It is clear the food system — which makes up 10% of the global economy — is increasingly a major driver of climate change. At the same time, it is disrupted by climate change.
This disruption will impact global investors across asset classes — in equities alone, food makes up US$4.9 trillion ($6.7 trillion) or approximately 4% of global market capitalisation.
So, it is critical that we think about how investors respond to identify opportunities in the market and potentially avoid risk that could materially impact their portfolios.
The Covid-19 pandemic was a glaring reminder of the fragility of our food system. During 2020 and 2021, the pandemic accelerated the number of people with food insecurity faster than the previous five years combined, and 2022 projections are expected to exceed previous numbers. Developing economies in Africa, Asia and Latin America experienced the fastest growth rates of food insecurity.
Food’s environmental impact
At the recent 2021 United Nations Climate Change (more commonly referred to as COP26) conference, members of the Glasgow Financial Alliance for Net Zero (GFANZ), signed a commitment to deploy over US$100 trillion in financing over the next three decades to move the global economy toward net zero carbon emissions by 2050.
The capital will be deployed over 24 major initiatives, one of the largest and most important being the transformation of the global food system — which will need to feed over 9.3 billion people and produce 70% more food by 2050 than we do today, while simultaneously reducing its significant negative impact on the environment.
While today’s global food system makes up nearly 10% of the global economy, it also generates over US$12 trillion a year in negative externalities ranging from water and air pollution to food-borne diseases and health impacts from exposure to toxic pesticides and fertilisers.
In stark terms, the globe is taking on a US$4 trillion loss each year to finance a food system that is unsustainable, inequitable, unstable and one of the biggest contributors to climate change.
See also: Did Munger miss a trick by avoiding silver?
It is estimated that over a third of greenhouse gas (GHG) emissions come from food systems. This estimate accounts for the full cycle of food production — including supply chain, packaging and retail — whereas previous calculations often accounted for GHG emissions only on the farm or pasture.
Food system GHG emissions are also creating a negative feedback loop, with the combination of falling yields, lower nutritional value and higher prices creating higher prevalence of food insecurity. Mitigation of these trends will require a broad range of solutions, including addressing issues around policy, land use, diet, waste, subsidies, trade agreements, among others.
These changes are where financial markets and investors will also play an important role — particularly in the deployment of some of the US$100 trillion in capital GFANZ pledged over the next few decades.
Food industry innovation requires innovation in financing
What does this mean for investors? First, innovation in the food industry must be financed. Whether it be funding for improving traditional farmers’ production, the move to high efficiency indoor agriculture, start-ups developing alternative proteins, or helping companies build supply-chain resilience, all will require large capital inputs from equity, fixed income and private markets.
If we are expecting the food industry to innovate, the asset management industry must also innovate to create investment vehicles to address these large-scale changes.
This may require rethinking traditional funding models, including the duration and types of loans, direct impactful investing and aligning investments to long-term sustainability goals, such as the UN Sustainable Development Goals. Due to the significant impact agriculture has on GHG emissions, it is critical that carbon trading and carbon markets develop as soon as possible.
Sink your teeth into in-depth insights from our contributors, and dive into financial and economic trends
Need for better financial incentives and environmental impact measurements
As we invest in innovation to help reduce negative externalities, a market based approach where we more effectively measure and price environmental impact will be necessary. More directly: The economic value of natural systems and the risks to these systems’ further degradation must be accounted for in asset pricing.
To give context, the World Economic Forum (WEF) and PwC have estimated that half of global GDP has significant risk exposure to changes in nature. But for investors, there is opportunity on the other side of this equation: the opportunity to help fund the global economy’s transition to a nature-positive economy.
It is estimated this transition will generate US$10 trillion in additional business revenue and cost savings and over 395 million jobs by 2030 — of which US$3.6 trillion and 191 million jobs are directly related to changing the food system.
Examples in the food sector include funding regenerative agriculture, creating sustainable and healthy fisheries, stopping biodiversity loss; reducing food waste and creating efficient, transparent and sustainable supply chains.
The growing role of private markets
Though public markets play a critical role in our food system, private markets can play a growing and significant role in food innovation going forward. For instance, venture capital investing in foodtech and agritech startups is rising steadily. From 2015 to 2019, over US$45.6 billion was invested in foodtech startups in 3,200 deals.
We believe this space will continue to grow as start-up companies explore lab-grown meat, 3D printed food and other innovations.
Additionally, private debt will play a key role in the coming years in providing funding to farmers making the transition from traditional to regenerative agriculture. In 2019, US$3.6 billion in private loans was issued in the United States through private debt managers, with US$2.8 billion having loan criteria tied to regenerative agriculture.
Food is no longer a story just about land, water and weather — it is a story about technology, innovation and the future. Companies harnessing technology and driving innovation to maximise efficiency of the five basic food inputs — water, sun, fertile soil, energy and distance to market — will provide growth and investment opportunities for investors.
It is clear that food innovation, and the future of food production, will play a major role in markets over the coming decades.
Stephen Dover is chief market strategist and head of Franklin Templeton Institute
