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FORWARD THINKING | – 5 Min

Transforming our food system to be fit for the future

By RACHEL CROSSLEY 28.10.2022

In this article:

    The global food system is emissions-intensive and wasteful. How can investors help transform it? Rachel Crossley, Head of Stewardship for Europe at BNP Paribas Asset Management, explores.

    One of the many effects of the Ukraine war has been to highlight the fragility of our global food system. As we previously explored, the Food and Agriculture Organization’s (FAO’s) Food Price Index earlier this year reached levels last seen in the 1970s oil crisis (it has subsequently fallen, but to still-high levels last seen in 2011).

    Not only does this make putting food on the table harder for many families, every 1% increase in food prices pushes another 10 million people into extreme poverty.

    These shocks arrived on top of a trend of already rising prices. Significant action is needed to create a food system that is fit for the future – particularly when it accounts for 37% of all greenhouse gas emissions. Agriculture is the largest source of anthropogenic methane emissions, the second most potent of all greenhouse gases.  A third of all food is wasted.

    Campaign group Feedback EU has highlighted that the EU throws away 153 million tonnes of food each year. Meanwhile, climate-related impacts are destroying farmland and resulting in hunger in, for example, Pakistan, Nigeria and the Horn of Africa.

    The climate/food nexus

    BNP Paribas Asset Management is pleased to have been one of the strategic advisors of an analysis commissioned by the PRI and carried out by Vivid Economics to generate robust estimates of both the risks and opportunities facing investors related to food system transformation.

    The food system is at further risk from both long-term and acute climate change impacts, including floods, drought and extreme heat. As the Race to Zero initiative highlights, climate-linked disasters caused USD 108 billion losses in crop and livestock production in developing countries between 2008 and 2018.

    It notes that, without action, individual global food supply firms could permanently lose up to 26% of their value by 2030, with a sector average loss of over 7%.

    On top of this, to deliver the essential global transition to net zero emissions, the food system has to undergo its own transition.

    Given the level of emissions that the food system generates, the IPCC has made it clear that the world cannot achieve a 1.5C future as envisioned in the Paris Agreement without addressing how food is produced and transported, or without a substantial shift in diets. Nor will we be able to make good on the Sustainable Development Goals by 2030.

    The successful transition of food and land use systems depends on a host of actors working together, and on humanity shifting to live within the planetary boundaries. In 2019, the EAT-Lancet Commission published a definitive report on healthy diets from sustainable food systems. The commission called for a shift towards plant-based diets, a reduction in food waste and substantial improvements in the food production supply chain.

    Such a transformation will require all companies working in the sector to transition their operations.

    To help, the Science Based Target initiative has launched guidance for land-intensive companies to set transition targets in line with climate science. The newly released and much-anticipated Forest, Land and Agriculture (FLAG) guidance targets emissions from, among other areas, soil loss, deforestation and degradation, and emissions from land management.

    To be approved by SBTi as having science-based targets – a metric increasingly required by investors – firms in relevant sectors need to set targets that are consistent with scenarios that limit the increase in global average temperatures to 1.5 degrees by 2050. Their targets must cover at least 95% of related emissions across scopes 1 and 2 and 67% of scope 3.

    How can investors help?

    It is critical that companies and investors act now to counter the considerable risk ­of investing in unsustainable food practices. Deforestation linked to production of crops such as soy and beef has been described as the ‘new coal’ in portfolios. That is, investment in companies that drive deforestation can generate financial, regulatory and reputational risks.

    These companies will be fundamental in transforming the food system, facilitating the shift to plant-based diets and alternative proteins; embracing agro-ecology and regenerative agricultural practices that reduce the reliance on chemical-based fertilisers and sequester more carbon in the soil; and reducing waste and moving to electrified and renewables-powered transport and supply chains.

    This will provide opportunities for investors across the value chain – from food production, to packaging and distribution. Race to Zero research estimates that solutions for a net zero, nature-positive, resilient food system could generate up to USD 4.5 trillion of new business opportunities annually by 2030.

    When it comes to production, there is a need to shift the allocation of capital towards entities committed to lower emissions and water-intensive practices. These include regenerative agriculture, which aids topsoil regeneration and improves biodiversity, precision farming techniques and manure recycling.

    Here, BNP Paribas Asset Management offers investment solutions for ecosystem restoration that include an indoor farming firm that uses AI tech, robotics and renewables to minimise water and energy use, among others.

    As we have previously highlighted, there are large opportunities in plant-based and alternative proteins, with the alternative protein industry set to grow seven times by 2035. These can include cultured meat alongside insect proteins and myco-proteins (proteins from fungi). It will be important that issues around nutrition and energy use when producing some of these are addressed.

    Plant-based foods have on average around a tenth of the emissions of animal products. BGC research indicates that investing in plant-based proteins has a greater impact in terms of emissions reductions from capital deployed than any other area. This trend fits in from a health perspective too, with the EAT-Lancet Commission recommending cutting red meat consumption by at least 50% for both planetary and health reasons.

    When it comes to distribution, sustainable cold chains will be key, as today around 13% of food waste is the result of a lack of effective refrigeration. Investment aimed at transforming cold chains through energy-efficient cooling technologies that use climate-friendly refrigerants rather than hydrofluorocarbons, and which are powered by renewables, will reduce emissions.

    At the end of the value chain, investing in low-carbon transport networks and technologies to distribute food represents an opportunity that can benefit other supply chains. There are other opportunities to improve supply chains such as investment in improved measurement and ordering systems, while blockchain could play a role in increasing supply chain visibility in, for example, the use of sustainable, non-oil based packaging.

    Finally, active investor engagement with companies and policymakers is critical to bringing about these food system changes.

    BNP Paribas Asset Management is working to drive food system transformation in several ways. In 2021, we joined the FAIRR Initiative, which produces the Coller FAIRR Protein Producer indexes and facilitates investor engagement on issues related to intensive animal production.

    We are pursuing bilateral discussions with various food sector players on this agenda and using opportunities that arise to urge policymakers and standards setters to provide the necessary frameworks and legal and regulatory mechanisms to underpin the transformation. For example, we recently supported a letter facilitated by FAIRR addressed to the FAO asking it to produce a net-zero roadmap for the food sector.

    Disclaimer

    Please note that articles may contain technical language. For this reason, they may not be suitable for readers without professional investment experience. Any views expressed here are those of the author as of the date of publication, are based on available information, and are subject to change without notice. Individual portfolio management teams may hold different views and may take different investment decisions for different clients. This document does not constitute investment advice. The value of investments and the income they generate may go down as well as up and it is possible that investors will not recover their initial outlay. Past performance is no guarantee for future returns. Investing in emerging markets, or specialised or restricted sectors is likely to be subject to a higher-than-average volatility due to a high degree of concentration, greater uncertainty because less information is available, there is less liquidity or due to greater sensitivity to changes in market conditions (social, political and economic conditions). Some emerging markets offer less security than the majority of international developed markets. For this reason, services for portfolio transactions, liquidation and conservation on behalf of funds invested in emerging markets may carry greater risk.

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