Sustainable Food & Agriculture Attracting Interest from Public Equity Fund Managers

Part 4 in a series on the ESG risks and opportunities associated with the transition to a more sustainable economy.

Supported by Impax Asset Management

The environmental impact of modern farming and food production — the greenhouse gas emissions from farming and animal husbandry, water and land usage, pesticides and antibiotics, the impact of packaging and transport — is becoming ever more clear, and consumers increasingly are demanding agri-business companies become more sustainable.

This is giving rise to a new subsector of ESG investing: sustainable food & agriculture. Investors and asset managers that enter the space are finding an expanding universe of public equities to invest in, and these asset owners are using their clout and their dollars to invest in companies that are taking concrete steps to make food and agriculture greener.

The risks that face the food and agriculture sector, forward-thinking investors and managers believe, “provide opportunity for alternatives from the sustainable food & agriculture sector,” says Agne Rackauskaite, research analyst and senior associate at Impax Asset Management, which manages about $720 million in its Impax Food & Agriculture Strategy.

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At Pictet Asset Management, “We don’t just invest in clean agriculture or clean food,” says Alice de Lamaze, senior investment manager and portfolio manager of the firm’s Nutrition fund. “We invest in companies that increase the quality, sustainability, and access to food products.”

Pictet divides its approach into three broad silos: food, logistics and agri-tech. Agri-tech includes areas like precision farming and animal husbandry. Logistics includes equipment, packaging and distribution, while food covers both food ingredients and food products.

One popular stock among many sustainable food & ag managers is Deere & Co., the American company perhaps best known for its green tractors. Deere has announced an extensive set of sustainability goals it will seek to hit by 2022, including the use of at least 50% renewable energy, increased energy efficiency, improved water management practices and dramatically reducing the carbon emissions of its products.

Deere, which is the Nutrition fund’s largest holding, is a “world leader in precision agriculture,” de Lamaze says. Through sensors, GPS and other technology, the company gives farmers “the ability to capture and analyze data and drive insights into what farmers should do to become more efficient and sustainable in their farming.”

Danone is another commonly held stock across sustainable food & ag portfolios. The international conglomerate has many organic products in its stable, and the company is also big on sustainability at the corporate level. Last April, Danone adopted a set of nine long-term goals, for both the company and its brands, that are aligned with the UN’s Sustainable Development Goals. The targets include sustainable sourcing for all ingredients, more efficient packaging, “protect[ing] soil health through regenerative agricultural practices,” and “implementing carbon positive solutions and aiming to achieve carbon neutrality by 2050.”

And Givaudin, the world’s largest manufacturer of flavors and fragrances, has its own environmental goals, an effort which it says “helps many of our key customers reach their own [greenhouse gas] reduction targets, while offering them the added assurance that their supply chains are secure today and fit for the future.” Among the company’s targets: 100% renewable electricity by 2025, a 15% reduction in water usage by 2020, and cutting total greenhouse gas emissions by 30% by 2030. The company says it also is “encouraging zero deforestation in our supply chains.”

Other popular names for sustainable food & ag managers include UK foodservice company Compass Group, Japanese tractor and heavy equipment manufacturer Kubota, American packaging companies Sealed Air and Sonoco Products, and Zoetis, the former Pfizer subsidiary that is now the world’s largest animal health company.

For sustainable food & ag investors and managers, there’s clearly no shortage of stocks to choose from; the all-cap Impax strategy, for instance, has an investable universe of some 600 stocks, while Pictet’s is nearly 400.

Those investable universes continue to expand, in part as more and more traditional food & ag companies enter and grow their presence in the space. This most often comes via acquisition of smaller companies that offer sustainable products or technologies. Among the recent acquisitions the space that help traditional companies bolster their sustainable credibility and make them investable for ESG managers:

  • Last year, Campbell Soup bought Snyder’s Lance, a snack-making company that has won praise for its efforts to increase sustainability in its operations, including its use of renewable energy and efficient water usage.
  • Also in 2018, General Mills acquired Blue Buffalo Pet Products, which “establishes General Mills as the leader in the Wholesome Natural pet food category, the fastest growing portion of the $30 billion U.S. pet food market,” the firm says in a statement.
  • In 2017, Danone announced a $12.5 billion deal to acquire WhiteWave, whose product range included a range of organic dairy items and numerous plant-based food and beverage products.

 

There’s also an increasing number of IPOs as established food-tech and other sustainable agriculture companies look to scale up.

The fast-food industry is not considered sustainable, and asset managers and owners see the industry as being ripe for improvement on a number of sustainability fronts, including greenhouse gas emissions and water use. To that end, more than 80 managers and investors recently teamed up for an initiative aimed at using shareholder engagement to pressure fast food giants to become more sustainable.

The effort, jointly sponsored by the sustainability nonprofit Ceres and investor network the FAIRR Initiative, calls on six of the largest companies in the fast-food sector — including McDonald’s, Domino’s Pizza, Chipotle and the corporate owners of Burger King, KFC and Pizza Hut — and asking them “how they plan to enact meaningful policies and targets to de-risk their meat and dairy supply chains,” the group says in a statement.

The meat and dairy industries currently have only “limited water and climate policies and goals in place,” the letters read. That needs to change, the coalition says, for both environmental and financial reasons.

“Far-sighted investors cannot ignore the headwinds facing the meat and dairy sector,” says Alice Evans, co-head of responsible investment at BMO Global Asset Management. “Increased environmental regulation, rising consumer demand for plant-based food, and fears over water pollution from intensive farms are all ingredients in the rising threat to the long-term value of the fast food multinationals. This investor engagement is further evidence that capital markets are putting sustainable environmental management on the menu for the fast food sector.”

Other publicly traded food & ag companies are also feeling the pressure from shareholder engagement programs. After such pressure, food service giant Aramark said last month it will commit to a no-deforestation policy across its entire global supply chain no later than 2025. The effort will start this coming June, when the company says it will ensure that all of the palm oil it buys comes from supplies that have been certified by the Roundtable on Sustainable Palm Oil, or RSPO.

Managers of sustainable food & agriculture strategies are convinced that such shareholder engagement efforts mark the beginning of a paradigm shift, where investors and companies will increasingly look to pressure companies to become more sustainable — as in the fast-food initiative — and reward those that already are sustainable by increasingly buying their public equities.

“We believe we are in the early days of a long-term growth story for sustainable food and agriculture,” says Impax’s Rackauskaite. “We think investment levels will increase as that growth story embeds and matures.”

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