Going Against the Grain

Upscaling innovative solutions could ensure long-term food security, sovereignty and sustainability.

Although recent headlines have been dominated by energy security concerns, food supply chains have also been threatened by Russian President Vladimir Putin’s military aggression, with the so-called breadbasket of Europe under siege.

“Russia and Ukraine are superpowers when it comes to agriculture,” says Alessia Lenders, Real Assets Associate at SLM Partners, an asset manager which specialises in sustainable land and real assets.

Combined, Russia and Ukraine account for around a quarter of the world’s wheat exports. However, with a World Food Programme (WFP) report warning that 13.5 million tonnes of wheat and 16 million tonnes of maize are currently stuck in both countries, there are mounting concerns that supply chain disruptions will cause food prices to spike.

For example, wheat imports account for 62% (12-13 million tonnes) of total annual wheat use in Egypt alone, the International Food Policy Research Institute said.

There is a worrying possibility that weakening food security will “trigger political unrest”, as was seen across Egypt and neighbouring countries in the early 2010s with Arab Spring, Lenders adds.

Russia’s invasion of Ukraine compounds an “already challenging commodities market” which is struggling in the face of supply chain disruptions caused by the pandemic and climate change-related impacts on food production, says My-Linh Ngo, Head of ESG Investment at BlueBay Asset Management.

However, just as investors increasingly look to invest in localised renewable energy generation, the current geopolitical situation could also prove to be a “catalyst” for more localised “investing in the future of food”, Robert Appleby, Founder of The Cibus Funds, tells ESG Investor.

There are investment opportunities in “companies embracing innovative technologies disrupting existing unsustainable food production and supply chain processes that both increase resource efficiency and ensure sustainability”, he notes.

Although localising supply is important to ensure food independence, this is far tougher to achieve for poverty-stricken and climate-vulnerable communities.

Going into 2022, 44 million people in 38 countries already “teetered on the edge of famine”, according to the WFP, one of the world’s largest humanitarian organisations. But the war has meant that the costs of WFP’s global operations are now set to increase by US$29 million a month, the report noted, warning that countries such as Afghanistan, Ethiopia, Lebanon and Syria are “particularly vulnerable”.

“Global issues always fall most heavily upon the poorest parts of the world,” acknowledges Paul Smith, Founding Partner at consultancy and think tank SustainFinance.

Upscaling innovative food solutions that are cost-effective, easily implemented and adaptable to extreme climates is therefore paramount, experts agree.

But building a sustainable global food and water system won’t come cheap.

Asset manager Schroders has estimated that US$30 trillion will need to be invested between now and 2050 to ensure food security. This will need to target three core themes: higher agricultural yields and efficiency through technological innovation, changes to global diets, and a major reduction in waste and emissions.

“Delaying the transition to a more sustainable food system will only increase the risks to the sector,” warns Dr Helena Wright, Policy Director at the FAIRR Initiative, an investor network focused on ESG risks in animal farming systems.

Missing key ingredients

While its impact is likely to be significant, Russia’s invasion of Ukraine is merely adding to existing concerns around food security.

From droughts in the Middle East, to unprecedented typhoons in China, to the ongoing impact of La Niña in Latin America, there is a vicious cycle of unsustainable food production contributing to climate change and climate change subsequently disrupting food production.

Around 14.5% of anthropogenic greenhouse gas (GHG) emissions come from livestock supply chains, according to the UN’s Food and Agriculture Organisation (FAO). The World Wide Fund for Nature has also said that beef and soy are the biggest drivers of deforestation in the Amazon. This kind of environmental degradation also increases the risk of further zoonotic disease-driven pandemics.

If there is a silver lining to be found in the current geopolitical climate, it’s that higher wheat prices are putting pressure on environmentally-damaging factory farming, says Andreas Schwarzhaupt, Founder and CEO of TrueInvestor.

“In the short-term, revealing the true costs and ecological damage of factory farming is good for the environment, and great for alternative protein investors,” Schwarzhaupt says. “It could have long-term benefits in the acceleration of a transition to sustainable foods.”

Our current dependence on livestock also increases our usage of arable food sources, according to 2019 research by NGO Greenpeace. Sixty-two percent of cereal crops are used as livestock feed, with just 23% feeding people. Further, 88% of soy and 53% of protein-rich pulses are used for animal feed.

The EU is currently considering legislation which would ban the import of soy linked to deforestation. This could subsequently weaken demand through higher costs and increased supply chain scrutiny.

“With much of the world’s crops going into animal feed, increased scarcity driven by the Ukraine crisis has put into focus the inefficiencies of animal protein-heavy diets,” says Wright.

Current efforts by food and agricultural companies to decarbonise their business operations and shift to more sustainable food products, like alternative protein, are slow.

While a number of large food retailers, including Unilever, Nestle and Tesco, have made general net zero commitments, 72% have not adopted protein diversification targets to decarbonise their business models, according to research by the FAIRR Initiative.

Further, only 7.5% of the largest firms in the food and agriculture sector have emissions reduction strategies that are aligned to the Paris Agreement, an assessment by the World Benchmarking Alliance identified.

Collaborative action taken by governments, such as The Global Methane Pledge, is nonetheless putting more pressure on these companies to decarbonise their processes and implement more sustainable practices. Further, investor networks Ceres and the Principles for Responsible Investment have published guidance for investors engaging with the sector to decarbonise their supply chains.

“Forcing these companies to change isn’t just up to investors, but the regulators and consumers, too,” says Smith. “Regulators need to nudge companies in the right direction with rules and guidance, while, as consumers, we need to more informed choices and show a willingness to change our approach to food.”

Rewriting the menu

As well as investing in alternative protein and carbon neutral energy drinks, there are other investment opportunities that can contribute to food security, sustainability and supply chain efficiency.

“Environmentally friendly farming practices such as agroecology, organic farming and agroforestry provide the only path to ensuring long-term food security, sovereignty and sustainability of all food systems,” says TrueInvestor’s Schwarzhaupt.

SLM Partners invests in farmland and timberland, with the ambition of scaling up regenerative and ecological approaches to land management, Lenders tells ESG Investor. Organic farming systems that rely on nutrients from compost, manure and other biological sources, as opposed to synthetic fertilisers, is an “example of circular economy in action”, she adds.

“Regenerative practices such as cover cropping, no-till, compost application and creating pollinator habitats increase biodiversity and soil organic matter,” Lenders says. This leads to healthier soils, improved water efficiency (increased water retention), and more resiliency against the effects of climate change.

A sub-theme of BlueBay Asset Management’s Impact-Aligned Bond Strategy is to invest in sustainable and nutritional food and agricultural management solutions. Last year, asset manager Kempen launched the Kempen SDG Farmland fund which aims to give investors access to agricultural investment opportunities while contributing to UN Sustainable Development Goals 2, 6, 12, 13 and 15.

Companies are demonstrating that the domestic climate doesn’t have to be a barrier to more efficient and sustainable local food production, says Appleby. The Netherlands, which has a naturally wet and cool climate, is an example of a country innovating to grow a wider array domestic produce, he points out. Companies like DutchGreenhouses are building sustainable greenhouses across the country that replicate ideal growing conditions for an assortment of fruit and vegetables.

“Indoor farming uses less land, less water and doesn’t depend on pesticides,” Appleby says.

Indoor vertical farms are also increasingly popular investment opportunities.

For example, AeroFarms develops vertical farms growing consumable ‘leafy greens’ – such as kale – in optimal aeroponic conditions. The company has plans to build vertical farms in the Middle East, where the hot climate and water scarcity makes growing crops outside challenging and resource-intensive. Dutch firm PlantLab has received €20 million in funding during the first round to develop a technology enabling the urban production of vegetables in vertical farming without using chemical crop protection agents.

As Russia is the world’s biggest exporter of fertiliser, it’s expected that this market is also going to be impacted by the war. In the short term, there are concerns about yields, but disruption could serve as an opportunity to explore technologies that move away from artificial additives in farming.

To further help improve efficiency, companies like Burro are developing technological solutions.

“They have developed cost-effective, electric-powered trays on wheels that can navigate their way between fruit and vegetable pickers and the packers, ferrying produce between the two,” Appleby explains. “As well as saving time, it’s also easing the workload of those employed.”

To make food go further, other companies are experimenting with genetics.

Swedish private equity firm EQT’s Future fund has recently invested in companies experimenting with sustainable genetic enhancements to improve the agricultural yield, nutritional value and shelf life of soft fruits.

“What could – and should – come out of [this current geopolitical situation] is a more strategic, holistic approach to food and energy security, which promotes more regional self-sustaining practices, and hopefully more of a focus on food nutrition and environmental sustainability,” says Ngo.

The practical information hub for asset owners looking to invest successfully and sustainably for the long term. As best practice evolves, we will share the news, insights and data to guide asset owners on their individual journey to ESG integration.

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