Commentary

Financial Markets Can Transform Our Food System

European lawmakers hail 2024 as the year of sustainable and resilient food systems, but financial markets hold the key to unlocking this future, says Peter Elwin, Director of Fixed Income and Head of Food and Land Use at Planet Tracker.

The world relies upon the global food system for sustenance, while millions depend on it as their source of income. With global revenues worth US$15-19 trillion, or around 20% of global GDP, according to Planet Tracker’s research, a resilient and efficient food system is essential for future global economic stability and wealth creation.

But the current set up is malfunctioning. Our global food system is not fit for purpose.

Current food system practices are driving climate change and depleting our natural capital, responsible for over a third of global emissions, 33% of soil degradation and 86% of animal species on the IUCN Red List. Combined with unsustainable consumption patterns, the pressure is on to feed a growing global population securely, efficiently, and equitably while meeting our goals for a nature positive, net zero world by 2050.

Financing the future of food

Planet Tracker estimates US$8.6 trillion of private finance funds the global food system. Yet a series of market failures mean the value of nature is not effectively priced, which are compounded by policy failures where governments incentivise or subsidise unsustainable practices. Private sector financial institutions (FIs) therefore face existential risks with their current ‘business as usual’ approach.

We must reform the way that capital is allocated within the financial system. FIs cannot meet net zero ambitions without contributing to food system transformation. Furthermore, they risk being unable to achieve their clients’ investment goals.

The opportunities for FIs should provide some food for thought.

Beyond meeting climate and nature goals, not to mention feeding a hungry planet, there are annual business opportunities worth US$4.5 trillion, with a further economic benefit of US$5.7 trillion from avoiding costs embedded in current practices, according to the Food and Land Use Coalition (FOLU).

In fact, the annual investment required to achieve these results is US$300-350 billion – equivalent to just 4% of the US$8.6 trillion of current investment, or 2% of estimated system revenues.

Three-four-six

So, the objective seems clear, and the sums seem simple. But putting into practice the steps needed to achieve systemic change requires initiative. Following the largest combined analysis of its kind of over 400,000 companies involved in the global food system across 160 countries, Planet Tracker has recently published its Financial Markets Roadmap for Transforming the Global Food System.

To help FIs decide where to put their efforts through investment and engagement policies and associated initiatives, the Roadmap uses a three-four-six structure to focus investors and drive meaningful, urgent change.

Three transformation pathways describe changes required at a systems level: protecting and restoring ecosystems; improving food production processes; making consumption sustainable. This essential context helps FIs decide how best to support the transformation through financial relationships with investee companies.

Four food system transformation themes develop investment frameworks. FIs must decide how to configure investment and engagement processes to ensure capital allocation in support of transformation, and mitigate future associated risks.

For example, the environmental footprint of the global food system is heaviest at the producer end of the supply chain, but the public equity and bank finance is currently focused primarily on manufacturing and retailers & food service. This will change. Other themes encourage increasing food system efficiency, developing sustainable product offerings and reducing food system pollution.

Finally, six priority actions for FIs should be taken before 2030. Not only are these actions designed to reduce food system harms, but will also have a correspondingly beneficial impact on FIs’ progress towards net zero lending and investment portfolios.

Based on the size and immediacy of their potential benefit, plus the extent to which they lie within the power of financial institutions to act today, the six actions are realistic, achievable and measurable.

FIs should aim towards: fully traceable supply chains; halving food loss and waste; halting deforestation; cutting methane emissions by 45%; making agricultural systems regenerative.

The six priority actions could reduce food systems emissions by approximately 10 Gt CO2e – nearly 60% of the food system’s current footprint, and reducing humanity’s overall greenhouse gas emissions footprint by a fifth.

Meanwhile, this undertaking has an important human dimension. We must ensure a just transition. For financial institutions, this means connecting work on food systems with wider commitments to uphold human rights and labour standards.

Our food future transformed

None of the global objectives that have been agreed in recent years with respect to people, planet and climate will be achieved unless the global food system is transformed, and many pledges require significant action by 2030. The Paris agreement to limiting global temperature to no more than 1.5°C by 2050 includes reducing emissions by 45% by 2030; the Kunming-Montreal Global Biodiversity Framework agreed in 2022 includes 23 ‘action-oriented global targets’ to be achieved by 2030.

There are significant risks for financial institutions that fail to reposition themselves in time. Change is inevitable.

For those FIs that seek to drive the required changes, there are significant opportunities. Plainly, the economic value potential is huge. The urgency of the linked climate and nature crises requires immediate action, and the financial sector should ready itself.

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