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How to Spot Opportunities in Sustainable Food and Agriculture

By Michael Landymore, Impax Asset Management

The food and agriculture sector is in the early stages of a far-reaching transition toward more sustainable food production and consumption. Growing environmental and resource pressures, changing consumer demands, technological innovation and ever-tightening regulatory interventions are disrupting depletive practices and unhealthy preferences. This transformation is creating fast-growing insurgent companies and changing the business models of incumbent firms, creating compelling investment opportunities for active investors.

Drivers of Disruption

The food and agriculture sector both causes, and is vulnerable to, environmental degradation. Pressures are intensifying as growing populations and rising living standards drive increased consumption of resource-intensive foods. But awareness is rising, and consumption patterns are changing rapidly as consumers shift toward flexitarian diets that involve more natural and sustainably produced foods.

Meat alternatives are being developed rapidly, with sales of plant?based meats projected to expand by 25% per year over the next decade.[1] Similarly, for companies in the natural food space, the slowdown in the consumption of branded, processed food has had a significant impact.

Enormous volumes of waste produced by our food system exacerbate the above impacts. Up to one-third of all food produced for human consumption is lost or wasted, at an economic cost of up to $1 trillion per year.[2] There is growing consumer demand for solutions.

Food production and agriculture can contribute to climate change through deforestation, which reduces the planet’s natural carbon storage capacity, and through the sector’s use of inputs such as fossil fuels and fertilizers. Globally, livestock rearing is responsible for 14.5% of anthropogenic greenhouse gas (GHG) emissions.[3] Agriculture-related tropical deforestation contributes to around 8% of GHG emissions.[4]

bees and comb
Excessive use of chemical nutritional and crop protection inputs has negative ecological and human health impacts.

Excessive use of chemical nutritional and crop protection inputs has negative ecological and human health impacts. Global use of pesticides has increased 81 percent.[5] Pesticides can destabilize ecosystems by altering the nutrient balance and reducing soil biodiversity, leading to declines in crop yields.[6] Decaying nitrogen fertilizers produce GHGs, while nitrogen and phosphorus runoff pollute groundwater and can lead to vast hypoxic “dead zones” in lakes and coastal waters.

Water scarcity is one of the most urgent food security issues facing many of the world’s countries. Globally, 70 percent of fresh water is used for food production-related irrigation, exposing the sector to changing patterns of precipitation. Around 1.2 billion people live in areas of physical water scarcity; an additional 500 million people are approaching this situation.[7]

Overuse of antibiotics — some 70 percent of antibiotics in the European Union are used in animal farming — is contributing to an antibiotic resistance crisis that is already costing Europe €1.5 billion per year in healthcare costs and productivity losses.[8]

Across the range of environmental and social impacts, governments are responding with policies and measures to improve the efficiency of food and agriculture production, reduce its environmental impacts and improve health outcomes.[9]

Opportunities

Fortunately, there is a global universe of companies that are helping to address the sustainability challenges of this sector — companies working to reduce costs by improving efficiency, lower environmental impacts, facilitate the provision of safe and nutritious food and promote animal welfare standards along the food value chain.

Incidents around adulterated foodstuffs have increased demand for laboratory food testing services and technology, resulting in a tripling in the number of tests over the last five years.

The natural foods category, including better-for-you snacks such as fruit and nut bars and seaweed crisps, is growing globally at a compounded annual rate of nine percent, gaining share from processed foods.[10] In response, large branded food manufacturers are developing new products and investing in the reformulation of existing products, replacing artificial ingredients with natural ingredients and removing ingredients linked to harmful health effects, such as sugar, fat and salt. Investment prospects in this area include companies involved in natural ingredients, dietary and nutritional additives, flavors, colors, emulsifiers, cultures and enzymes.

Numerous opportunities to reduce food waste exist across all parts of the food value chain. Post-harvest technologies such as grain handling, grain conditioning and storage equipment can help to reduce or eliminate losses from weather, pests and disease.

Extending the shelf life of perishable foods can have a dramatic impact on reducing food waste. We believe companies producing natural preservatives, such as lactic acid, are a good example of this.

A range of technologies and practices are being developed to reduce the inputs needed to produce food. One example is sensor technology that detects weed species and applies just enough herbicide to kill them but not more, thereby reducing chemical use by 80-90%. Similarly, drip irrigation can reduce water use by up to 60% while almost doubling yields.[11]

Crop imagery and biomass measurement from drones and satellites is another important development, as it can help farmers more accurately apply fertilizers. Better nutrition and animal care within the dairy industry can increase milk-to-feed ratios and reduce animal mortality, which can improve yields and reduce cattle emissions. These outcomes could help retain consumers who would otherwise switch to lower-impact alternatives.

Efforts to reduce plastics pollution and the use of fossil feedstocks are encouraging a shift away from single-use plastics to fiber-based alternatives, such as cardboard for fresh produce. Meanwhile, bioplastics such as polylactic acid can be derived from renewable resources including sugarcane and corn starch.

What to Look For

ESG risks in the food and agriculture sector include reputational damage and loss of contracts if linked to deforestation, as well as operational and supply chain risks related to physical climate change. To manage risks, companies must thoughtfully consider the nuanced complexities of each ecosystem when it comes to implementing policies on land use and biodiversity or when promoting reduction in agricultural land conversion.

The transition of the food and agriculture sector from a depletive economic model toward one that can sustainably feed a growing global population is firmly underway, and it is creating opportunities for well?positioned companies to outperform. Identifying companies that can offer solutions to the sustainability challenges of the traditional food value chain will help investors avoid the businesses being disrupted, resulting in an innovative universe of companies from which to compile a compelling investment portfolio.

 

Article by Michael Landymore, Senior Portfolio Manager, Managing Director, Impax Asset Management. Michael is responsible for the food and agriculture strategy at Impax Asset Management. He focuses on industry analysis, stock screening, company analysis and portfolio construction. Michael has been advising investors and companies in the food and beverage industry since 1982. He was part of the highly rated food equity analyst team at Investec Securities/Henderson Crosthwaite, subsequently with Rabobank corporate finance, and he most recently served as the manager of the Léman Focus Global Food & Agriculture fund at Helvetica Wealth Management Partners in Geneva. Michael has a degree in economics from King’s College, Cambridge, and is a chartered fellow of the Chartered Institute for Securities & Investment (CISI).

FOOTNOTES

  1. Yusuk Khan, “UBS Predicts Plant-based Meat Sales Could Grow by More Than 25% per Year to $85 Billion by 2030,” Business Insider, July 19, 2019.
  2. Food and Agriculture Organization of the United Nations, “Food Wastage Footprint,” 2014.
  3. Lisa Friedman, Kendra Pierre-Louis and Somini Sengupta, “The Meat Question, by the Numbers,” The New York Times, Jan. 25, 2018.
  4. World Resources Institute, “Tropical Forests and Climate Change: The Latest Science,” Working paper, 2018.
  5. Food and Agriculture Organization of the United Nations, FAOSTAT database, Pesticides Use.
  6. Report of the Special Rapporteur on the right to food (A/HRC/34/48), ReliefWeb.
  7. United Nations Department of Economic and Social Affairs (UNDESA) website, last accessed April 29, 2020.
  8. FAIRR, “Responding to Resistance: FAIRR’s Engagement with the Restaurant Sector,” 2017.
  9. The EU adopted regulations in May 2018 to ban the use of three of the most widely used neonicotinoids, a type of pesticide. In 2018, the United States government was ordered by a federal court to ban the extensively used pesticide Chlorpyrifos due to concern about its effects on the brain and nervous system in humans.
  10. Berenberg Research, “Ten Trends” report.
  11. Jennifer Chu, “New Design Cuts Costs, Energy Needs for Drip Irrigation, Bringing the Systems Within Reach for More Farmers,” Massachusetts Institute of Technology, writing in Phys.org, April 20, 2017.

Energy & Climate, Featured Articles, Food & Farming, Impact Investing, Sustainable Business

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