ESG InvestingJan 18 2021

The future of food stocks is changing

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The future of food stocks is changing
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Climate change is getting a lot of airtime these days.

Much of the conversation around how consumers and investors should mitigate climate change has centred on the contribution to man-made greenhouse gas emissions and the need to transition to renewable energy.

However, far less attention has been drawn to another industry, which, as it happens, contributes about 26 per cent of all man-made GHGs and is the leading cause of global tropical deforestation and biodiversity loss: our food system.

Why is our food system so destructive? There are a number of factors and contributors, but the meat sector is by far the biggest offender.

Brace yourself for this. Half of the world’s habitable land (that is, land that is ice and desert free) is used for agriculture – and 77 per cent of that agricultural land is used for either grazing livestock or growing feed for livestock.

As the human population has grown, demand for meat has increased. Cattle and soy production are now the leading cause of deforestation in the Amazon biome. Nearly 80 per cent of all soy produced is used to feed livestock, including cattle.

As the image below shows, the supply chains for beef and lamb/mutton emit more kilograms of carbon dioxide equivalent per kilogram of product than any other type of food.

 

 

Even more worryingly, the overwhelming bulk of this contribution comes from the first two stages of the food supply chain alone: land use change and farming.

'Land use change' refers to the conversion of forests into agricultural land.

Deforestation not only leads to the emission of huge quantities of carbon dioxide through forest biomass combustion and decomposition, but it also alters soil carbon content enormously.

According to the World Resources Institute, the loss of tropical forests contributed some 4.8bn tonnes of carbon dioxide a year globally between 2015 and 2017, about 8 per cent to 10 per cent of total man-made GHGs.

The second stage is farming, where fertilisers, manure, farm machinery, and livestock also release staggering quantities of GHGs into the atmosphere.

Take the humble cow. Over 12 months just one of these animals can produce up to 300kg of methane – a gas that traps roughly 28 times more heat than carbon dioxide over a 100-year time scale and 84 times more heat than carbon dioxide over a 20-year time scale.

Comparatively, the processing, transport, retailing, and packaging stages of the supply chain that follow have a much smaller GHG footprint. Combined, these later stages contribute only around 5 per cent to 10 per cent of global man-made GHGs.

Meanwhile, GHG emissions from the supply chains for plant-based products can be up to 50 times lower than meat products. Not to mention the numerous studies claiming that plant-based diets can help reverse a raft of food-related illnesses like cardiovascular disease, Type 2 diabetes and obesity.

So, it is the types of foods that we are eating that are driving the majority of GHG emissions in the food system. Emissions derived from the way we process, transport, store and package food are negligible in comparison.

Accordingly, what we eat is far more important than where our food comes from in terms of reducing GHGs and deforestation.

An example I like to give is that the impact of a locally-sourced steak from your local farm shop is far, far worse than an avocado that has travelled over 5,000 miles from Mexico.

Consumers around the world are really beginning to wake up to these realities. This growing environmental and health consciousness has the potential to be both the single biggest thing we can do to reduce deforestation in places like the Amazon rainforest (largely attributable to beef production) and Borneo (largely attributable to palm oil production) and to reduce man-made GHGs attributable to the food system. It also has the potential to unlock a raft of new investment opportunities.

Plant-based meat and cultured meats

This year’s pandemic and the living adaptations we have had to make have only served to accelerate this conscious rethinking of our purchasing habits.

Around 81 per cent of French consumers surveyed by OpinionWay in May 2020 said they intended to purchase more environmentally-friendly food after the lockdown.

When asked why they were cutting back on meat consumption, nearly half of respondents to a 2019 Gallup poll cited environmental concerns as a major driver.

This is paving the way for a large increase in the sale of meat alternatives in the future.

Management consultancy Kearney forecasts that conventional meat’s share of the global meat market will fall from 90 per cent in 2025 to just 40 per cent by 2040.

Over the same period, the share held by novel vegan meat replacements (that is, plant-based meat alternatives like the Beyond Burger and Impossible Burger) is expected to rise from 10 per cent to 25 per cent, while lab-grown meat (sometimes called 'cultured' or 'cellular' meat) is slated to take a 35 per cent position.

Venture capitalists have long anticipated this trend, with funding for Foodtech and Agtech start-ups reaching $19.8bn (£14.5bn) in 2019, more than double the amount raised in 2016, which was only $8.6bn. Meanwhile, public investor hype around the sector has been well and truly fanned by the IPO of Beyond Meat.

Notwithstanding this year’s pandemic, shares in the plant-based meat producer have risen from below $75.60 on December 31 2019 to $142 as of November 27 2020.

In the same period, shares in a more recent entrant to the public markets, Else Nutrition, which makes plant-based baby food, have risen from C$0.53 (31p) to C$4.50.

The value of the plant-based meat market is now on track to rise from $10.1bn in 2018 to $30.92bn in 2026. And as this occurs, more and more of these private companies will go public.

To make the most of this opportunity, we have made plant-based foods one of the nine sub-sectors tracked in our Sustainable Future of Food theme.

Together with Tematica Research, we have identified the global publicly-traded companies that derive all or a large proportion of their revenues from plant-based food.

And given that conventional meat consumption, particularly beef, is incompatible with a sustainable future of food, we exclude companies producing foods derived from land-reared meats from the theme.

Beyond plant-based food

It is not just meat alternatives that stand to benefit from increasing environmental consciousness among food consumers. There are many other sectors where companies are innovating to reduce the carbon footprint of the food supply chain.

One excellent example that we hone in on in our Sustainable Future of Food theme is 'smart agriculture', or 'farming 4.0' as it is sometimes referred to.

This refers broadly to the advanced technologies – including robotics, sensors, software and aerial and satellite imagery – that are being combined with big data and cloud-based solutions to enable more precision and automation (and therefore resource efficiency) within the farming process.

Whether it is monitoring moisture levels in fields, assessing the ideal time to pick the harvest or the precise application of input resources like water, fertilisers, pesticides and fungicides, these new platforms allow farmers to provide each plant with exactly what it needs rather than holistically spraying an entire field.

In doing so, farmers can save on input resources, reduce GHG emissions and reduce the nasty environmental side-effects associated with surface run-off, including water eutrophication.

Ultimately, change starts with the consumer. And with consumers around the world becoming better informed about the environmental (and, importantly, health) impacts of what they eat, the transition to a more sustainable food system is finally becoming possible.

The companies driving technological innovation across the food value chain, and the companies designing and producing the new food products that the climate-conscious consumer is demanding, will be best positioned to benefit from the tailwinds of this transition.

Stuart Forbes is co-founder of Rize ETF