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A Giant Leap for Salmon Farmers

Impact-focused innovation can open up aquaculture to a wider range of investors, says Grant Cavanaugh, CIO of Scoot Science.

Even with a global recession on the horizon, the appetite for luxury foods shows no sign of abating.

The global salmon market size is projected to reach US$76.15 million by 2028 representing a compound annual growth rate of 3.7% from 2021.

Five million metrics tonnes of salmon reached the world’s dining tables last year, and while a large share of these fish were wild, there is a massive market for farmed salmon.

Aquaculture, to give it is proper name, is big business. The OECD predicts the ocean economy will grow at twice the rate of the mainstream economy in the current decade, largely fuelled by an undernourished population’s demand for protein.

Yet investment in aquaculture remains challenging for investors to access, particularly those with ESG issues driving their investment strategies.

The issue is not so much environmental impact – salmon aquaculture is more efficient than meat and dairy farming both in terms of production and greenhouse gas emissions – but rather its vulnerability to climate changes and biodiversity risk.

Rising sea temperatures, oxygen depletion, loss of habitat and disease area all issues for salmon farmers attempting not only to maintain a living but attract the necessary investment to develop their operations into sustainable alternatives to conventional land farming.

According to the 2021 EY Norwegian Aquaculture Analysis, the volatility in the stock prices of listed salmon fisheries has led investors to demand greater transparency over the risks to which these company are exposed.

Aquaculture offers investors “something rare: uncorrelated, persistent, green risk-adjusted returns”, says Grant Cavanaugh, CIO of Scoot Science, an ocean analytics and forecasting company focused on creating the first transparent, comprehensive, data-driven tools for measuring the impact and risk of ocean conditions on salmon farms globally.

Until recently, allocations have remained scant because of the difficulties of accessing and presenting a comprehensive range of supporting data.

However, Cavanaugh argues that much of the data investors need to identify aquaculture companies with the biggest ESG risks and opportunities already exists.

“Fish farmers have been measuring everything that’s going on, in and near the coastal waters. They have sensors that measure the ocean’s depth and temperature. That data will just sit somewhere on an Excel spreadsheet gathering dust. Those are exactly the numbers that you need to get a good picture of how the ocean operates.”

Limited options

Scoot Science employs oceanographers, data scientists and software specialists to lift the requisite information from dusty databases and turn it into meaningful forecasts for companies to be able to mitigate risks. The analytics, meanwhile, provide their investors with more data on likely profitability and sustainability.

While Scoot Science does not collect its own ocean data, it is able to bring together information from numerous systems and use proprietary tools for analysis.

“Our oceanographers and analysts have been building really good physics-based tools that are meaningfully better than black box machine learning algorithms to help wrap minds around [climate change] risks for aquaculture,” he says.

The company built SeaVest, a tool which it says can be used by aquaculture businesses to demonstrate their commitment to sustainable food production, and by institutional investors to drive capital to the most successful operations.

Cavanaugh says: “We are trying to sell products that in terms of ocean forecasts didn’t exist historically. Simultaneously we are trying to leverage the data to explain an industry that historically wasn’t investable to institutional investors. So, we’re really making a marketplace using this core data about the oceans as the bridge between institutional investors and operators.”

The company also offers advisory services across sustainability, finance and operations.

Scoot Science’s input to the aquaculture sector will support the EU’s BlueInvest initiative which is designed to “foster innovation and investment in sustainable technologies for the blue economy”.

Cavanaugh says it is critical there are more means for investors to put capital to work in aquaculture, which has thus far been dependent on blue bonds for finance.

There needs to be more opportunities to invest in aquaculture through a larger number of players, he adds.

“There are only three lenders that service the entire [salmon farming] industry: DNB, Rabobank and Nordea are all Northern European institutions which have desks specialising in seafood lending. It is pretty weird from the standpoint of global finance that these profitable [aquaculture] operations are only serviced by a small handful of banks.”

According to Cavanaugh this means that “despite recent blue economy commitments, the outcome has been a lack of global capital flowing not just to salmon but the larger blue economy.”

Beginning of a new era

However, for salmon farming to attract investment of any size, it also needs to move beyond its current concentration in the hands of few small family-run businesses – 80% of the top 50 salmon farms are family owned – to larger commercial enterprises.

Cavanaugh says consolidation is on the horizon since most of the business owners are in their 60s, suggesting imminent transition to new ownership, which could present private equity or M&A investment opportunities.

Consolidation may also help bolster the attractiveness of Oslo Bors, the Norwegian exchange on which many salmon farmers are listed.

According to Thor Talseth, Founding Partner of Neptune who contributed to Scoot Science’s report into investment in salmon aquaculture, Oslo Bors contains too many small companies that do not belong on a public index.

Talseth says: “What is needed is more sizable public companies that are diversified and have excellent management.”

For Cavanaugh the salmon aquaculture sector is on the cusp of transition. He argues that once investors have transparency into the relative risk and merits of the industry, there will be greater appetite to explore an allocation.

Once there is some fluidity in company ownership and organisations emerge of greater size to merit investment, this should also create momentum.

And as these two levers move, then more asset managers should come to market with suitable products.

“Institutional investors don’t change their stripes overnight; these are relatively slow-moving operations. We would imagine that there’s going to be a graduated pace towards putting this type of [ocean analytics] to work.”

He continues: “Today, there are one or two private equity funds that, on the margin, will consider entering into ocean-based operations, particularly aquaculture. With this kind of transparency, we think that it’s reasonable that some of the more sophisticated institutional allocators like the Canadian pension funds, who may have big investment teams, or sovereign wealth funds will invest in aquaculture portfolios.”

Scoot Science’s contribution to the aquaculture investment space undoubtedly makes life easier for investors wanting to analyse the companies in the sector. However, there are many hurdles for asset owners to overcome as they weigh up the place of salmon farming in their ESG portfolios.

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