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Commentary

How Investors can Accelerate the Food and Agriculture Revolution

Dr Henning Stein, Finance Fellow at Cambridge Judge Business School, and Ariel Barack, CEO of Ordway Selections, explain why the drivers of change – and the roles of public and private markets – are evolving.

Efforts to build a genuinely sustainable food and agriculture system have now been under way for a number of years. On the whole, the story so far has reflected an uncomfortable truth: revolutions are messy.

There have been few exceptions to this rule throughout history. Political, social and even scientific upheaval has almost always proved tumultuous, for the simple reason that radical change is seldom easily achieved.

Given this, we should not be surprised that the global transformation of how we produce and consume food has been neither flawless nor swift. Equally, we should not shy away from its imperfect path to date.

There is no denying that some of the setbacks have been jarring. There is also no denying that many investors’ faith in the quest to feed humanity while safeguarding the environment has been undermined.

Other stakeholders have also been left disenchanted. By way of illustration, consider all those who have ‘bet the farm’ – sometimes literally as well as figuratively – on novel technologies whose promise has not yet translated into tangible results.

Yet none of this means we are in the midst of a revolution that is doomed to fail. Rather, it means we are still on a steep learning curve.

As investors, we have to understand what has happened, recognise where errors have been made and rethink our approaches. In public and private markets alike, there are important lessons to digest.

The irrefutable case for change

It is first imperative to appreciate why, in spite of limited progress, the investment attractions of sustainable food and agriculture not only remain strong but have arguably increased. This obliges us to see the bigger picture.

The most significant point here is that this is a transition that absolutely has to take place. The policies and practices that have dominated food production and consumption for the past three quarters of a century are no longer fit for purpose.

Incorporating farming, processing and distribution, the food system in its entirety is responsible for around a quarter of all greenhouse gas emissions. In turn, the dire effects of climate change – including extreme weather events, ecological decline and dwindling biodiversity – are ravaging landscapes and destroying many farmers’ livelihoods.

Meanwhile, more than 330 million people now face acute food insecurity. Over 80 billion animals are slaughtered each year to meet demand for meat and dairy products, yet the threat of famine persists in many countries.

These interlinked crises are unfolding amid ongoing geo-economic and -political turmoil. Investors have become wearily accustomed to an ever-fluctuating narrative of recovery, recession, hard landing, soft landing or no landing at all.

The prices of many assets – equities, oil, even gold – have been rising in concert. Tech-centric themes such as artificial intelligence have soared in both popularity and performance. Sharp corrections could be in the offing.

Against this backdrop of exigency and uncertainty, the food and agriculture revolution retains the support of governments, supranational organisations, businesses and entrepreneurs.

This can be seen in initiatives such as the EU’s Farm to Fork Strategy – a key component of the European Green Deal – and the US Department of Agriculture’s Agriculture Innovation Agenda. Crucially, it also merits the continued backing of investors seeking both long-term returns and positive change.

Rethinking public markets 

As interest in sustainable food and agriculture has developed, publicly listed markets have been an obvious entry point for most investors. At least in some cases, this route has not met expectations.

The performance of many exchange-traded funds centred on agricultural technology – agtech – has been conspicuously poor. Some have delivered losses of more than 50% since inception. Some have even been liquidated.

More recently, there have been funds that have fared comparatively well. For example, the VegTech Plant-Based Innovation & Climate ETF’s year-to-date cumulative return at the time of writing is close to 9%.

Yet such a figure is strictly relative, with even the best performers comprehensively outstripped by broader indexes. Respectively, the S&P 500 and Nasdaq generated returns of 34% and 45% during the same period. Investors could be forgiven for thinking they should look elsewhere.

To an extent, they should. A key lesson is that a passive ‘pure play’ philosophy might not be the optimum means of benefiting from growth in this fledgling arena. Perhaps appropriately, investors in food and agriculture should not put all their eggs in one basket.

Suitably sensible diversification is not hard. There are numerous actively managed public funds that offer exposure to the major drivers of this revolution while at the same time spreading risk across a much wider variety of cutting-edge businesses and sectors.

Favouring such strategies should not be seen as evidence of a loss of confidence in the existing system’s successful disruption. It instead represents a prudent, pragmatic approach to the challenges and opportunities that invariably stem from far-reaching innovation.

The growing influence of private equity

Another vital lesson is that this revolution necessitates a multilateral response. No single stakeholder group can hope to accomplish everything that needs to be done, because the task is too vast.

The tragedy of the commons is an issue here. The tendency when a problem is all-pervading is to leave the job to someone else. In this instance, as has become manifest, there can be no ‘sole saviour’.

Acknowledgement of this truth has led to the idea of blended finance – a powerful union of public, philanthropic and private capital. The last of these components is becoming ever more critical, especially in light of the concomitant rise of impact investing.

It is routinely assumed private equity is purely a matter of capital deployment. This is seldom the reality today. It is just as much a matter of discovering and nurturing visionary companies so as to have an enduring influence on industries, communities and society in general.

With this goal in mind, private markets can hold great appeal for investors in food and agriculture. They can make sense both with regard to returns and from the perspective of long-term sustainability, particularly in the presence of close alignment between general and limited partners and meaningful engagement with underlying assets and local managers “on the ground”.

Of course, these markets are essentially exempt from the level of regulatory scrutiny applied to their public counterparts. Yet it does not automatically follow that they play ‘fast and loose’ with ESG considerations.

Many private funds are integrating ESG principles into their investment processes. Allianz Global Investors’ SDG Loan Fund, which has mobilised more than US$1 billion of capital to advance the United Nations Sustainable Development Goals in emerging and frontier markets, is just one example.

A shift towards treating sustainability as a value proposition is notably apparent in investments in natural capital, including regenerative agriculture.

The way ahead

There have been several previous revolutions in food and agriculture. Right now we are witnessing the death throes of what was long-touted as the ‘Green Revolution’, which set out to address the scourge of hunger in the wake of World War Two.

The Green Revolution was itself hugely innovative and disruptive. It massively boosted crop yields in a bid to feed a global population of around 2.5 billion people. Unfortunately, thanks to the law of unintended consequences, it eventually helped usher in the era of industrialised farming and unsustainable methods.

The global population today stands at more than eight billion. In other words, the transformation needed now is totally unprecedented in scale – as is the investment required to drive it.

To a degree, we have to be patient. Most revolutions are not just messy but – perhaps counterintuitively – gradual, since they must rely not only on the technology or reason that underpins them but on the acquiescence that finally legitimises them. An existing paradigm is toppled only when a sufficient accumulation of ‘anomalies’ at last brings about an abandonment of conventional thought.

As we have seen, we must also accept undertakings of this magnitude inevitably entail mistakes. Plenty have already been made. We are now at the stage where we must not make the same mistakes twice.

Ultimately, investors cannot lose sight of what is actually happening here. This is a multi-decade, multi-stakeholder, multi-trillion-dollar journey that in many ways has only just begun.

As we keep moving along the learning curve, we must do all we can to make the journey smoother and faster. In tandem, by identifying and maximising investment approaches that are truly effective, we must try to ensure this revolution – unlike its predecessors – is one that lasts.

 

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