Dubai – The Franklin Templeton Institute 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. Highlights of their remarks include:
Anne Simpson, Global Head of Sustainability at Franklin Templeton
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. 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 war in Ukraine is a stark reminder of the geopolitical risk in agricultural supply lines. This crisis arrived on the heels of COVID-19 pandemic-induced inflation, which has increased food prices over 30 percent, creating an additional US$42 million in monthly costs to feed vulnerable populations. Asset managers have a responsibility to actively identify opportunities and risks in the financial markets, to protect clients’ assets by generating, sustainable risk-adjusted returns. Understanding investment and impact is what sustainable investment is all about: taking care of people, the planet and prosperity. Food is essential to each.
Stephen H. Dover, Chief Market Strategist and Head of the Franklin Templeton Institute, on the role of technology in the food industry
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. 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 percent of global market capitalization. Further, it is critical that carbon trading and carbon markets 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. 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.
David Sheasby, Head of Stewardship and ESG at Martin Currie, on the role of banks in the food system
The banking sector has a key role to play in managing and mitigating the impact of the food supply chain on biodiversity and climate change. The global food system is responsible for 70 percent of global water use, over 50 percent of biodiversity loss and over 33 percent of greenhouse gas emissions contributing to climate change. Banks provide a wide variety of finance to companies involved in agriculture and food supply chains, including term loans, trade finance, revolving credit and project finance. We are seeing that some of the leading banks are recognizing their impact on the food system in their approach to agricultural lending activities. We believe that banking leaders will seize the potential investment opportunity in this space while also effectively managing risks associated with the food sector.
Banks can further incentivize change by setting eligibility criteria that preclude the conversion of forest or ecosystems. These conditions can be applied retrospectively, by looking at what producers have done and removing eligibility as appropriately, or prospectively, by applying a penalty interest rate once the loan has been received. Further, supply-chain financing can have a broader influence with buyers or financiers supporting “conversion-free” supply chains, whereby they choose to buy or finance only those agricultural commodities that are not linked to deforestation or conversion of other ecosystems.
Banks will need reliable and robust biodiversity data to enable target setting, and there is a real need for more streamlined biodiversity-related key performance indicators. We are encouraged by the development of reporting frameworks, including the Principles of Responsible Banking (PRB) and the Task Force on Nature-related Financial Disclosure (TNFD), which will facilitate lenders and investors to make more informed assessments on the risks and opportunities associated with the food supply chain.
Lisette Cooper, Vice Chair, and Frances Aderhold, Sustainable Investing Research Analyst, Fiduciary Trust International on investment opportunities in regenerative agriculture
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. 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 United States 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. While 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.
Mohieddine Kronfol, Chief Investment Officer, Portfolio Manager of Franklin Templeton Fixed Income, on investment opportunities in the Gulf Cooperation Council region
There is a common misconception that Gulf Cooperation Council (GCC) states are behind the curve in terms of applying environmental, social and governance (ESG) practices, but we see that GCC states are making progress in areas such as carbon emissions and food security, presenting unique opportunities for investors.
We believe GCC markets are better placed than most in terms of adopting ESG protocols because the largest emitters of greenhouse gases – national oil companies and utilities – are government owned. This gives governments much more control in terms of implementing necessary technological upgrades and regulatory changes. Initiatives such as seawater harvesting, soil improvement techniques, microalgae production and groundwater conservation have all played a part in improving food production in the region.
Despite the bold and ambitious policymaking and programming, the GCC is still only 31 percent food secure, on average, and storage and transportation of locally cultivated produce is still very inefficient. It is estimated that US$200 billion of investment is required annually until 2050 to meet the GCC food supply and demand gap. These investments are needed across the full value chain, including capital to improve efficiency gains, technology and the development of novel processed food. Investments will also be needed to support better logistics, help reduce waste across the system and improve storage capabilities. We see that there is an opportunity to invest in companies applying technologically advanced production and farming technologies to disrupt the region’s alliance on imported food.
John G. Levy, Director of Impact, Franklin Real Asset Advisors, on real estate opportunities in vertical farming
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.
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.
Dimitry Dayen, Senior Analyst, and Rob Buesing, Senior Analyst, ClearBridge Investments, on the plant-based diet
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. 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.
Claus Born, Institutional Portfolio Manager, and Preyesh Patel, Senior ESG Analyst, Franklin Templeton Emerging Markets Equity, on sustainable beef in the Amazon
Two goals of COP26, the United Nations (UN) Climate Change Conference included curtailing deforestation, with Brazil as a focus, and building resilient agriculture. Brazil’s beef industry has faced pressures over deforestation as supermarkets and consumers steer clear of beef linked to the demise of the Amazon rainforest. The ability to trace cuts of beef to a single animal and ranch within Brazil, including tagging cattle with chips after birth to digitally track movements, will be crucial for minimizing revenue losses and reputational damage from food safety concerns. Without digital traceability, Brazil’s largest meatpackers face potential bans from markets like Europe and potentially China.
A global carbon market would give Brazil’s government a tangible monetary incentive to enact more climate-friendly policies that will limit deforestation. A global carbon market that confers monetary value to forests and farmland soils could benefit not only Brazil and the Amazon, but also rainforest countries, such as Indonesia.
Ashley Allen, Research Analyst for Franklin Templeton Fixed Income, on extreme weather and food prices
Challenging weather conditions have impacted food production and resulted in increased consumer prices across the globe. Sustained commodity price increases have demonstrated the need for a more stable food supply and present investment opportunities for credit issuers who can lead with innovative solutions to meet rising global demand and consciously work to mitigate the social impact of climate change.
Credit issuers should work to provide local farmers with education and capital investments, possibly in the form of micro loans or other local partnerships to implement best practices in land management, water efficiency and crop resiliency. Credit investors would be able to earn an investment return while also contributing to overall increased agriculture sustainability and reduced greenhouse gas emissions through lower tilling needs, improved crop resiliency and increased farmer profitability.
One of the biggest opportunities for companies to mitigate the risk of higher input costs resulting from shrinkage of supply-induced impacts related to climate change is by investing in agricultural innovation and technologies that support more sustainable land practices, more resilient crops and higher crop yields. The debt capital markets currently provide some of the best investment vehicles to address the wide scale mitigation of climate risk in our food supply.
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