JBS, the world’s largest meat processor, is preparing for a billion-dollar IPO on the NYSE this year. But its plans were significantly undermined in March after a two-year investigation by the Brazilian authorities revealed high-level government and corporate involvement in a scheme to disguise and sell rotten meat to the domestic and international retail market.
This sparked consumer outcry, numerous import bans on Brazilian beef and a single-day fall of 11 percent in JBS’ share price. The company was also forced to cease beef processing at all but three of its 36 plants in Brazil and a class action lawsuit against the company seems inevitable. It’s a similar story for the BRF food conglomerate: its share price fell by more than 7 percent as the scandal emerged, and its plans for a $1.5 bn London IPO of its halal food unit One Foods Holdings may now be cancelled.
Sectors with labyrinthine supply chains face increased exposure to ethical and sustainability risks. The garment industry is sure to note that this month marks the fourth anniversary of the Rana Plaza factory collapse in Bangladesh, where poor oversight of health and safety risks led to the tragic death of more than 1,000 people. The tragedy prompted engagement from investors and companies that led to the creation of the legally binding Bangladesh Accord, to ensure brands such as H&M and Benetton undertake inspections of their garment factories.
The food sector – and meat processing in particular – seems to have more ESG issues in its supply chain than most. The Brazilian rotten meat debacle is the latest in a long line of scandals that have misled consumers, hurt share prices and damaged corporate reputations. Earlier this year British restaurant giant Whitbread was exposed for mixing pork products into beef lasagna. In 2014 one of China’s largest food processors, Shanghai Husi, intentionally distributed expired meat to the restaurant sector, resulting in a combined $10.8 bn loss of value for both McDonald’s and Yum! Brands, owner of KFC. In 2013 the UK horsemeat scandal highlighted the need for better controls at UK meat producers to preserve food safety and consumer confidence.
These food scandals sit alongside another highly significant risk in meat supply chains: antibiotic resistance. In March IR Magazine reported on how a $2 tn investor coalition was challenging fast food giants to tackle overuse of antibiotics in livestock. More than 70 percent of all medically important antibiotics are used on farm animals, and investors note that this significantly contributes to the potentially catastrophic global health threat of antibiotic resistance. The pervasive problem could wipe $100 tn off global output by 2050, affecting sectors from pharmaceuticals and agricultural commodities to producers, processors and retailers.
Similarly, livestock pandemics, such as the current bird flu outbreak in Asia, are reaching critical levels. In China alone, the outbreak has killed nearly 200 people and resulted in a cull of tens of millions of birds, pushing down prices for broiler chickens.
Trading in a globalized economy is a complex business, especially in the food sector, and there is a temptation for IROs to leave suppliers to manage their own sustainability issues. The Brazilian rotten meat scandal is a timely reminder that investors and the market don’t see things that way. Firms that allow unethical or unsustainable practices in their supply chain eventually feel the impact in the boardroom.
Maria Lettini is director of the Farm Animal Investment Risk & Return Initiative
This article appeared in the summer 2017 issue of IR Magazine
