The most important sub-themes within the food sustainability complex at this current time are arguably plant-based foods, sustainable packaging and supply chain technology.  Areas such as efficient farming, agricultural science and water technology are more longer-term themes.  All of these themes will need to be incorporated into the agricultural industry at a large scale to support the wider food sustainability theme and help solve the food scarcity crisis.

The plant-based food subsector consists of companies producing plant-based foods/alternatives to meat and dairy products, catering for the vegan and vegetarian population.  The popularity of vegetarianism and veganism has been on the up globally.  Nowadays, it’s not only in the likes of India where cultural and religious beliefs are the main factors in adhering to a vegetarian diet.  Even in the likes of Europe and the US, more and more people are following suit (or becoming flexitarian, meaning they are sometimes vegetarian and still consume less meat).  This is happening at a larger scale as consumers become more aware of the negative climate and environmental impacts associated with the production of meat, as well as growing evidence that plant-based foods are in fact far healthier for us than meat.

Sustainable packaging is another sector that has already made quite a lot of progress, particularly given widespread bans of single use plastics.  The sector focuses on the production of sustainable food packaging that can be reused, recycled or composted.  This means investing in companies that are focused on fibre-based packaging (because it can be produced sustainably i.e. sustainable forestry), aluminium or glass (as they can be continuously recycled) or organic material (because it is compostable).  Consumer demand for sustainable packaging and stricter legislation such as broader bans should continue to drive this subsector, creating more interesting opportunities in this space.

The supply chain technology theme exists to reduce food waste.  Almost a third of all food is wasted globally, and this occurs throughout the food value chain.  The UN Food and Agricultural Organization (FAO) estimates that approximately 14% of the world's food is lost on an annual basis between harvest and the retail market while an estimated 17% is wasted between the retail and consumer levels.  Reducing this is essential to limit both food scarcity and climate change issues.  To do so, there is a need for widespread adoption of various processing and logistics technologies, which will reduce the amount of food waste.  This will involve companies from production (harvesting) to supply chain (processing, storage, transport) all the way through to consumption (cleaner/more efficient cooking techniques).

Companies that operate within efficient farming aim to increase the quantity and quality of crops through technology.  They seek to do this via improved efficiencies in the use of their inputs as well as attempting to reduce the negative impacts of environmental factors e.g. single weather events.  Examples of this have included precision farming (incorporating robotic/AI technology for precision planting, weeding, harvesting etc.) and digital/smart farming (physical machinery fitted with sensors and farm-management software for data collection to assess factors including environmental conditions, allowing for better farming practices).  There are also strides being made across vertical, hydroponic and aquaponic farming, all of which are closed loop systems (which reduces water wastage), with no or a limited need for soil.  That being said, current power prices are limiting the progress being made in these farming initiatives for the time being.

There are also more innovative companies within this space that are trying to maximise crop yields through agricultural science.  This includes companies that focus on seed science (gene editing and breeding technologies rather than gene modification i.e. a small tweak to existing DNA rather than the introduction of a new, foreign gene), fertilisers and crop protection products.  This theme is still quite young, but it has all the potential to be a long-term theme given the need to increase the efficiencies of food production.

Last but not least is water technology.  Rather than tell you all about this here, I will redirect you to a recent paper here written by Niels, which focuses on the importance and scarcity of water, and how investors can take advantage of this theme.

It’s still early days for a lot of these subsectors and any underlying companies to have any real impact on food scarcity but the direction of travel is only going one way.  And given there is still a lot of progress to be made within the food industry, there will undoubtedly be a lot of investment opportunities to exploit within these subsectors.  But the question remains – how do investors access these opportunities?  The most lucrative investment will be through closed-ended private equity or agricultural funds.  These funds should focus on particular segments of the market such as food sustainability or farming, which can provide exposure to a number of subsectors.  Investing in these closed-ended funds also means investments into companies that have the greatest potential to improve food sustainability and generate strong returns, relative to public equities.

The next best thing, if there isn’t an inability to invest in closed-ended funds, is to invest in listed companies involved in these sustainable food practices.  While investing directly in these companies may be a difficult task, investors can take advantage of the wider theme by investing in a sustainable food-related public equity fund or an ETF.  Some of the available fund options include the Pictet Nutrition Fund, RobecoSAM Circular Economy Equities Fund or the BNP Paribas Funds Smart Food. On the ETF side, the options you could consider are the VanEck Future of Food (YUMY) or the Rize Sustainable Future of Food (FOOD) ETFs.

It should be noted that these funds (and the theme in general) will have a high exposure to technology and/or high growth companies, so they will be susceptible to short-term volatility, particularly in the current economic environment. Having said that, it is important to consider that this is a long-term theme!

Chirag Jasani

22 September 2022