.

The benchmark is a tool for investors to understand issues such as mortality rates, how long it takes for animals to go from the farm to the abattoir, as well as the proportion of laying hens in a poultry business’s supply chain that is cage-free. Antibiotic use is another factor.

The benchmark also considers animal welfare risk management factors. These include company policies as they relate to animal welfare, as well as governance and management of these factors, leadership, how businesses perform in this area and innovation.

The question is how well companies are managing these factors. The benchmark is really helpful in assisting investors to assess how companies are managing these dynamics.

In particular, investors want to gain an understanding of the direction in which a company’s risk management is going. This includes whether it is progressing, stagnating or retreating. If it’s going backwards, this may be a warning sign.

A company’s performance against this benchmark is also important, which is whether the business’s practices have improved over time. This is the outcome of the risk management system.

If its momentum is improving, that’s a socially positive aspect investors may take into account.