Author Details

Paribesh Pradhan

Paribesh Pradhan
Senior Associate, MSCI Research

Social Sharing

Extended Viewer

Climate Change and the Cow in the Room

  • The global food system is one of the major drivers of climate change, biodiversity loss and depletion of freshwater resources, and these environmental impacts seem likely to increase as the world’s population grows.
  • Shifting from animal-based proteins to traditional plant-based and alternative proteins could offer one way to ensure an adequate food supply while mitigating the industry’s environmental impact.
  • Our model shows that decarbonization of the global food industry’s value-chain climate-transition risk could help avoid USD 295 billion in potential market-cap losses under a scenario that would keep temperature rise to 1.5°C.

The global food system is one of the major drivers of climate change, biodiversity loss and depletion of freshwater resources.1 Companies are challenged in figuring out how to reconfigure the food industry so that it can support a global population projected to reach 9.8 billion people by 2050, while investors seek to reduce climate-transition risk in their portfolio. 2,3

 

Let’s begin by talking about the cow in the room

The value of the global agribusiness and food industry currently stands at USD 5 trillion,4 with estimated sales of USD 1.4 trillion5 coming from the global meat industry in 2017. The production of animal proteins is responsible for the largest share of the food industry’s environmental footprint. Over three-quarters (77%) of global agricultural land is used for livestock production such as meat and dairy.6 Livestock-based agriculture is responsible for 14.5% of total global greenhouse-gas emissions,7 and nearly half of all global food-system emissions.8 A third of human-caused methane emissions also come from livestock production systems.9 Based on current trends, global demand for animal-based protein is expected to double by 2050, from a 2000 baseline.10

 

Dealing with transition risk

The transitional risks food companies face when embarking on the journey to decarbonize and move to a net-zero food economy are difficult to gauge. We looked at food-industry Scope 311 value-chain climate-transition risks by constructing a universe of publicly listed companies involved in food production from constituents of the MSCI ACWI Investable Market Index (IMI).12 Our review based on publicly available information showed that 46% (224 of 485 companies) were involved in traditional plant-based and alternative proteins.

Only six companies generated more than 50% of their revenues from traditional plant-based and alternative proteins. This sample set has a diverse traditional plant-based and alternative-proteins portfolio, ranging from soy products to almond-derived products to nut- and plant-based meat. We then compared the weighted average Scope 3 Climate Value-at-Risk (VaR) of these six companies to that of the entire 485-company universe. For these firms, we found that there is 95% lower value-chain climate-transition risk.

 

Climate VaR: Scope 3 value-chain transition risk
 

Weighted average Scope 3 Climate VaR 1.5°C scenario (AIM CGE) [%] as of Nov. 30, 2021 Difference [%]
Sample set of 6 Companies All 485 Companies  
-0.25 -5.41 95.34%


Source: “The Protein Transformation: A Critical Driver for Net-Zero Economy.” MSCI and Blue Horizon, 2022.

In a hypothetical scenario in which all food companies in our universe were to shift to generating revenue from mostly traditional plant-based and alternative proteins, their exposure to value-chain climate-transition risks would be reduced. According to the MSCI Climate Value-at-Risk Model, in our research universe, this would amount to USD 295 billion13 of avoided market-cap loss under a climate scenario that would keep temperature rise to 1.5 degrees Celsius (1.5°C) by the end of this century.

 

224 out of 485


companies involved in traditional plant-based and alternative proteins

 

USD 295 bn


of avoided market-cap loss in case of shift toward traditional plant-based and alternative proteins in the 1.5°C climate scenario. This equates to 7% of all market-cap in our 485-company universe.

 

95%


lower value-chain climate-transition risk for companies generating more than 50% of their revenue share from the traditional plant-based and alternative proteins

Source: “The Protein Transformation: A Critical Driver for Net-Zero Economy.” MSCI and Blue Horizon, 2022.

 

Diversifying protein portfolios

Calls for climate action (decarbonization, net-zero transitions and climate-risk disclosures), concerns over unhealthy diets, the ethical issues associated with factory farming and calls for environmental sustainability are all feeding demands for a dietary shift. The adoption of more traditional plant-based and alternative proteins is thus expected to rise, with the alternative-protein markets alone projected to reach a market value of as much as USD 290 billion by the end of this decade.14

The question for consumers is whether or not to eat animal-based proteins. For food companies, it is how to reflect a potential shift in consumption patterns. And for investors, the issue is how to incorporate these considerations as they seek to diversify their portfolios to align with a 1.5°C climate scenario.15

This post was written by MSCI ESG Research with input and contributions of data and research by Blue Horizon. MSCI ESG Research was compensated for this research. Further details can be found in the full paper.

 

 

1Springmann, Marco, et al. 2018. “Options for keeping the food system within environmental limits.” Nature, Oct. 10, 2018.

2“World population projected to reach 9.8 billion in 2050, and 11.2 billion in 2100.” UN, June 21, 2017.

3“COP26: ‘Not blah blah blah,’ UN Special Envoy Carney presents watershed private sector commitment for climate finance.” UN News, Nov. 3, 2021.

4“Global agriculture’s many opportunities.” McKinsey & Co., June 1, 2015.

5Beyond Meat’s 10k filling for 2020.

6“Environmental impacts of animal and plant-based food.” Blue Horizon, October 2020.

7Gerber, Pierre, et al. 2013. “Tackling Climate Change through Livestock: A global assessment of emissions and mitigation opportunities.” Food and Agriculture Organization of the United Nations (FAO).

8“Global food system transition is necessary to keep warming below 1.5°C: Opportunities for alternative proteins.” Climate Advisers and Good Food Institute, 2021.

9“Methane emissions are driving climate change. Here’s how to reduce them.” UN Environment Programme, Aug. 20, 2021.

10“Food Futures: from business as usual to business unusual.” WRAP, 2015.

11Scope 3 emissions are those produced by suppliers upstream and by distributors downstream from their businesses — or in more simple terms, emissions that originate from the value chain of a company.

12Universe: Constituents of the MSCI ACWI IMI belonging to the following Global Industry Classification Standard (GICS®) sub-industries: agricultural products, packaged foods & meats, restaurants, food distributors, hypermarkets and supercenters and food retailers (n=485), as of July 15, 2021. The MSCI ACWI IMI captures large-, mid- and small-cap representation across 23 developed-market and 27 emerging-market countries, covering approximately 99% of the global equity investment opportunity set. GICS is the global industry classification standard jointly developed by MSCI and S&P Global Market Intelligence.

13USD 295 billion equates to 7% of all market cap in our 485-company universe, as of Nov. 30, 2021

14Witte, Björn, et al. “Food for Thought: The Protein Transformation” Boston Consulting Group and Blue Horizon, 2021.

15MSCI. 2020. “A Food Revolution? Climate, technology and the consumer in the re-shaping of the food industry value-chain.” MSCI Thematic Insight.

 

 

Further Reading

The Protein Transformation: A Critical Driver of the Net-Zero Economy

A Food Revolution? Climate, technology and the consumer in the re-shaping of the food industry value-chain

Is the Food Industry Ready for Kunming? The Short Answer Is No.