Written by Rahul Bhushan, Co-Founder and Director of Rize ETF
An estimated US$350 billion must be invested annually if the world is to transition to a sustainable food system by 2030. It’s a huge sum. It has the potential to supercharge growth for a wide range of innovative companies operating across every single stage of the food supply chain.
So, why has the Green Investment conversation largely side-lined Sustainable Food, despite the huge requirement for sustainable capital in this sector?
The reason is simple: funding this vital system has been woefully inadequate for years. In fact, the amount channelled into the area to date is thought to be around 22 times less than that into green energy and transport. This is all the more shocking when you consider that the global food system is responsible for more than a quarter of the world’s greenhouse gas emissions.
Impetus for Change
That’s all set to change, providing an excellent opportunity for shrewd investors. Numerous directives are emerging to drive sustainability across various stages of the food supply chain as awareness of the environmental issues they present grows. They include:
· The ban on all meat advertisements from public places in Haarlem, Netherlands;
· Canada’s updated climate plan, which now includes a target for reducing emissions from fertiliser use; and
· The European Commission’s pledge to reduce toxic pesticide use by 50% across European agriculture by 2030.
It’s paving the way for a broader piece of legislation targeting the entire supply chain like the Inflation Reduction Act has done in other green areas (such as clean energy and electric vehicles). And given the scale of capital required to accommodate true food system sustainability, the tidal wave of capital heading towards stocks that can really drive change stands to be huge.
As always, the investors who stand to generate the most outsized returns here are those who catch the trend in its nascent stage–i.e., now. So, with this in mind, here are three areas currently spearheading the global food system’s sustainable transformation:
1) Precision Farming
Precision farming addresses the fact that, essentially, we grow crops today in exactly the same way farmers did 5,000 years ago.
It centres around the use of digital tools to change this, building efficiencies and a better understanding of exactly how much water and fertiliser (and crop protection products) is needed to increase output, reduce wastage and prevent soil degradation.
A leading stock in this sector is John Deere, which has been heavily investing robotics and automation in its tractors and for the farmers it serves to be equipped with better digital tools to monitor their crop and fields and even operate their tractors remotely.
2) Sustainable Packaging
Packaging and packaging waste have a significant impact on the environment and drive depletion of non-regenerative virgin materials. In Europe, for example, approximately 177kg of packaging waste was generated per person in 2020.
The European Commission is working to address this by making sustainable products the norm, introducing proposals to make all packaging on the EU market recyclable.
SIG Combibloc in Switzerland is a global leader in this area. Its sustainable, circular and easily recyclable packaging is already supporting a robust balance sheet with target revenue growth of 20-22% in FY23.
3) Plant Based Foods
If cows were a country, they would be the third largest emitter of greenhouse gases behind the US and China.
It’s why the need to find alternatives to the way we currently produce meat and dairy is so critical. And it’s why the plant-based food market is continuing to grow so rapidly–in excess of the overall grocery sector last year, in fact, with increasingly rapid expansion expected.
Stocks in this area are learning from their mistakes, gaining market share through means like promoting health benefits, limiting vegan labels and identifying protein sources. Nowhere can this be seen more clearly than with Oatly, a leading global brand in alternative dairy products.
Sorting historical challenges such as US expansion and building new factories has squeezed the company’s profitability. However, valuations now look more attractive and the product remains a consumer favourite.
Investor Entry Point
The time to invest in the sustainable food transition is now. Not only do the winds of change seem to be in motion, but the scale of capital this stands to unlock is truly enormous.
Capturing this through quality stocks balancing innovation with strong balance sheets and recurring revenues could be key to strong investment returns in this megatrend.
