A new report from investor network FAIRR highlights a series of environmental, social, and governance risks associated with the expanding aquaculture industry
Over the past 50 years a single industry has transformed the way we obtain a key part of humanity's diet - but most people know little about it.
The aquaculture is booming, enabling the farmed production of water-based plants and animals, as opposed to capturing them in natural environments such as rivers, seas, or shorelines. While it made up just five per cent of total seafood production in 1960, today it provides more than half of all the fish consumed by humans - and is worth a whopping $232bn a year.
But a report published yesterday warns that investors in this booming industry risk running aground thanks to multiple failures across the sector to manage serious environmental, social, and governance (ESG) risks.
Produced by the global investor network FAIRR, Shallow Returns? points to how an average annual growth rate of almost six per cent has driven strong investor interest in the industry. But it warns that much of this growth is based on intensive, high-density farming that brings with it a range of well-documented social and environmental risks. You've heard of the 'carbon bubble' and the associated stranded assets, could we be facing a fish bubble too?
Key among the risks faced by the sector is climate change. One 2019 study calculated that aquaculture was responsible for 1.82 per cent of global methane emissions. Worse still, the sector not only contributes to climate change, it is also particularly exposed to climate risks. In northern parts of Europe and the Americas, for example, warmer water and salinity changes are expected to result in increased salmon diseases and parasites. In Asia, stronger and more frequent tropical storms pose a growing danger to farm stock and infrastructure, while across Southeast Asia - one of the world's most productive aquaculture regions - some studies have suggested climate impacts could lead to a 10 per cent to 30 per cent drop in marine fish production by 2050.
Another environmental issue highlighted by FAIRR is that of effluents from the farming process spurring the growth of toxic algal blooms, which can devastate fish stocks. In 2016, algal blooms caused an estimated $800m of damage to the Chilean fishing industry, killing almost 27 million fish. Chilean salmon producer Invermar reported a loss of $8.25m thanks to the crisis, the report notes. A similar toxic wave is currently scything through the Norwegian salmon industry, with government reports suggesting 10,000 tonnes of salmon have been killed.
The report also flags up habitat destruction as a result of fish farming, primarily a consequence of escapees flooding neighbouring natural environments. In July 2018, Norwegian salmon giant Mowi lost $3.4m and 690,000 salmon when a storm damaged 10 net pens, the report says. Such break-outs do not just impact profit lines, but also have severe effects on the surrounding ecosystems. When farmed fish mix with native marine populations, they can modify the gene pool and outcompete local species - an issue that threatens regulatory costs and reputational damage to the companies involved. In 77 out of 147 rivers sampled in Norway, for example, almost 50 per cent of wild fish contained the DNA of farmed salmon.
A further environmental risk the report highlights is that of the huge impact on fish stocks of the feed required to sustain many aquaculture businesses. Salmon and shrimp are carnivorous and, when farmed, are usually fed with fishmeal and fish oil. However, demand is set to outstrip supply for the juvenile fish that make up these products, with an FAO report from last year warning that low supply of such feed stocks is set to constrain the sector's future growth. Consequently, upward pressure is expected to cause prices to rise by 90 per cent by 2030, putting additional pressure on producers' margins.
Beyond these environmental dangers, the report outlines several social risks facing the aquaculture industry. These include alleged human rights abuses in seafood supply chains, community resistance to industry expansion among First Nations groups in Canada, and growing consumer concern with fish welfare. The industry has also been hit by a series of food fraud scandals, including a spectacular 2015 case of Pacific menhaden being mislabelled as higher-value horse mackerel, which would have retailed for $19m.
As well as social and environmental issues, the report highlights questions about inadequate governance, which are rendered all the more concerning in light of the many other challenges the industry will have to address if it is to maintain itself on a sustainable footing. Such concerns were inflamed by a lawsuit filed last month by US purchasers of Norwegian farmed salmon. The filing, which is based on an ongoing investigation by the European Commission, accused multiple firms - including the world's largest salmon farmer Mowi - of conspiring to fix prices.
The firms involved deny the allegations. "Mowi has not been involved in price fixing or other anti-competitive conduct, and believe that the allegations are unfounded," a spokesperson for the firm told BusinessGreen.
Regardless of the outcome of the case, the wider concerns about the industry's environmental impacts remain. If the aquaculture industry is to maintain current growth trajectories, the report argues, it will have to accelerate progress in strengthening management regimes, reducing loss and waste, and tackling major issues such as pollution, fraud, and climate change.
There are clear steps the industry can take to address these issues, FAIRR director Maria Lettini explains, and investor pressure has a key role to play.
"Investors should be aware of the sustainability risks in the aquaculture sector before they wade in too deeply," she says. "There are clear steps which must be taken to manage these risks. For example, aquaculture operations should be certified against global standards that meet FAO guidelines. The market should also consider greater cultivation of species that remove marine pollution rather than contribute to it - such as mussels and oysters. In addition, farming these species brings minimal animal welfare concerns and does not require fishmeal-based feed."
Finally, for readers spooked by the report's litany of risks, it ends by considering alternative industries that investors could consider. As in the meat and dairy industries, new plant-based products that imitate seafood are starting to emerge tentatively onto the market. One firm selling these products, Sophie's Kitchen, experienced strong sales growth through 2018, while Quorn Foods launched a new range of plant-based 'Fishless Fillets' in March 2019.
FAIRR is backed by a network of investors managing over $12tr of assets, including Aviva Investors, CANDRIAM, DNB Asset Management and Norwegian pension group KLP. The 'fish bubble' may enjoy a much lower profile than its carbon cousin, but some of the world's largest investors are starting to take note.
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