Food innovation: investing to feed our future

The Franklin Templeton Institute has released its latest insights paper, 'Food innovation: Investing to feed our future', focusing on the innovation and investments needed to feed a growing global population in the face of climate change and geopolitical conflict. The paper features perspectives from a variety of Franklin Templeton experts and makes for very interesting reading.

"Over the coming decades, investors, asset managers and researchers will be increasingly focused on the challenge of feeding a growing global population in the midst of climate change, geopolitical shocks and uncertainty," said Anne Simpson, Global Head of Sustainability at Franklin Templeton. "It is clear to Franklin Templeton that innovation in food and agricultural technology will be necessary to boost agricultural productivity and the nutritional value of food while reducing the negative impacts of agriculture on the environment."

"The future of food, including the innovation and technology that will be needed to safely produce and distribute the food we need, will impact global investors across asset classes," added Stephen H. Dover, Chief Market Strategist and Head of the Franklin Templeton Institute. "The necessary innovations in the food industry must be financed. Whether it be funding for improving traditional farmers’ production, the move to high efficiency indoor agriculture, startups developing alternative proteins, or helping companies build supply-chain resilience, all will require large capital inputs from equity, fixed income and private markets. In equities alone, food makes up US$4.9 trillion, or approximately 4% of global market capitalization. Further, it is critical that carbon trading and carbon markets are also developed as soon as possible."

As emissions continue to grow and global temperatures continue to rise, higher carbon dioxide levels in the atmosphere reduce nutrient levels in foods. Mitigation of these trends will require a broad range of solutions, including addressing issues around policy, land use, diet, waste, subsidies, and trade agreements. At the same time, the food system is highly complex and interconnected, and deployments of capital must consider unintended consequences. Changes in the system create ripple effects that have long-term impacts and can lead to severe disruptions.

"As we invest in innovation to help reduce negative externalities, it will be necessary for investors to more effectively measure and price environmental impact," continued  Dover. "The economic value of natural systems and the risks to these systems’ further degradation must be accounted for in asset pricing. Half of global GDP has significant risk exposure to changes in nature. It is estimated that 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. For investors, there are opportunities to help fund the global economy’s transition to a nature-positive economy."

A productive and sustainable agricultural system starts with rebuilding healthy soils through nature-positive practices, representing cost-effective, sustainable, and scalable ways to sequester carbon and generate positive ecosystem benefits, according to Lisette Cooper, Vice Chair, and Frances Aderhold, Sustainable Investing Research Analyst, Fiduciary Trust International. "Regenerative agriculture is centered around practices that promote soil health, crop diversification and human health. The Croatan Institute estimates that regenerative agriculture could mitigate up to 170 gigatons of CO2 emissions and generate nearly US$10 trillion in net financial return over the next 30 years. More than US$700 billion of financing is needed to scale these agricultural solutions in the USA over the next 30 years, representing a significant opportunity for investors to invest in a more sustainable food system."

Due to the transition period required to rebuild soil health, the investment opportunity for regenerative agriculture is primarily concentrated in private markets. "This includes real asset strategies that acquire conventional farmland to be transitioned to regenerative or organic, as well as venture and growth equity funds that invest in innovations to support the scaling of regenerative practices across the value chain in areas as diverse as soil monitoring sensors, biologics, marketplaces, satellite technology, regeneratively-grown food products, and more," Cooper explained. "Although there are no cure-all solutions, it is critical to transform the agriculture and food system toward nature-positive solutions to help manage risk, meet our climate targets and preserve the environment for future generations."

Like clean energy infrastructure before it, vertical farming will mature into a defined real asset sector that will be a part of well-diversified portfolios. "Over the next several years, vertical farms will create alternative use cases for underutilized land and vacant buildings, and create opportunities to drive lasting social and environmental impact," suggested John G. Levy, Director of Impact, Franklin Real Asset Advisors. "A confluence of powerful short-term and long-term market factors give vertical farms the potential to become a major disruptor in the food and agriculture space. The global population is growing, the supply of arable land is shrinking, weather patterns are becoming far less predictable, eating habits are shifting and demand for sustainable products is growing. We need solutions that increase yield; use less water, chemicals and land; and reduce our dependence on long, wasteful and complex food supply chains. Vertical farming promises to not only increase global food security, but also to provide forward-thinking investors with strong opportunities to bring scale to this burgeoning space.

For investors, large-scale emissions reductions in agriculture from developing technologies are a long way off from monetization, but plant-based food categories look to be growth stories, and in many cases, these foods are getting a push from large consumer staples names. "Changes in consumer preference are already reducing the harmful climate effects of cultivating beef, as the shift in consumption from beef to chicken has already resulted in less land used for meat production," concluded Dimitry Dayen, Senior Analyst, and Rob Buesing, Senior Analyst, ClearBridge Investments. "Changing consumer preference is also relevant in the milk arena, where consumers have been gravitating toward replacing almond milk and soy milk with oat milk. For any diet-based strategy geared toward lowering carbon emissions, consumer taste will continue to be a critical variable in growing this space."

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