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Can animal welfare be a proxy for supply chain governance?

In November 2012 scenes of Australian cattle, filmed from inside an Indonesian abattoir, were beamed into homes across the nation as part of an investigative news expose. The scenes both shocked and appalled scores of everyday Australians and formed part of an ongoing momentum that placed the issue of animal rights firmly in the national spotlight.

More recently, footage of the live baiting of greyhounds almost led to the demise of an entire industry, so vehement was the outrage after it aired as part of another investigative feature in 2016.

It’s no surprise that, against this backdrop of growing awareness, the cause of animal welfare has emerged as a consideration for investors who are keen to act in ways that align with their personal values.

An emerging competitive advantage

Cattle, poultry, sheep and other livestock take up a significant portion of the food market, and the way they are farmed has been a recurring point of contention for animal rights advocates.

People with little experience in a farming environment may have a minimal understanding of how animals are treated as part of a profit driven schema of mass production. Prior to widespread media exposure and the realities of an internet-connected world, animal related business practices were relatively free of public scrutiny.

The change in awareness levels is being gradually matched by a change in business practices to meet the new expectations of consumers.

Things have evolved beyond the point where companies regard the issue of animal welfare as a mere business risk. Many now see it as an avenue for gaining a fresh competitive advantage.

The business case for a humane approach

The Business Benchmark on Farm Animal Welfare (BBFAW)i measures animal welfare standards of 99 food-related companies on the basis of published informatiomii. The latest benchmarking demonstrated that, although animal welfare is still an underdeveloped business issue, companies are showing an upward trend in performance.

According to research by Morgan Stanley, evidence points to a high BBFAW score serving as an indicator of companies with good levels of supply chain control and visibility. Good animal welfare policies may even suggest possible financial and reputational benefits for companies who score high on the benchmark.

The connection between supply chain governance and adherence to animal welfare benchmarks is a logical one. Closer scrutiny regarding the conditions of livestock across supply chain processes leads to an overall increase in oversight levels and procedural thoroughness. As a flow on effect, standards around auditing and risk management can naturally be expected to improve.

Over the past year, we have seen a striking change in the manner in which companies talk about farm animal welfare. Increasingly companies describe farm animal welfare in terms of the opportunities – financial and reputational – that can be delivered.

– Morgan Stanley Researchiii

Many companies are already demonstrating an understanding of the new opportunities. Customer demand, and pressure from investors, has driven growth and innovation in new directions that adhere to humane standards of animal management. High BBFAW benchmark scores have acted as commercial catalysts for rebranding and the development of marketing strategies to engage new demographics.

Of the 99 companies covered by the 2016 BBFAW Benchmark, 87% recognise farm animal welfare as a business issue.

Higher standards on farm animal welfare are more frequently being viewed as an indicator of companies that can adapt and innovate as a response to new markets. As an additional signpost for investors, the risk and reputational benefits of a more humane approach to supply chain practices can make a material difference to future profitability and earnings across the value chain.

The combination of reduced risk, enhanced reputation, capacity for evolution, extended market reach and ethical accountability is a potent one. It has the potential to appeal equally to investors with a clear eyed focus on growth opportunities, and those driven to invest in an impactful way that preserves the dignity and welfare of all living creatures.

For more information on ethical and sustainable investment opportunities, please contact your Morgan Stanley Financial Adviser.

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