Business
Aquaculture’s future profitability is at stake
Aquaculture’s future profitability is at stake
Published by Jessica Weisman-Pitts
Posted on September 1, 2021
Global Banking and Finance Review
Company
Published by Jessica Weisman-Pitts
Posted on September 1, 2021
With growing demand for seafood produce, alongside the depletion of wild-fish stocks, aquaculture has become an attractive opportunity for investors. But the industry faces financial, environmental and social risks which – if left unaddressed – could curtail future profitability, writes Alice Delemare Tangpuori, Campaign Manager, Changing Markets Foundation
In the coming years, the aquaculture industry is projected to grow exponentially, reaching US$376 billion in value by 2025. The attractiveness for investment is explained by a declining supply of wild-fish and rising consumer demand for seafood. For investors, this is perceived as an opportunity to make substantial returns, with big financial players like DNB, Nordea Bank and Rabobank lending a combined total €8 billion to aquaculture companies in 2019. However, according to the Changing Markets Foundation, there are material ESG risks left unaddressed in aquaculture investments –namely the sector’s dependence on wild-caught fish in feed and the high level of mortality as a result of poor fish welfare.
Diminishing returns
Aquaculture currently provides over half of global fish consumption and this is projected to reach 60% by 2030. The sector is divided into resource-intensive fed aquaculture and non-fed aquaculture. Not all farmed seafood requires the input of food, for example some species filter their food from the surrounding waters, as is the case for mussels and oysters. However, the fed aquaculture (such as salmon, seabass and shrimp) has outpaced non-fed aquaculture, driving the demand for fish meal and fish oil (FMFO), the ingredients in feed that are composed of wild-caught fish. The Food and Agriculture Organization (FAO) estimates that one fifth of the combined world-capture of wild marine fish is processed into FMFO, the majority of which is used to feed farmed fish. Without a current mechanism in place to prevent the use of wild-caught fish in aquaculture, demand risks outstripping supply and overall jeopardising the value chain.
In light of this, aquaculture’s dependence on wild-caught fish threatens diminishing returns: As demand grows for aquaculture grows, coupled with a finite supply of wild-caught fish for feed ingredients, this has pushed FMFO prices higher. The World Bank projects that by 2030, the price of fishmeal and fish-oil will have increased by 90% and 70%, respectively since 2010. And because feed is the biggest cost in aquaculture, accounting for 50-70% of business expenditure, these higher prices cause a contraction in the profit margins of fish farmers.
Moreover, the mounting demand for FMFO has the potential of surpassing supply by up to 16 million tonnes a year by 2025. Such relentless demand for FMFO incentivizes poor fisheries practices, encouraging illegal, unreported and unregulated (IUU) fishing. This is a serious compliance issue which affects the whole aquaculture supply chain and contributes to the further decline of wild fish populations.
The Sustainability Accounting Standards Board (SASB) highlights that companies that work with suppliers to actively manage feed sourcing scarcity risks, will be better protected from price volatility and supply disruptions, and this may improve their brand reputation.
In short, aquaculture is not a sustainable source of protein while it remains dependent upon wild-caught fish for feed. Unless the sector’s dependence on FMFO can be ended and the switch made to sustainable alternatives, it represents a resource risk that will limit further growth and profitability of the industry.
Mortality rates cause for concern
Besides the reliance on wild-caught fish, the issue of fish mortality on farms is further cause for concern. Factors leading to fish mortality are often directly related to poor fish farming practices. Over time financial shortcuts in fish farming practices lead to disease, lice, stress and ultimately higher mortality rates. These high mortality rates are inevitably reflected in heavy financial losses. Since 2010, the top-ten farmed-salmon producers have lost a total of $3.7 billion – equivalent to over half a million tonnes of salmon deaths. Analysis in a Just Economics report published in February 2021 shows that poor husbandry, parasites and pollution have caused hundreds of millions of fish deaths at a cumulative cost of $15.5 billion over seven years to the four main salmon-producing countries (Norway, Scotland, Chile and Canada).
It has been shown that good fish-welfare standards can provide more stable earnings, lower production costs and reduce the risk of reputational damage, and this can affect the valuation of a company. Research shows good fish health versus poor fish health can make the difference of 20% to the market value of a company. In 2021, Nordic Credit Rating gave an A- rating to SalMar, a Norwegian salmon farming company, based on low production costs, stability of biology and their recognition of the industry’s effect on the environment and the importance of fish welfare.
It is therefore in aquaculture companies’ long-term interests to improve farming practices and maintain a focus on good fish health and welfare.
Spotlight: Mowi ASA
Mowi, one of the world’s largest seafood producers, claims to be a leader in sustainability, viewing itself as ‘leader of the Blue Revolution’. However, it had the highest amount of fish mortalities out of the top ten salmon producers in the last decade. Since 2010, 50 million salmon (a quarter of a million tonnes) have died or escaped from Mowi farms – worth $1.7 billion. Mowi also has no target for reducing its reliance on, or phasing out, the use of wild-caught fish in feed.
In January 2020, Mowi was the first company in the aquaculture sector to issue a green bond, pledging €200 million to finance ‘green’ projects. Mowi stated a key use of proceeds would go to developing sustainable feed and improving fish welfare, but a closer look reveals the framework relies heavily upon weak certification schemes rather than aiming for a measurable reduction in fish deaths or the elimination of wild-caught fish in feed . It appears that Mowi has issued a green bond for nothing more than conducting business as usual – on the other hand, Grieg Seafood in their green bond framework have recognised the need to develop novel feed ingredients.
There is a huge investor appetite for debt issued to scale sustainable practices in seafood, but the lack of a common green bond standard means not all green bonds are created equal. Investors therefore have an important role to play in ensuring that the use of proceeds really does address the most critical sustainability issues.
Importantly, Changing Markets’ report highlights that companies that invest in better alternatives, including higher welfare seafood and higher environmental standards can have higher success in winning over consumers who are increasingly aware of environmental challenges. In Europe, consumers are willing to pay 14% more for salmon produced with higher welfare standards. For company Regal Springs, higher ESG standards on its tilapia farms in Central America and Indonesia translated into a healthy price premium versus Chinese tilapia; as well as securing lucrative contracts in North America with wholesaler Costco and meal-kit supplier HelloFresh.
Moving forward
These ESG risks present financially material issues to investors, and more effort is needed to mitigate them. Companies should look to:
Alongside the depletion of wild-fish populations, unsustainable aquaculture hinders the ability to create value over the long-term. Conscious efforts to improve practices should support investors’ decisions looking ahead.
With growing demand for seafood produce, alongside the depletion of wild-fish stocks, aquaculture has become an attractive opportunity for investors. But the industry faces financial, environmental and social risks which – if left unaddressed – could curtail future profitability, writes Alice Delemare Tangpuori, Campaign Manager, Changing Markets Foundation
In the coming years, the aquaculture industry is projected to grow exponentially, reaching US$376 billion in value by 2025. The attractiveness for investment is explained by a declining supply of wild-fish and rising consumer demand for seafood. For investors, this is perceived as an opportunity to make substantial returns, with big financial players like DNB, Nordea Bank and Rabobank lending a combined total €8 billion to aquaculture companies in 2019. However, according to the Changing Markets Foundation, there are material ESG risks left unaddressed in aquaculture investments –namely the sector’s dependence on wild-caught fish in feed and the high level of mortality as a result of poor fish welfare.
Diminishing returns
Aquaculture currently provides over half of global fish consumption and this is projected to reach 60% by 2030. The sector is divided into resource-intensive fed aquaculture and non-fed aquaculture. Not all farmed seafood requires the input of food, for example some species filter their food from the surrounding waters, as is the case for mussels and oysters. However, the fed aquaculture (such as salmon, seabass and shrimp) has outpaced non-fed aquaculture, driving the demand for fish meal and fish oil (FMFO), the ingredients in feed that are composed of wild-caught fish. The Food and Agriculture Organization (FAO) estimates that one fifth of the combined world-capture of wild marine fish is processed into FMFO, the majority of which is used to feed farmed fish. Without a current mechanism in place to prevent the use of wild-caught fish in aquaculture, demand risks outstripping supply and overall jeopardising the value chain.
In light of this, aquaculture’s dependence on wild-caught fish threatens diminishing returns: As demand grows for aquaculture grows, coupled with a finite supply of wild-caught fish for feed ingredients, this has pushed FMFO prices higher. The World Bank projects that by 2030, the price of fishmeal and fish-oil will have increased by 90% and 70%, respectively since 2010. And because feed is the biggest cost in aquaculture, accounting for 50-70% of business expenditure, these higher prices cause a contraction in the profit margins of fish farmers.
Moreover, the mounting demand for FMFO has the potential of surpassing supply by up to 16 million tonnes a year by 2025. Such relentless demand for FMFO incentivizes poor fisheries practices, encouraging illegal, unreported and unregulated (IUU) fishing. This is a serious compliance issue which affects the whole aquaculture supply chain and contributes to the further decline of wild fish populations.
The Sustainability Accounting Standards Board (SASB) highlights that companies that work with suppliers to actively manage feed sourcing scarcity risks, will be better protected from price volatility and supply disruptions, and this may improve their brand reputation.
In short, aquaculture is not a sustainable source of protein while it remains dependent upon wild-caught fish for feed. Unless the sector’s dependence on FMFO can be ended and the switch made to sustainable alternatives, it represents a resource risk that will limit further growth and profitability of the industry.
Mortality rates cause for concern
Besides the reliance on wild-caught fish, the issue of fish mortality on farms is further cause for concern. Factors leading to fish mortality are often directly related to poor fish farming practices. Over time financial shortcuts in fish farming practices lead to disease, lice, stress and ultimately higher mortality rates. These high mortality rates are inevitably reflected in heavy financial losses. Since 2010, the top-ten farmed-salmon producers have lost a total of $3.7 billion – equivalent to over half a million tonnes of salmon deaths. Analysis in a Just Economics report published in February 2021 shows that poor husbandry, parasites and pollution have caused hundreds of millions of fish deaths at a cumulative cost of $15.5 billion over seven years to the four main salmon-producing countries (Norway, Scotland, Chile and Canada).
It has been shown that good fish-welfare standards can provide more stable earnings, lower production costs and reduce the risk of reputational damage, and this can affect the valuation of a company. Research shows good fish health versus poor fish health can make the difference of 20% to the market value of a company. In 2021, Nordic Credit Rating gave an A- rating to SalMar, a Norwegian salmon farming company, based on low production costs, stability of biology and their recognition of the industry’s effect on the environment and the importance of fish welfare.
It is therefore in aquaculture companies’ long-term interests to improve farming practices and maintain a focus on good fish health and welfare.
Spotlight: Mowi ASA
Mowi, one of the world’s largest seafood producers, claims to be a leader in sustainability, viewing itself as ‘leader of the Blue Revolution’. However, it had the highest amount of fish mortalities out of the top ten salmon producers in the last decade. Since 2010, 50 million salmon (a quarter of a million tonnes) have died or escaped from Mowi farms – worth $1.7 billion. Mowi also has no target for reducing its reliance on, or phasing out, the use of wild-caught fish in feed.
In January 2020, Mowi was the first company in the aquaculture sector to issue a green bond, pledging €200 million to finance ‘green’ projects. Mowi stated a key use of proceeds would go to developing sustainable feed and improving fish welfare, but a closer look reveals the framework relies heavily upon weak certification schemes rather than aiming for a measurable reduction in fish deaths or the elimination of wild-caught fish in feed . It appears that Mowi has issued a green bond for nothing more than conducting business as usual – on the other hand, Grieg Seafood in their green bond framework have recognised the need to develop novel feed ingredients.
There is a huge investor appetite for debt issued to scale sustainable practices in seafood, but the lack of a common green bond standard means not all green bonds are created equal. Investors therefore have an important role to play in ensuring that the use of proceeds really does address the most critical sustainability issues.
Importantly, Changing Markets’ report highlights that companies that invest in better alternatives, including higher welfare seafood and higher environmental standards can have higher success in winning over consumers who are increasingly aware of environmental challenges. In Europe, consumers are willing to pay 14% more for salmon produced with higher welfare standards. For company Regal Springs, higher ESG standards on its tilapia farms in Central America and Indonesia translated into a healthy price premium versus Chinese tilapia; as well as securing lucrative contracts in North America with wholesaler Costco and meal-kit supplier HelloFresh.
Moving forward
These ESG risks present financially material issues to investors, and more effort is needed to mitigate them. Companies should look to:
Alongside the depletion of wild-fish populations, unsustainable aquaculture hinders the ability to create value over the long-term. Conscious efforts to improve practices should support investors’ decisions looking ahead.
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