Investing in aquaculture: how do the risks weigh against the rewards?

Aquaculture (also known as fish farming) is a booming industry, and its growth outlook is strong. As natural fish levels continue to deplete, the aquaculture industry has played a role in plugging the need for the world’s growing protein consumption. This article outlines some of the opportunities and the risks investors might consider when considering this sector.

As aquaculture is a relatively new industry, there is limited mainstream knowledge or research on company practices, particularly when compared to terrestrial farming practices, and there are many financially material sustainability risks which investors should be cautious of. This was the reason for Invesco ESG team’s field trip to visit one aquaculture company’s operations in Norway. 

Aquaculture production outstrips wild fishing

Aquaculture is the farming of fish, crustaceans, molluscs, aquatic plants, algae, and other organisms and involves cultivating freshwater and saltwater populations under controlled conditions.

It sits within two expanding but delicate economies: the ocean economy, which the OECD forecasts will grow at twice the rate of the mainstream economy by 2030,¹ and second, the protein industry, which WHO reports is growing at an unprecedented rate due to population growth, rising incomes and urbanisation.²

Furthermore, the average per capita seafood consumption has doubled globally since the 1960s and the aquaculture sector, which has provided more fish and seafood than wild fishing since 2014, is growing at 6% annually. China’s aquaculture production has tripled in two decades and growth is set to continue.³ Aquaculture is already a core part of many other countries’ economies and some countries ― Chile, Canada, Scotland, Norway for example ― have significant growth plans.⁴

Will a decline in livestock farming bolster aquaculture?

Agriculture, and more specifically livestock, is under increased scrutiny for its environmental impacts. It’s reported to contribute around 20-25% of total global carbon dioxide equivalent emissions and the majority of this is from livestock (methane).⁵

Around 30% of the Earth’s arable land is used to raise livestock⁶ and it is a water intensive activity, with reports of more than 15,000 litres of water needed to produce 1kg of beef compared to ~4000 litres to produce 1kg of pulses and ~4300 litres to produce 1kg of chicken meat⁷.

Alongside these environmental concerns, there are growing health concerns, particularly from red meat consumption. The International Agency for Research on Cancer has added processed meat to its Group 1 category of carcinogens, meaning that they consider this causes cancer, and has added red meat to its Group 2A carcinogens, meaning that they consider that it probably causes cancer.⁸ Many governments are looking at increasing taxes on red meat and higher meat tax proposals have been introduced in Germany, Denmark and Sweden.⁹ 

How sustainable is wild fishing?

The other inherent advantage of aquaculture is that it doesn’t rely on wild stocks. Many steps have been taken to better manage wild commercial fishing, but recent reports suggest this has not resolved the problems. For instance, the International Council for the Exploration of the Sea (Ices) 2019 report found that cod is being harvested unsustainably and North Sea cod sources have dropped by 31% since 2015.¹⁰

Some aquaculture companies do use wild fish sources in their fish feed and may still be exposed to this risk. Indeed, the World Bank predicts that fish feed and fish oil prices are set to rise by 90% and 70% respectively over 2010-2030 due to limits in wild caught fish.¹¹

There are, however, alternatives to using wild fish in feed in fish farming: the company we visited has built a fish feed production facility and uses the remaining parts of the fish that aren’t going to the end customers, therefore reducing waste and reliance on volatile feed prices.

Swimming against the tide

Seafood is globally the most highly traded food commodity meaning aquaculture revenues are at risk of trade restrictions. In 2018, the US government announced its intention to become more self-sufficient in seafood supply, criticising low standards in importing nations. The US FDA subsequently blocked 26 shipments (more than total for all of 2017-2018) of Indian Shrimp due to the detection of banned antibiotics.

There is also a high-risk of food fraud in seafood, which can lead to recalls that increase a company’s operating costs. Studies have found that one third of seafood sold in the US and Canada are mislabelled, often with lower value fish being passed off as higher-value fish.¹²

Labour standards and community resistance are also growing concerns. For example, the European Commission warned Thailand that imports may be blocked due to standards in the shrimp industry and companies that were linked to these allegations of slave labour in this supply chain faced negative media headlines.¹³ And, in 2018, the government of British Columbia reached an agreement with the First Nation people to close several farms and restrict salmon fishing in coastal areas. In the same year, the Washington state senate voted to stop salmon farming by 2025 in response to local community protests.

Another risk factor for aquaculture is climate change, which is impacting production levels and causing disruption in current fish farms. Southeast Asia, one of the world’s most productive aquaculture regions, is expected to experience a 10% to 30% drop in marine fish production by 2050. 

Algae blooms are also proving costly. In 2019, in northern Norway, algae blooms rose to their highest levels in 30 years, amounting to losses of over EUR 339 million¹⁴. The fish farming industry is also facing increased costs to fight diseases that come through fish lice. The World Bank is estimating sector losses of USD 6 billion per year and in Norway salmon farms are estimated to lose 9% of revenues each harvest due to disease related costs.¹⁵

Conclusion

We believe aquaculture will continue to be a strong growth area. That being said, there are risks ― most manageable, but some inherent.

Companies (including the one we visited) are increasingly taking steps to manage risks and mitigate impacts on the marine ecosystem by fish farming on land or leveraging technology at sea (such as using underwater cameras and drones to monitor fish, reduce feed and respond quickly to issues like broken nets which help reduce the impact of escaping fish and contamination). However, it appears there is more to be done to have a systematic approach across operations.

For the inherent risks, such as algae and climate change, we believe that as investors these are growing material issues for discussion with companies that we invest in.

How Invesco’s ESG team collaborates with companies and Invesco’s investment teams to address this topic

In-depth research and company engagement provide valuable insight for investors. The findings of this work have been presented and discussed internally leading to further consideration of how these trends will impact holdings upstream and downstream in the value chain. The site visit allowed Invesco’s ESG team to question one major player in this industry on their practices but also to emphasise the importance of having well-managed and sustainable processes. Protein diversification and sustainable sourcing have also subsequently been part of our one to one engagement with two large supermarkets that has fed into the development of their updated sustainability strategies.

To learn more about Invesco's approach to ESG investing, read our Invesco Climate Change Report 2019. 

In our Invesco ESG Investment Stewardship Annual Report 2019 we share our key achievements over the past year.