Risk Mitigation for Investors and Insurers

Companies in the food sector face numerous economic and reputational risks, including relating to food safety, losses of key customers, product recalls, supply chain disruptions, the inability to keep pace with competitors and what Citibank referred to as the “potential headline risk” of animal cruelty.

There is an increasing awareness among investors of the responsibility to work with food businesses to better ensure they are mitigating such risks. For instance, the New York State Common Retirement Fund issued a letter to McDonald’s about their animal welfare policy, expressing concerns about  “potential financial and reputational risks associated with McDonald’s chicken welfare practices”. The fund is the United States’ third-largest public pension fund.

Insurers may pay out significant claims to meat, milk and egg producers when animals die, become ill or are otherwise unproductive. Beyond this, one challenge for underwriters is how to best assess the potential economic and reputational risks related to animal welfare as an ESG issue when assessing a transaction with companies involved in rearing, transporting or slaughtering large numbers of farm animals.

Requiring companies to report on their practices with reference to the Responsible Minimum Standards is an effective way to mitigate these risks, because the Responsible Minimum Standards are purposely drafted to incorporate recommendations about the practices which have the greatest potential for financial and reputational damage. Investment and underwriting strategies should each include an expectation that companies are not only transparent about their business, but that they are improving their practices. Shareholders expect financial institutions to manage their portfolios responsibly, including that the companies they invest in and insure are responsible businesses.

The FARMS Initiative recommends that investors and insurers engage with meat, milk and egg producers about implementing the Responsible Minimum Standards and engage with food businesses such as restaurant and supermarket companies about their supply chains and the extent to which they meet the Responsible Minimum Standards. Further, investors and insurers should encourage and incentivize producers and food businesses to create time-bound plans to fully implement the Responsible Minimum Standards in their practices or supply chain.

The FARMS initiative encourages investors and insurers to use the Responsible Minimum Standards in conjunction with the FAO-OECD Guidance on Responsible Agricultural Supply Chains and OECD Responsible Business Conduct for Institutional Investors. They are well suited to use throughout the due diligence cycle.