Responsible Investment

How to invest responsibly in the emerging market dairy industry

Discover the environmental and social implications – good and bad – of investing in the dairy industry within emerging markets.

May 2021

The demand for dairy in developed markets may be declining, but there is still a runway for growth in many emerging markets. The dairy industry can positively support social issues such as health and wellbeing – the ‘S’ in ESG (environmental, social and governance) – but it also has negative environmental impacts – the ‘E’ in that same acronym. So we’re asking: can this industry reduce its negative impact to become a sustainable part of meeting the nutritional needs of future populations in emerging markets?

Increasing demand for dairy in emerging markets

Combined with rising incomes and urbanisation, the demand growth for protein rich and convenience food looks set to grow rapidly. And dairy companies are well placed to capture this growth. Don’t just think a glass of milk – think yoghurt, ice cream and cheese… all products that will allow ample room for diversification and premiumisation. In many emerging markets, the dairy industry is still in the early stages of consolidation, leaving room for the best players to gain market share.

Dairy and the UN Sustainable Development Goals (SDGs)

Cow’s milk is a widely distributed, good source of protein and calcium, as well as nutrients such as vitamin B12, iodine and magnesium. It is likely to play an important role in helping countries, particularly those in the developing world, address malnutrition challenges and meet SDG 2: Zero Hunger. According to the UN, the dairy sector accounts for about 14% of global agricultural trade, and more than 150 million farmers (most of them small) depend on tending to cows for their livelihood. We therefore see the dairy industry not just as an enabler of food security and nutrition, but also of sustained economic growth and inclusive social development.

What about the environmental impacts?

At the same time, we must acknowledge the significant environmental impacts of dairy farming. Increasing demand for dairy products around the world is putting significant pressure on the natural resources that make this industry possible, particularly water and soil. Dairy cows and their manure also produce significant amounts of methane and other greenhouse gas emissions that contribute to climate change. Meanwhile, poorly handled manure and fertilisers can degrade local water resources, and unsustainable dairy farming and feed production practices can lead to the loss of ecologically important areas. Overall, these factors can contribute to the growing problem of biodiversity loss, which you can read more about here.

Great strides have already been made to reduce the environmental impact of dairy farms. According to the US Sustainability Alliance, milk production in the US has quadrupled in the last 60 years, but a gallon of milk today uses 65% less water and greenhouse gas emissions have been reduced by 63%. Progress continues to be made e.g. the World Wildlife Fund’s Net Zero Initiative, but there is still considerable room for improving the sustainability of the industry.

Our responsible investment approach

It is our responsibility to consider all relevant factors that could materially impact the sustainability of a company’s business model. Therefore, the evaluation of ESG opportunities and risks is integral to our process. We look at how our companies are mitigating the risks and maximising the opportunities to maintain and enhance their license to operate over the long term.

Engaging for positive change

Our obligations don’t end when an investment decision is made. We engage with our investee companies to encourage robust ESG practices that will help them create long-term shared value.

In this context, we have asked companies in the dairy industry to:

Fully incorporate climate change and other environmental considerations into long-term business strategies
Set science-based carbon emissions reduction targets that cover emissions from the entire dairy value chain
Collaborate with farmers to develop and implement sustainable agricultural practices, including around manure, soil and waste management
Map environmental risks and opportunities to raw milk and feedstock supply chains
Explore and invest in alternatives to plastic packaging
Consider expanding product portfolios to include plant-based alternatives

Final thoughts

Like most areas of life, investing in the dairy industry is not black and white. When we consider the growing challenges of malnutrition and food accessibility, a relatively cheap, protein-rich source of food cannot be discounted. Demand growth in the developing world is an exciting investment opportunity. However, as custodians of capital we must have a comprehensive understanding of the challenges and risks in the sector too. Engagement to encourage best practices and sustainable production can help to mitigate these risks and move towards reducing the industry’s impact on the environment.

Risk warnings

The value of investments and any income derived from them can go down as well as up and investors may not get back the original amount invested.

Investing in emerging markets is generally considered to involve more risk than developed markets.

Views and opinions have been arrived at by BMO Global Asset Management and should not be considered to be a recommendation or solicitation to buy or sell any companies that may be mentioned.

The information, opinions, estimates or forecasts contained in this document were obtained from sources reasonably believed to be reliable and are subject to change at any time.

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How to invest responsibly in the emerging market dairy industry

Emerging Markets Team: LGM

Increasing demand for dairy in emerging markets

Dairy and the UN Sustainable Development Goals (SDGs)

What about the environmental impacts?

Our responsible investment approach

Engaging for positive change

Final thoughts

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