Report urges lenders to price sustainability risks into seafood industry capital costs

A new report from the nonprofit Planet Tracker is urging banks and investors to price the hidden risk of unsustainable operations by Japanese seafood companies into their lending decisions.

Planet Tracker is a project of Investor Watch, a nonprofit company with the goal of encouraging “impact investing,” or aligning capital markets with social and ecological sustainability. Mark Campanale, a co-founder of Investor Watch, formerly worked for asset management companies and was involved in the creation of several responsible investment funds. He also provided input to the current report.

Planet Tracker is a follow-on to a couple of previous projects, including the Carbon Tracker Initiative and the Fish Tracker Initiative. The Carbon Tracker Initiative suggested tighter regulations and a shift in the market would add risk to investments in carbon-emitting energy. The initiative urged divestment from carbon-burning energy companies and a commitment to fund renewable energy projects. This was followed by the Fish Tracker Initiative, which argued that publicly listed companies were doing a poor job of disclosing risks to investors, such as depletion of resources, tighter regulations, and loss of reputation or fines stemming from unsustainable practices.

Planet Trackers scored a victory in 2014, when Greenpeace claimed that China Tuna Industry Group Holdings Ltd (CTI) had understated the environmental and sustainability risks of the company's operations, and provided outdated information to investors in the draft prospectus of its IPO application. CTI had aimed to raise up to USD 150 million (EUR 134.3 million) to expand its fishing fleet targeting bigeye tuna. The Hong Kong Stock Exchange suspended the IPO immediately and the company later withdrew its IPO application.

The current report is titled “Perfect Storm – Profits at Risk in the Japanese Seafood Industry.” Japan was chosen as the subject of the report because it is such an important player in seafood markets and because 2018 reforms to the country’s Fisheries Act indicate a willingness from the Japanese government to address sustainability issues.

The first three sections of the report focus on declining seafood stocks amid growing consumption, a decline in Japanese production relative to global trends, and Japan’s continued top positon in seafood company revenues.

The report’s third and fourth sections focus on risks to the seafood industry’s investors and lenders. Unpriced financial risks to investors are identified: a lack of traceability of fish catches makes it difficult for investors to know if a company is sourcing from an unsustainable stock; a lack of transparency, such as undisclosed financial relationships with subsidiaries, suppliers, and vessel owners – and opaque relations with subsidiaries – make it difficult to estimate risk; and that risk is exacerbated by the fact that no clear standards exist to account for variations in wild-catch biomass.

As for recommendations specifically for Japanese companies, the authors recommend securing sustainability certification; adopting traceability technology and efforts through use of observers or vessel monitoring systems (a step Japan is already moving toward on species for which a total allowable catch, or TAC has been adopted); reporting operations transparently (Japanese companies have complicated and opaque group company structures); biological reporting using a standard designed for valuing growing agricultural crops as assets (used in aquaculture but difficult for wild-catch fisheries, since they don’t own the fish or possess them until they are caught); adopting a sustainability policy, and reporting in English so that global financial data providers can more easily evaluate the data.

The report cites “industry inefficiencies” as an unreported risk, claiming that Japan’s wild-catch fishery foregoes annual economic benefits of from USD 51 billion to 83 billion (EUR 45.7 billion to EUR 74.4 billion) due to management that allows biomass to fall below maximum sustainable yield. Such estimates are based on an assumption of drastic cuts to harvests for over a decade before the economic benefits could be realized.

The release of the report in Japan was facilitated by Seafood Legacy, headed by CEO Wakao Hanaoka, though the organization did not have a hand in writing it. Seafood Legacy tries to build contacts between companies and sustainable producers, such as finding retail partners for fishermen undertaking fishery improvement projects (FIPs). It has taken a positive and cooperative approach, celebrating, and promoting even small achievements.

Asked whether the threat of raising capital costs for companies that do not adopt this set of recommendations was not more stick than carrot, Hanaoka told SeafoodSource, “Seafood Legacy decided to organize this Fish Trackers report launching event in Tokyo because I agree that it shows a risk for the investors to continue investing in fisheries companies without knowing the fish stock status or stock management. I take this report more as a message to show the investors how they can support making the fisheries sector more positive and the business be more sustainable.”

Hanaoka urged Japan’s fishing companies to be more transparent with their financial and catch reporting so sustainability organizations can better assess them in a fair way.

The focus on providers of capital is not restricted to Japan. A similar report, “Leverage points in the financial sector for seafood sustainability” (Jean-Baptiste Jouffray, Beatrice Crona et al.), appeared in the journal Science Advances, and a related article, “Banking on a better seafood industry,” appeared on the website of the Stockholm Resilience Center, with which the lead author is affiliated. Jouffray was also among those who reviewed the draft of the Planet Tracker report.

Giving more impetus to the movement, the United Nations Environment Programme – Finance Initiative (UNEP FI) launched its Principles for Responsible Banking on 22 and 23 September, 2019, in New York City, during the annual United Nations General Assembly, with pledges of adoption by 130 banks from 49 countries, representing more than USD 47 trillion (EUR 42.1 trillion) in assets. UNEP also has a Sustainable Stock Exchanges Initiative that urges stock exchanges to demand more disclosure and sustainability commitments as a condition of listing.

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