The post ESG and its impact on the commercial property sector first appeared on ESG Foundation.

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The post Assessing the ‘G’ in ESG first appeared on ESG Foundation.

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Following the pandemic, there has been an increased global focus on animal welfare and tracing antibiotics usage in Asia – being home to the largest livestock-producing country and the leading consumers of antibiotics in the world, China. According to a study by Thomas et al. (2015), the livestock production system in China has intensified with the help of antimicrobials.

Antimicrobials consumption is projected to nearly double in the future. In recent decades, the meat-producing industry has been affected by factors such as a tightening of environmental protection policy and outbreaks of viral zoonotic epidemics – such as African Swine Fever and H1N1 – and tripled by increased awareness among the public about the issue about food safety.

Contagious animal diseases are one of the typical material risks that these companies in the intensive animal farming industry are exposed to. One of the causes of these diseases is the overuse of antibiotic drugs in intensive animal agriculture industry. Corporations in this industry use antimicrobials as a feed additive to marginally improve animal growth rate.

As a result of natural selection, drug-resistant bacteria survive and multiply inside farm animals’ body, weakening animals’ immune system and therefore making them susceptible to virus pathogens. Christy et al. (2018) also informs that antibiotic-resistant bacteria inside farm animals might transmit to human beings through food chains or disseminate in the environment through animal wastes. The disease spread tendency and antibiotic resistance problems go hand in hand, bringing food safety crisis to the spotlight.

How can this be addressed?

Improving animal welfare and addressing the issue of antibiotics overuse should start with setting up a feasible ESG reporting framework to enable stakeholders track companies’ achievements in managing animal welfare. The SASB and GRI reporting frameworks recommend that corporations in the animal farming industry consider animal health and welfare as a material topic to disclose in their practices for responsible and prudent use of antibiotics and how they protect animal health and welfare. Companies can improve their animal welfare in reference to the ‘five freedoms’, which are globally recognized as the gold standard in animal welfare. They include freedom from hunger and thirst, freedom from discomfort, freedom from pain, injury and disease, freedom to express normal behavior, and freedom from fear and distress. The five freedoms form the basis of animal welfare legislation in many countries.

The next step is to connect this social factor with corporate risk management and financial performance. Companies that do not control antibiotic usage in their supply chain will face risks from multiple perspectives. The first is the regulatory risk from authorities and potential waste management costs. In 2019, the Ministry of Agriculture and Rural Affairs in China started to promote the regulation of antibiotics in the aquaculture industry. There is a trend that pollutant discharge of antibiotics will be gradually included in the regulatory scope of water pollution discharge of key industries.

Apart from regulatory risks, these companies also face rising business risks. This risk stems from the uncertainty of livestock prices and sales. Livestock prices directly influence the profitability of these companies. For example, frequent outbreaks of African Swine Flu cause the replacement of highly productive pig breeds with low productive pig breeds.

A public statement from an investor activities record, published by Zhengbang Inc. in August 2022, shows that its PSY (a major indicator of sows’ production yields) decreases during African Swine Flu episodes. As a result, firms find it difficult to predict the quantities of future sow herds required to maintain production.

Risks can also come from animal epidemics directly related to companies’ inability to raise funds. Most companies in this intensive industry in China have an ‘outsourcing from individual farmer to company’ production model. This model requires less capital investments and makes it easier for companies to expand their production in no time. However, expanding the business without gauging the business cycle stage properly subjects the business to the risk of limited cashflow for its daily operations. To fill this gap, most companies choose debt financing to support the initial cash outlay of its investment project.

A lot of corporations are already subject to the high debt-to-equity ratio problem. However, a high debt ratio in capital structure is not a serious problem as long as there is a stable operating cash flow. But the cyclical characteristics of this industry puts a question mark on solvency. Rising debt ratios in capital expenditure makes it more difficult for these companies to obtain short-term funding.

Zoonotic diseases also increase the risk of biology assets impairment for companies. Due to diseases like African Swine Flu and demand fluctuations, those companies are also subject to credit rating downgrading. According to Wen’s company 2021 financial report, its international depository receipts are downgraded because of African Swine Flu. China Chengxin Credit Rating Group also provides a negative rating outlook regarding Muyuan’s convertible debt in the medium term. The likelihood of future debt downgrading might increase the cost of financing for these companies.

The intensive animal agriculture industry in China is typically a cyclical one. Target customers for large-scale companies in this industry are quick-serve restaurants and hotels. During the pandemic, those restaurants and hotels suffered massive revenue losses due to lockdowns. In several annual reports of corporations in this industry, there were sharp declines in gross profits margins which culminated in short-term liquidity problems. Most companies are also suffering from having a decrease in diluted earnings per share from 2020 to 2021, which indicates companies’ decreasing ability to create short-term value to shareholders.

Given that China has demonstrated it determination towards a “zero-Covid policy” for decades to come, a key priority for companies is to rebuild consumers’ confidence towards food safety issues in order to switching their target market from quick-serve restaurant to individual consumers.

One way for companies to successfully get over tough times is to transform their business models – addressing food security problem in supply chains, and paying attention to animal rights and antibiotics usage. The ‘outsourcing from individual farmer to company’ production model makes it difficult for companies to secure animal welfare and avoid the overuse of antibiotics. Due to African Swine Flu, backyard households that lack technical knowledge of animal disease prevention are exiting the market. It is expected that the market will become more concentrated in the future. Since the majority of companies in this industry are developing domestic disease resistance breeds and hedging risks from feed price increases by signing forward contracts, an alternative way for these companies to improve their profitability and increase competency is to control material risk from animal disease by improving animal welfare. This differentiates their products and helps them to gain more pricing power.

In the future, the ‘self-production and sales model’ might be a good way for companies to directly control risks arising from animal epidemics. Innovation and application of new technology will be a trend in maintaining good living environments for livestock. For example, Muyuan Inc. recently incorporated a fresh air filtration system and separate ventilation system to improve herd health management. Consequently, firms may also seek to improve their ability to trace antibiotic usage with the help of intelligent technology.

The author calls for an active engagement among shareholders and stakeholders with ESG principles, to address the issue of antibiotics overuse by companies in the intensive animal industry in China. An active engagement with animal welfare and antibiotics overuse issues among these companies will help accelerate the transformation of their business production models and improve companies’ ability to resist short-term shocks from animal epidemics. This might prove to be a viable solution to financial dilemma for companies in intensive animal agriculture in China.

Reference list:

China Chengxin International Credit Rating Co., Ltd. (2022) Muyuan Inc. 2022 convertible debt rating report via http://static.cninfo.com.cn/finalpage/2022-06-29/1213855298.PDF

https://www.ncbi.nlm.nih.gov/pmc/articles/PMC6017557/

Hu, Y. J., & Cowling, B. J. (2020). Reducing antibiotic use in livestock, China. Bulletin of the World Health Organization, 98(5), 360–361. https://doi.org/10.2471/BLT.19.243501

Manyi-Loh, C., Mamphweli, S., Meyer, E., & Okoh, A. (2018). Antibiotic Use in Agriculture and Its Consequential Resistance in Environmental Sources: Potential Public Health Implications. Molecules (Basel, Switzerland), 23(4), 795. https://doi.org/10.3390/molecules23040795

Muyuan Inc. (2022) 2022 Semiannual financial report via http://static.cninfo.com.cn/finalpage/2022-08-31/1214469634.PDF

NewHope Inc. (2021) 2020 Corporate social responsibility report via http://tz.newhopeliuhe.com/storage/20210510/report/9eda5a389a8608353693b48aae966fb0-5853-447.PDF

Tan ren sheng Inc. (2022) 2021 Financial report via http://static.cninfo.com.cn/finalpage/2022-04-29/1213212269.PDF

Tan ren sheng Inc. (2022) Investor relation activity record on 15^th June, 2022 via http://static.cninfo.com.cn/finalpage/2022-06-15/1213715218.PDF

Tie Guo (2022) ‘Over 5 Billion Commercial Paper Defaults, Zhengban Inc Run Out Of Cash’  via https://baijiahao.baidu.com/s?id=1735234611154427293&wfr=spider&for=pc

Van Boeckel, T. P., Brower, C., Gilbert, M., Grenfell, B. T., Levin, S. A., Robinson, T. P., Teillant, A., & Laxminarayan, R. (2015). Global trends in antimicrobial use in food animals. Proceedings of the National Academy of Sciences of the United States of America, 112(18), 5649–5654. https://doi.org/10.1073/pnas.1503141112

Wen’s Inc. (2022) 2021 Annual report via https://www.wens.com.cn/uploadfiles/2022/04/20220416103035134.pdf

Wen’s Inc. (2022) Investor relation activity record on 24^th, August, 2022 via

Zhengbang Inc. (2022) Company forward hedge activity report via https://data.eastmoney.com/notices/detail/002157/AN202208301577844263.html

Zhengbang Inc. 2022 Semiannual financial report via https://data.eastmoney.com/notices/detail/002157/AN202208301577844280.html#

I am grateful for the support and encouragement the ESG Foundation in helping to publish this article. I would like to give my warmest thanks to Clive, Founder of the ESG Foundation, senior advisors at the ESG Foundation and my colleagues.

The post Antimicrobial resistance and ESG – the overlooked Social factor behind Chinese meat-producing companies’ financial dilemmas first appeared on ESG Foundation.

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The post Does ESG investing have a sustainable future? first appeared on ESG Foundation.

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Why Enter? 

An important part of ESG is communicating your success to your stakeholders. These awards will create a competitive and transparent forum for companies to compare and celebrate their ESG improvement and performance against their peers.

The ESG Awards Timeline: 

Early Deadline: Friday 16th September

Final Deadline: Friday 7th October

Shortlist Announcement: Wednesday 26th October

Virtual Awards Ceremony: Wednesday 9th November

The post The ESG Awards 2022 first appeared on ESG Foundation.

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Today, China has become “expensive” from a production perspective, this is why a great number of fast fashion labels moved to surrounding countries like Bangladesh or Vietnam. In a search for cheap labor, exploitative conditions have sadly become the new norm, including overtime, physically unsafe circumstances, and wages that do not cover even the basic living costs of workers. In developing countries the supplier power is very low due to the fear of losing business with Western companies and also due to the very different nature of their economies. Given these differences authorities and governments usually avoid setting mandatory minimum living wages which leaves the workers and their unions in a poor position.

However, this is not happening only Bangladesh or Vietnam notoriously known for the unsafe and unfair conditions. but even in the United Kingdom. In Leicester, which was once a world-famous knitwear and footwear producer, there have been several allegations and reports back in 2020, mentioning one of the biggest fast fashion retailers, Boohoo, which news has even made the headlines of The Times too.

The company which has become famous for its ultra cheap prices and Gen Z favored styles has released a response in which they stated that from now on there will be unannounced factory visits to ensure compliance, however fair fashion activists and social media communities questioned whether Boohoo was just making a smart PR move. It looks like Leicester has become the home of fast fashion sweatshops, where getting a proper contract and the national minimum living wage is very rare. The workers are mostly immigrants keen to secure a stable job and usually not familiar with the local employment terms, so it is not surprising that those who are experiencing the injustice and exploitation, remain silent most of the time. The pressure from fast fashion brands is increasing because they are eager to pour thousands of styles onto the market for the lowest possible retail price but keeping a margin that suits their business needs. The result is usually the sad but real fact, that manufacturers must accept the lowest possible price to secure orders and remain in the business to survive.

The social aspect of ESG reporting aims to disclose the real relationships the companies hold with their employees and currently evaluates the following social issues: human rights, product quality and health and safety in the factories, data security and digital rights and socio-economic inequality alongside diversity and inclusion.

New legislation proposed in 2021 by the EU on the living wage for garment industry workers creates a list called the “High risk low-wage countries” which contains countries where the EU members exceed a total set annual value of imports of garments and footwear. Along with this a “Wage risk point” is identified as an estimate of the minimum wage needed to sustain a basic decent life in exporting nations where EU countries receive imports from.

Being labelled as a “High risk low-wage” country means that the wage falls below the wage risk point, the consequence is being put into an Annex. The first aim of this legislation is to encourage the governments in the garment producing countries to increase their living wage to an ‘adequate level’. This constitutes a level where garment and footwear workers are no longer living in poverty so they are able to provide the basic needs of life for their families.

This is encouraged by the Annex List because there is a risk of losing business for manufacturers who don’t offer an adequate wage if companies would buy from producers that pay their workers a minimum living wage.

The second aim is to encourage all EU importers to engage with their garment producers to ensure the wage levels are high enough for the workers producing their goods. If not, there will be action taken against them in the form of fines and sanctions. Only the importers of the garments and footwear will be subject to this regulation. A three-year transition period is given to allow time for this increase in minimum wages.

Despite some uncertainties around measuring social issues, since they are less tangible than issues experienced in the ‘E’ and ‘G’ of ESG, the legislation proposed by the EU is a step in the right direction. Furthermore, it shares the same aim as the ‘S’ in ESG – it encourages companies and consumers to get more involved with the impact that their business or purchases are having on social issues.

So, what are you doing? And do you really need a bigger wardrobe?

The post ESG: Is there still a problem with the ’Social’ profile of the fashion industry? The EU thinks there is first appeared on ESG Foundation.

The post ESG: Is there still a problem with the ’Social’ profile of the fashion industry? The EU thinks there is appeared first on ESG Foundation.

There are many different ways to reflect ESG considerations through investment products and processes. These range from stewardship (the promotion of effective company governance through activities such as engagement and voting) and ESG integration (the inclusion of material ESG information in investment analysis and decision making), through to products with a formal ESG mandate or label.

Vanguard has developed a four-stage framework to help advisers navigate the ESG landscape and the first step – defining the client’s goals – can help you to assess the different ESG options and decide on an appropriate approach.

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Advocates of ESG investing, meanwhile, have been feeling burned, raising cries of greenwashing around supposedly environmentally friendly funds that have holdings in such industries as coal or arms manufacturing.

As head of global sustainable finance for Fitch Ratings, Andrew Steel is a key arbitrator of this debate, with views likely to rankle both ESG true believers and haters. Fitch both assesses the financial risk of debt based on ESG-related factors and rates investments on their ESG impact. At the Milken Institute Global Conference this week, Steel explained why energy companies with oil, gas and coal assets can get top scores for ESG credit risk — and why strict ESG investors may be missing out on not just returns but a chance to influence the world for the better.

The post Can coal investing be environmentally friendly? A contrarian take on ESG first appeared on ESG Foundation.

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How do these ESG risks differ from any other enterprise risks? They have several interesting facets:

• The perception of the risk issues may vary significantly for different stakeholders
  • Shareholders and Non-Governmental Organizations (“NGOs”) may perceive new products in quite different ways
• The nature of the risks are changing quite rapidly with time
  • #metoo was a game-changer in terms of acceptable behavior in the media industries
• The risks impact primarily on the reputation of organizations
  • In a world of 24 hour news and social media, the reaction time for many organizations’ crisis management communication is significantly reduced

It is particularly helpful therefore to consider both threats and opportunities when considering the ESG landscape and to understand how these are perceived by a range of stakeholders. It is not unusual for threat to be perceived negatively by the majority of stakeholders, but be seen as an opportunity for one stakeholder group.

At Argo Group our approach has been to build up a threat and opportunity assessment over time, using subject-matter experts across the company, in particularly our Sustainability Working Group to inform our assessment of a range of risks as they change over time.

The main benefit of applying risk management to such an assessment, is the way it facilitates prioritization.

Alex Hindson is Chief Risk & Sustainability Officer at Argo Group and co-chair of the Risk Officer Sustainability Forum (https://www.riskcoalition.org.uk/rosf)

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