With a projected population of 10 billion by 2050, asset managers talk to Piyasi Mitra about their focus on sustainable food and water investments to meet demand and reduce environmental impact.
As the global population is projected to reach almost 10 billion by 2050 (UN), sustainable food production is becoming urgent. In response, asset management firms are focusing on sustainable food and water funds, recognising the investment potential in agriculture technology. These funds aim to address the rising demand while reducing the environmental impact of food systems, offering a solution for long-term sustainability and resource management.
Felix Odey, portfolio manager, global resource equities at Schroders, shares that the asset manager’s resource equities range includes energy transition, conventional energy, and sustainable food and water funds. Within this range, the Global Sustainable Food & Water Fund, focuses on investing in building sustainable food and water systems, including water management, agrosystems and food production and processing. There are three key components to ensuring the fund’s sustainability, starting with universe creation. Odey says: “We seek companies providing solutions in areas like greenhouse gas emissions, water, biodiversity, land use, waste, and food security, focusing on sustainability challenges in the food system.”
About 21–37% of total greenhouse gas emissions come from the food system (Intergovernmental Panel on Climate Change), with sub-sectors decarbonising more slowly than electric vehicles or the power sector, notes Odey.
The second component is a company-specific approach, assessing what companies do and how they manage ESG risks, directly influencing portfolio construction. The final aspect is engagement, adds Odey.
Valuations and “cool tech”
The goal is to support companies offering products and technologies to scale up while selecting those best positioned for transition, shares Odey. Around half of greenhouse gas emissions come from animal farming, and while there’s no single solution, a significant impact can be made through plant-based food, which can reduce CO2, land, and water use by up to 95%. Long-term technologies are essential, but Odey emphasises the importance of being an active manager, focusing on valuations as well as “cool technology.”
Schroder’s proprietary tool, Sustainex, assesses positive and negative externalities per dollar of revenue. A negative Sustainex score doesn’t exclude a company. For example, fertilisers are carbon-intensive but crucial to the food system, as halting nitrogen fertilisers would cut global agriculture yields by 60% and increase deforestation. The tool helps evaluate companies’ greenhouse gas intensity, factoring it into valuations.
Odey believes biodiversity data, like water and greenhouse gas data, will improve over time. “AI and geolocation data will help us accurately estimate the positive or negative impacts of our portfolio companies,” he says. While sustainability funds have niches, he doesn’t expect a major shift in the role of public equity investments within these funds. However, key factors like water and land use, biodiversity, emissions, waste and nutrition will remain critical over the next 5 to 20 years, he predicts. Given the global trajectory, negative environmental feedback loops in the food system could drive up global food prices, accelerating the adoption of the technologies being invested in. “While it’s crucial to navigate sub-sectors affected by a changing world, the core metrics by which companies are evaluated are unlikely to change significantly,” says Odey.
Principal Asset Management’s Article 9 Global Sustainable Food and Biodiversity Fund also leverages fundamental research and a proprietary Sustainable Development Goals (SDGs) alignment tool to invest in companies addressing key SDGs, such as zero hunger, good health and wellbeing, clean water and sanitisation and responsible consumption and production. With rising demand for sustainable food and advancements in agricultural technologies, the fund aims for capital growth by investing in companies focused on sustainable agriculture and food security, targeting sectors that prioritise nutrition and agricultural efficiency. Martin Slipsager Frandsen, global equities portfolio manager, emphasises that “sustainable food production is the most credible path to improving biodiversity,” noting agriculture’s significant potential for impact and investment opportunities.
“We seek companies providing solutions in areas like greenhouse gas emissions, water, biodiversity, land use, waste, and food security, focusing on sustainability challenges in the food system”: Felix Odey, portfolio manager, global resource equities, Schroders
AI & precision agriculture
Environmental policies are beginning to take shape, with consumer support increasing and instances of hyperinflation being observed in parts of the food system, such as olive oil and cocoa. However, according to Odey, this is likely just the start of broader trends. Technologies with long-term potential may face near-term earnings pressure, highlighting the need for active management.
Areas like aquaculture and pulp packaging appear “undervalued” to the Schroders team, and current trading multiples don’t reflect their long-term growth potential. Beyond structural opportunities, there’s now a cyclical upside as agricultural markets recover from post-Ukraine volatility and downturns, Odey adds.
AI and precision agriculture are key areas of focus, he highlights. Companies are developing equipment that identifies weeds in real time, applying pesticides only where needed. Paired with AI, this technology collects data on soil nutrients, instantly informing farmers and integrating weather data and crop price forecasts. This helps counter soil degradation and extreme weather patterns—ways to combat “negative feedback loops.”
Biopesticides are rapidly growing for companies seen as “old economy” pesticide firms. Pheromonal biocides, for example, disrupt insect mating by releasing natural pheromones that degrade after four days. Currently, 40% of the world’s agriculture is irrigated, doubling crop yields, and making irrigation systems crucial. Schroders has invested in a company that produces pivot irrigation systems, commonly used in desert areas like Australia and the Middle East. After the Ukraine crisis, Middle Eastern countries, realising their import dependence—especially on Black Sea grains—are focusing on technology to improve food security.
Vertical farming and aquaculture, while not new, hold promise. Salmon farming gets a bad reputation for using fish oil and fish meal, but Schroders invests in a company producing algae-based omega-3-rich feed, phasing out controversial sources. Given constraints on land use, greenhouse gas emissions, and water, aquaculture, alternative proteins, and vertical farming are part of the solution, though still on a small scale. Some farms can increase yields up to seven times, disrupting higher-margin crops like leafy greens and tomatoes. While row crops may not be impacted soon, companies in the UK, which didn’t exist three years ago, now supply pak choi and leafy greens at top UK supermarkets—”a sign of exciting progress”.
Europe serves as a case study, in Odey’s eyes, particularly with the European Farm to Fork deal promoting sustainable EU food systems. However, farmers’ backlash highlights the need for alternatives before regulations drive change, making new technologies essential. “Green alternatives for fertilisers and pesticides aren’t ready for mass adoption, meaning market development will take time. Long-term trends point toward more regulation, but we’re not factoring it into our valuations, as progress could accelerate without it,” adds Odey.
Water woes
KBI Global Investors, an institutional asset management boutique claiming to be one of the first to recognise the alpha potential from investing in companies addressing sustainability challenges related to water, food and energy, launched its $3.4 billion water strategy 25 years ago. This strategy offers access to companies providing solutions to critical global water issues, including water recycling, sanitation, and infrastructure. This year, the firm is emphasising the transformative impact of ‘smart water’ technologies in tackling some of the most complex water management challenges.
In a collaboration with global water technology leader Xylem, the city of Buffalo, New York has in recent years implemented a comprehensive water management initiative, leveraging real-time control, modelling and analytics technology. Its goal was to mitigate the challenges posed by combined sewer overflows, where a mixture of stormwater and untreated sewage is discharged into water bodies during heavy rainfall – two billion gallons of it.
Geoff Blake, head of business development and client services at KBI, said, “In the first year, Buffalo’s Smart Water solution reduced water usage by 450 million gallons, protecting local waterways, preserving biodiversity, and promoting a healthier aquatic ecosystem.” Last March, the Buffalo Sewer Authority announced that the smart sewer system had saved $145 million. Schroders, on the other hand, invests in a Dutch filtration company with nano-technology that treats multiple water contaminants and shows strong growth potential. This innovation will positively impact water use in agriculture and industry. It also backs a company producing carbon-neutral or low-carbon potash, offering a sustainable alternative in fertiliser production, shares Blake.
Europe serves as a case study, particularly with the European Farm to Fork deal promoting sustainable EU food systems. However, farmers’ backlash highlights the need for alternatives before regulations drive change, making new technologies essential.
“Money is not the issue”
Investing in sustainable food systems seems futile when lump sum money supports the opposite, points out Dutch asset manager Triodos Investment Management. From 2016 to 2023, banks provided at least $307 billion in credit to agricultural companies with high deforestation risks, while institutional investors held $38 billion in shares and bonds from these companies. Additionally, the UN estimates that 90% of public agricultural subsidies are harmful, with 80% of the EU’s subsidies supporting emission-heavy animal products.
To drive lasting change, investors must focus on impactful initiatives and avoid financing unsustainable practices, such as industrial animal protein production and deforestation-linked commodities.
The Triodos Food Transition Europe Fund supports the shift to sustainable food and agriculture by providing long-term equity to leading European businesses. It recently invested in sustainable aquaculture, acquiring a minority stake in Ocean Rainforest, a seaweed grower in the Faroe Islands. Seaweed, used in food, animal feed, and bio-stimulants, enhances biodiversity, captures carbon, and contributes to sustainable food systems, aligning with the fund’s commitment to nature-based solutions.
In similar tones, Odey points out how we’ve recently been lulled into a false sense of security. While prices spiked during the Ukraine crisis, inflation has since eased, but governments are more aware of the risks to food security, with consumers spending a larger portion of their income on food. Globally, governments spend about $540 billion annually on food subsidies, but the focus is shifting. In the UK, grants once incentivising production are now tied to biodiversity, water, and air quality KPIs. In the US, the Inflation Reduction Act is driving change in biofuels, with farmers now incentivised to produce lower-carbon crops like corn and soy. This shift motivates farmers to adopt lower-carbon fertilisers and cover crops, accelerating new technology adoption.
The debut edition of Funds Europe’s Carbon Impact Research Report 2024 sheds light on the key trends shaping decarbonisation projects, carbon footprints, sustainable fund allocations, and the responsible investment strategies adopted by European asset management firms. Download the full report here: https://funds-europe.com/carbon-impact-research-report/
