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Investors Ride Aquaculture Tech Wave

Mounting global demand for the fruits of the sea means it is more important than ever to finance the industry’s transition to sustainability. 

Close to 90% of global marine fish stocks are exploited and depleted, due to the growing demand for seafood. Demand is therefore increasingly being met by the aquaculture industry. 

However, as is the case with other land-based food value chains, the vast majority of aquaculture processes are unsustainable. 

At least US$55 billion in capital expenditure is required to finance the aquaculture sector’s transition to more sustainable practices, according to research published by financial think tank Planet Tracker.  

In its analysis of 57 listed aquaculture companies, the NGO found that these companies generally cannot afford to self-finance their transition efforts, meaning external capital is needed to avoid ‘aquafailure’.  

In this feature, we examine the case for large asset owners and institutional investors exploring the investment opportunities that sustainable aquaculture presents. 

Why should asset owners consider investing in sustainable aquaculture? 

Between 1990 and 2020, the global aquaculture industry’s annual output increased by over 600% – or 6.7% a year. However, a litany of ESG-related issues must be addressed as the sector continues to scale. 

Bad practices include the use of microplastics and heavy metals throughout the value chain, the use disease-related chemicals and antibiotics, and disease outbreaks. 

“Stocking density levels are both a driver of profitability and animal welfare, and fish escapes threaten the local environment,” says François Mosnier, Head of Planet Tracker’s Oceans Programme. 

Additionally, fish farms can generate waste that pollutes local water resources and natural habitats.  

Some aspects of aquaculture are also very emissions-intensive. A recent study showed that bottom trawling – a practice that contributes fish feed used in aquaculture – released around 370 million tonnes of CO2 a year, equivalent to the annual emissions of the entire aviation industry. 

The way in which companies use fish feed and care for animals largely determines their ESG risk profile, according to Mosnier. “In many countries, fish on which local populations rely for their diet are used as feed for the aquaculture industry and are often overfished.” 

A popular alternative is soy-based feed – but this comes with its own environmental risks, as soy farming exacerbates deforestation.  

From a governance perspective, the fragmented nature of the aquaculture industry – made up of a myriad of small-to-medium-sized companies – makes investment assessments and subsequent risk mitigation difficult. 

“It’s a fast-growing sector with a wide range of opportunities for impact investors, like supporting the provision of jobs in low-income countries,” says Jobien Laurijssen, Sustainability Manager at family office investor VP Capital. 

There are other major social risks to address, including forced labour, illegal recruitment practices, and hazardous working conditions. 

A shift away from conventional aquaculture towards technology-heavy solutions and regenerative aquaculture has started, but this requires capital,” says Mosnier. “The prize is healthy, sustainable, and profitable ‘blue’ food.” 

Are there credible investment opportunities? 

Last year, Morgan Stanley published a report in which it identified sustainable aquaculture as one of four big opportunities for ocean impact investment – alongside decarbonising the maritime industry, marine solutions to protect ecosystems, and marine renewable energy. 

Sustainable aquaculture can serve climate objectives, the report suggested, as fish farms can be co-located with new renewable energy sites and farmed seafood is a comparatively low-carbon source of protein. 

“Aquaculture is an industry yet to be consolidated and with low profitability, [yielding] a 5% earnings before interest and tax margin on average,” explains Mosnier. “That can ride a strong underlying growth potential and significantly expand margins if it succeeds in reducing feed and disease costs and associated environmental issues, thereby securing long-term expansion.” 

Regenerative aquaculture, such as farming seaweed, has the largest growth potential and could account for over 15% of aquaculture production by 2050 with investor backing, Mosnier claims.  

Norwegian sustainable food company Hima Seafood recently received a US$250 million investment from alternative investment manager Foresight for its first land-based aquaculture project – a trout farm run using a freshwater recycling system. 

Meanwhile, impact-focused investment management firm Snowball sees investment opportunities in data-driven aquaculture. “This includes investing in technology for sustainable farm management, farming species with lower trophic levels, fish feed and seafood alternatives, smart-fishing equipment, and supply chain transparency,” says Jake Levy, Senior Investment Manager at Snowball. 

Scaling aquaculture investments take time, but the benefits are beginning to emerge. As an example, eFishery has become the first aquaculture company valued over US$1 billion. The company has developed a platform that gives smallholder farmers access to fish feed and financing.  

Another innovation in progress is the development of recirculating aquaculture systems (RAS). “In a RAS farm, fish can be farmed on land anywhere in the world with lower consumption of fresh water, and shorter transport distances,” says Levy. 

However, RAS process is energy-intensive, which increases the cost of production. As such, the system has yet to be proven at scale. “There are many companies trying to crack this, with a big financial prize for those that can,” says Levy. 

What are the potential routes to investing in sustainable aquaculture? 

Although there are many examples of companies innovating throughout the sustainable aquaculture industry, the market remains too nascent to attract many of the larger asset owners. As of 2022, aquaculture funds were worth an estimated US$3.15 billion. 

Three types of funds typically invest in sustainable aquaculture. These include climate and food technology funds with small exposures to aquaculture that typically invest in later fundraising stages, broad-focused ocean funds like Oceans 14 and SWEN Blue Ocean Partners, and aquaculture-focused funds like Aqua-Spark and HATCH. 

“We have found that most of the investable opportunities are in venture and growth capital,” adds Levy. “However, it has been exciting to see the emergence of nascent instruments, such as payments for ecosystem services and blue bonds.” 

In 2018, the Seychelles issued the world’s first sovereign blue bond to finance its transition to sustainable fisheries in 2018. 

Both Snowball and VP Capital are investors in Aqua-Spark, which is supported by over 300 investors spanning 25 countries and has more than €450 million (US$484 million) in AUM.  

“VP Capital has been invested in Aqua-Spark for around seven years and chose to do so as part of its impact strategy,” says Laurijssen. “The fund has an open-ended structure, which suits our approach as a long-term investor.”  

Aqua-Spark has seen steady returns in recent years. “Since our first investment in 2015, our internal rate of return (IRR) has varied between 12% and 27% on a net basis depending on entry, with a target IRR of 20%,” says Lissy Smit, CEO of Aqua-Spark. 

The firm also sees future investment opportunities in sustainable aquaculture in Africa, where demand for fish currently outstrips supply, with almost 40% of stock imported.  

Aqua-Spark will be launching a dedicated Africa fund later this year to address food insecurity, targeting local entrepreneurs who are building vertically integrated farms like Chicoa, as well as companies like Aquarech – which connects smallholders to markets and other resources. 

“Whatever type of fund investors choose, they need to be aware that aquaculture is a nuanced industry,” Smit warns. “As such, they should look for fund managers with expertise in the area.” 

How are regulatory developments impacting the sector? 

Just like the availability of funds in the sustainable aquaculture space, the regulation of aquaculture is beginning to ramp up.  

“Aquaculture relies on environmental commons for its production process,” explains Mosnier. “As such, the way in which regulators perceive and deal with this reliance, and the extent to which aquaculture fits into increasingly crowded coastlines, is key.” 

In Norway, for instance, reliance on natural capital has materialised in the form of a significant resource rent tax for salmon producers. 

The EU, too, adopted new strategic guidelines in 2021. The goal was to help the sector become more competitive and resilient, and to improve its overall environmental and climate performance to enable companies to participate in the green transition. 

Argentina, Canada and the UK have also increased their regulatory scrutiny of aquaculture, while the UN High Seas Treaty should help to reduce the adverse effects of wild capture fisheries and encourage the industry to transition to more sustainable practices.  

Against this backdrop, it is now imperative for the aquaculture industry to demonstrate to consumers and regulators that it can continue to grow while minimising environmental and social impacts, Mosnier insists.  

“Compared to fishing, farmed seafood is not as scrutinised yet,” he adds. “Once it is, disparities between nature-positive, low-carbon, affordable and healthy blue proteins versus environmentally- and socially-damaging monoculture, will for sure make waves in an industry that still undersells itself compared to agriculture.”

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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