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Please see the below article from Invesco, received yesterday – 17/11/2021.

The challenge of preventing climate change is a matter of life and death, and thus, gets likened to a war. In a war, there are often multiple battles being fought at the same time. The fight to transition our energy dependence away from fossil fuels and towards renewables energy is a key focus, but there are other battle lines being drawn out.

Global food chains need to become more sustainable if we want to avoid climate change. This theme has, so far, remained in the shadow of the energy transition. Herein lies the opportunity. In this blog, we’ll frame how global food supply chains can become more sustainable and highlight the companies we own that are enabling this.

 The dual problem – unsustainable practices compounded by a growing population

The food industry faces various sustainability issues. It relies heavily on cheap labour, tolerates an enormous amount of food waste and produces a lot of food with low nutritional value. But we’re going to focus specifically on the environmental concerns here, which are set to intensify as global food demand increases.

The world’s population is expected to reach 9.7 billion by 2050 – that’s nearly 2 billion more mouths to feed relative to today1. Bearing in mind that over 700 million people are currently undernourished2 and around 1.9 billion adults are overweight or obese3, this increase in population size means we’ll have to produce around 50% more calories than we do now to provide everyone with a nutritious diet.

Using today’s agricultural practices, we would need to find an area twice the size of India to do so, which would greatly amplify the food industry’s environmental impact.

Environmental concerns

Whilst on its journey from farm to fork, the food industry releases emissions across the value chain. It accounts for a quarter of global greenhouse emissions, which includes a material contribution to global Co2 emissions and approximately 50% of global methane emissions. Research from Poore and Nemecek showed that, on a global level, more than 50% of emissions generated by the food system was related to livestock – either through land use, animal feed, land conversions or methane production. Nearly 20% of emissions were generated by activities after the production phase, including processing, transport, packaging and retail.

The food industry needs to decarbonise, if global warming is to be held below 1.5°C. Industrial agriculture also poses significant risks to biodiversity and is a large contributor to the consumption of single-use plastic.

The solution – and how our funds are exposed

To reduce the impact of western food chains we need to either drastically change what food we consume or how we produce and distribute it. We believe that innovation can facilitate this change and our investment strategies own some of the companies that are innovating across the three components of the food chain: production, processing and distribution. Interestingly, many of the solutions are coming from enterprises outside of the food value chain.

 Food Production – adopting more sustainable techniques

All global food chains start with crop production. The amount of global acreage used for farming and the extensive use of agricultural chemicals are threatening natural carbon sinks and biodiversity. To become more sustainable, farmers need to change farming practises.

Agriculture relies on fertilisers to enhance yields. Without them, we would run the risk of insufficient food production. However, commodity fertiliser can wash off fields into rivers when it rains. This has negatively impacted natural fish populations.

Yara, a leading fertiliser company, produce premium, targeted fertilisers that do not leach into water systems, thus reducing the biodiversity risks linked to fertiliser application. It has also developed digital farming technology, which enables smart application of the optimal amount of fertiliser, creating a better effect with less waste.

As well as reducing the amount of fertiliser applied, farmers can also adopt new techniques to reduce their Co2 emissions. The popularity of ‘no-till’ methods, where farmers do not plough the land, is growing. These methods produce lower yields, and therefore less profit, but sequestrate much more Co2 out of the atmosphere. Yara has launched a program that helps farmers monetise any additional carbon sequestration achieved. This programme incentivises farmers to look at lower carbon practices and is fuelling the growth of ‘no-till’ acreage.

Another innovation is soilless vertical farming. This is when plants are fed nutrients through water systems with the plants’ roots suspended in air, water or non-soil mediums such as sand and gravel. Whilst in its infancy, vertical farming is gaining traction as it uses less land, less water, no pesticides, delivers more nutrients and can be carbon neutral when using renewable electricity. The reduction in acreage required for food production is also a positive for biodiversity. Signify, held across our large and smaller company portfolios, is a worldwide lighting manufacturer with a leading position in vertical farming lighting solutions.

 Food Processing – reformulating and repackaging food

Food processors need to offer more sustainable products. Plant-based alternatives to dairy and meat have a significantly lower environmental impact. Plant-based food product innovation will help shift consumption habits and lower the impact of global food chains, but food processors need to gain scale by growing capacity.

GEA is an equipment supplier to the food processing industry and has a strong position in plant-based food. They are a key enabler for food processors to innovate into plant-based food alternatives. This company should also help traditional food production become ‘greener’, as their product innovation allows customers to improve energy efficiency, reduce waste, including water, and leverage alternative packaging solutions.

The food industry makes up 30% of the packaging market, and thus, is a large consumer of single-use plastic. UPM and Stora Enso, two global leaders within the pulp and paper sector, offer plastic-free packaging options for food processors. Using today’s technologies, 25% of plastic packaging could be switched to paper-based packaging. In addition, UPM and Stora are investing in biochemical capabilities where they aim to make wood-based bioplastic, a solution that reduces the demand for hydrocarbons. UPM has recently signed an agreement with Coca-Cola for bio-based PET bottles.

 Food Distribution – reshaping the length and shape of global food supply chains

A revolution in the food industry requires the involvement of supermarket chains. The food retail names we own, Ahold and Carrefour, has committed to offering healthier options, improving product transparency, eliminating waste and reducing emissions. Large scale food retailers have the power to force change at the food production and food processing stages, and they will also be instrumental in reducing the carbon intensity of food chain logistics.

The emissions from food transport can be overlooked but are significant. Reducing the miles travelled from farm to fork and the decarbonisation of road and sea freight will reduce the impact of global food supply chains. Yara is leading in the development of green ammonia, a type of ammonia created from hydrogen rather than natural gas.

In future, green ammonia could be used as fuel by the maritime industry to reduce sea freight emissions. Volvo and Daimler are developing their product range of electric trucks. Road freight emissions will fall as logistics companies electrify their truck fleets.

 Conclusion

The energy transition, understandably, is a huge topic within the investment community. This needs to be a success if we are to combat climate change, but this is not the only challenge. As mentioned above, global food chains need to innovate for the world to mitigate climate change. Over time, the equity market will reward those companies that can facilitate these changes. However, today’s investors can already build exposure to this multi-decade theme.

What we’ve analysed here are the sustainability concerns linked to getting food from farm to fork. There are other companies trying to solve issues that relate to the next stage of the journey: once food has left the plate. The theme of reducing waste and the circular economy is another battle that needs to be fought in our war against climate change. And we’ll address this in a future blog.

Please check back in again soon for a range of blog content from us and from some of the world’s leading fund management houses.

Alex Kitteringham.

18/11/2021.