From shifts in consumer eating habits to a new focus on responsible business practices, here are the main reasons why you should consider investing in sustainable agriculture and food production in 2020.
Eating has always been revolutionary. From the beginnings of farming in the Fertile Crescent 8,000 years ago to crop rotation and 19th-century mechanisation, food science has enabled the modern world.
Now food and farming face a fresh wave of disruption as consumers demand more plant-based products and eco-friendly agriculture.
From healthy snacks to weed control via drones, biodegradable packaging and stamping out food waste, sustainably-minded companies are upending the traditional intensive food and farming sector. With that change comes opportunity.
This article looks at the possibilities for investing in sustainable food and farming, showcasing new technologies and solutions to the challenges faced by the environment.
What is sustainable investing and can it be profitable?
Until recently, most companies were accountable for just one thing: their bottom line.
Today, investors expect more: namely social and environmental impact. This is because consumers are willing to pay more for brands by companies with a sustainable approach.
As a result, companies with sustainable goals tend to outperform those without them, as shown by a 2017 study by Boston Consulting Group. Doing good can lead to doing well for several reasons. For instance, energy efficiency can save money, while social causes motivate employees and attract talented staff.
It is therefore little surprise that sustainable investing is now the fastest-growing sector of the investment industry, reaching $23 trillion globally, according to the Global Sustainable Investment Alliance’s April 2019 report.
In the past, experts in sustainable investing would negatively screen companies and business sectors, which often led to investors sacrificing returns for responsible investment choices. But in recent years investment managers have switched to positive screening of environmental, social and governance (ESG) risks to create an investment approach that aims to generate returns in line with or exceeding the market.
How sustainability is changing consumer behaviour
The push towards sustainable investing is not just about profit. Consumer awareness – amid environmental, health and animal-welfare concerns – is shaping the market, especially in food and farming.
Farming contributes to climate change through deforestation and the large volumes of emissions that animal rearing produces.
In recent years consumers have also begun to question the quality of the food they buy, with a growing number adopting a more natural, less processed diet. Flexitarian lifestyles encourage mostly plant-based foods while allowing meat and other animal products in moderation.
Meat substitutes such as tofu and textured soy protein have been around since the 1960s, but meat alternatives are now mainstream.
Plant-based alternatives are forecast to grow by 25 per cent a year over the next decade, according to UBS.
By 2040, most of the “meat” people eat will not come from animals, according to consultancy AT Kearney. Its research suggests that 60 per cent will be lab-grown (known as cultured meat) or plant-based substitutes.
Consumers are also concerned by the huge volume of food and packaging waste, as well as the environmental impact of farming. They want solutions.
Food production, of course, isn’t just a matter of taste or ethics. It is crucial to modern life. As Norman Borlaug, the Nobel Prize-winning agronomist, who developed disease-resistant wheat in the 1950s, put it: “Civilisation as it is known today could not have evolved, nor can it survive, without an adequate food supply. If you desire peace – cultivate justice but at the same time cultivate the fields to produce more bread.”
Sustainable food production opportunities
In addition to reducing meat consumption, consumers will happily pay a premium for less wasteful food packaging, foods from sustainable sources and those free of artificial colouring.
Snacks seen as healthy, such as nut bars and seaweed crisps, are growing 9 per cent annually at the expense of processed food, according to Berenberg.
Consumers expect functional and health-promoting snacks, unheard of a few years ago, such as chocolate quinoa bars, collagen cookies, probiotic cheese and vegan ice-creams.
A study by food giant Mondelez shows that the top three qualities adults look for in snacks today are freshness (43 per cent), low sugar (36 per cent) and low fat (31 per cent).
This waning appetite for junk food has seen food giants scramble to reformulate existing products with less salt and sugar, as well as to invest in healthier options.
Ingredients such as natural additives, probiotics and enzymes are in demand, bringing opportunities for sustainable food producers.
The early adopters of new technologies to cut food waste, reduce fertiliser use and improve animal welfare have also benefited.
Investors who are interested in emissions reduction can seek alternative farming opportunities in companies producing things such as plant-based meat and dairy alternatives, which produce little or no methane.
The transition of the food and agriculture sector away from intensive farming promises a new model that can sustainably feed a growing worldwide population expected to reach close to 10 billion by 2050 according to the UN.
Despite the inevitable disruption, it is creating opportunities for sustainably-minded companies offering innovative solutions to the problems faced by the traditional food and farming sector.
Agricultural research can make a big difference in farming, particularly in the world’s poorer areas. For this reason, the Bill and Melinda Gates Foundation, which promotes agricultural development, has begun championing agritech companies.
“I have seen first-hand that agricultural science has enormous potential to increase the yields of small farmers and lift them out of hunger and poverty,” Bill Gates said.
Food and farming investment opportunities
So who are today’s leaders in food and farming sustainability?
Such companies solve environmental issues, operate in a responsible manner and are strongly committed to sustainable development.
Investment opportunities in eco-friendly farming can be found, for example, in companies that make natural preservatives such as lactic acid, which help to extend the shelf-life of perishable foods and reduce food waste.
Up to one-third of all food produced for human consumption today is lost or wasted, costing up to $1 trillion a year, according to the Food and Agriculture Organisation of the United Nations.
Crop imaging and biomass measurement with drones is another important advance in sustainable farming practices. They can help farmers apply fertilisers more accurately and efficiently.
Weed-control technologies that use sensors to detect weed species and apply just enough herbicide to kill them can reduce chemical use in the agritech sector by up to 90 per cent. This approach is predicted to become commercially viable soon.
Emerging technologies could eliminate excessive use of crop-protection chemicals, which have a huge impact on the environment and human health.
Global use of pesticides has grown from 230 million tons in 1990 to 417 million tons in 2016 – an 81 per cent increase – according to the Food and Agriculture Organization of the United Nations.
Furthermore, the overuse of antibiotics in the farming of meat and dairy, which are then consumed by humans, is contributing to a resistance crisis.
Today there are solutions that the dairy industry could adopt for better animal care, which would help retain customers who would otherwise switch to lower-impact alternatives.
Sustainable packaging producers are also a possible agricultural investment opportunity.
Every year, several million tons of debris end up in the world’s oceans, the majority of which is plastic. Its accumulation has a catastrophic effect on marine wildlife.
Sustainable packaging producers reflect the shift in demand away from single-use plastic packaging towards cardboard and bioplastics.
What are the challenges of sustainable agriculture?
When choosing agricultural investment opportunities, investors should be aware of risks such as reputational damage and loss of contracts if their assets are involved in controversies such as deforestation, as well as operational and supply-chain risks linked to climate change.
Climate change is already having an impact on farming with changes to rainfall patterns, increasing temperatures and extreme weather such as heatwaves, droughts, storms and floods.
According to the Food and Agriculture Organization of the United Nations, sudden-onset disasters – especially floods – have increased from 14 per cent of all natural disasters in the 1980s to 20 per cent in the 1990s and 27 per cent since 2000.
Although agricultural practices can be improved, these changes will create challenges for farming generally.
Reacting to environmental policy and regulation
Policy and regulation are big influences in shaping the future of sustainable food production.
Awareness of the health and environmental impact of agrochemicals and antibiotics has fuelled pressure on authorities and policy-makers to find alternatives and ban their use altogether.
In a bid to improve sustainability, governments have been tightening rules covering everything from global CO2 emissions and water pollution to standards on fertiliser use, bans on pesticides and curbs on toxic chemicals in food.
The European Union banned three widely used neonicotinoid pesticides in 2018, while the US removed a popular pest-control product, Chlorpyrifos, amid concerns over its effect on the human brain and nervous system.
As conventional farming rethinks some of its long-held practices, companies that are ready to address these sustainability challenges will be most resilient to increased regulation.
How to access opportunities in sustainable agriculture and food production
Recognising the rising risks and expanding opportunities from this disruption in the food and farming market, BNP Paribas Asset Management, in partnership with Impax Asset Management Group, launched the Smart Food strategy.
It aims to generate outperformance over the long term by investing in shares in food and farming companies chosen for their sustainable business practices, potential for earnings growth and the quality of their finances.
The strategy focuses on sectors such as food safety, distribution and value-added foods, which offer defensive investment options to offset more cyclically exposed areas such as growers.
Companies in the strategy’s universe must derive a minimum of 20% of their revenue, profit or invested capital from sustainable food activities.
In sum, agriculture and food production are being disrupted by a number of trends that will likely usher in a greater focus on sustainability. Companies participating in these trends could therefore offer high growth potential, as well as an opportunity for investors to make a positive impact.
For more information, download our Smart Food whitepaper or view the Smart Food Fund Sheet.
