Sector special: Investing in agriculture sustainably

From food security to biodiversity, there is much for investors to consider

Investing in agriculture can get messy very quickly from a sustainability standpoint.

There is no question that modern, conventional farming practices exact harm on people and the planet, compared with those that use less water, fossil fuels and land. But much like with the energy sector, doing what is most sustainable can be costlier, which affects people living in poverty.

That is highlighted by the dilemma in fertilizer production, said Shawn Reynolds, portfolio manager of VanEck’s Future of Food ETF and leader of the firm’s Natural Resources Equity investment team. For example, natural gas is the main ingredient for nitrogen-based fertilizer, which is widely used on industrial farms.

On top of that, the availability of another fertilizer ingredient, potash, has been stunted by global sanctions on Belarus, a major producer, Reynolds noted.

Supply has gone down, and costs have gone up, leading some farms to avoid using fertilizers, and that in turn has hampered food supply.

“It’s something that makes us very worried about where food price and availability and hunger is headed,” Reynolds said.

Factor in drought conditions, sharply rising poverty rates and supply chain issues caused by Covid and Russia’s war on Ukraine, and things get worse, he noted.

But agriculture needs to change. The world is already struggling to provide food for the roughly 7.7 billion people living today – a figure that the UN projects will increase to 9.7 billion by 2050.

The intensity of land, water and fossil fuel use will have to come down in order to grow enough food for that extra 2 billion people, Reynolds said.

Major issues

Agriculture is a leading contributor to global warming, responsible for 11% of greenhouse gas emissions, according to the Environmental Protection Agency. That figure includes emissions associated with raising animals and certain crops production, not necessarily the environmental costs of water use, electricity production and transportation in agriculture.

Cows are also a major source of methane, which is nearly 30 times more effective at trapping heat in the atmosphere than carbon dioxide.

“There are low-methane diets for cows … so there may be some sort of technological band-aids that we can apply,” said Julie Gorte, senior vice-president for sustainable investing at Impax Asset Management. “But frankly, when people in the climate world start talking about [the] need to be on a plant-based diet – they’re right. We can’t afford to eat the amount of meat that we eat per capita, especially in rich nations like this one, and still get to net zero by 2050. It’s just not in the cards.”

Agriculture – particularly multinational industrial animal farming – is also the leading cause of land-use change, which is the top driver of biodiversity loss, Gorte said.

While that is obvious for rainforest land burned down for cattle grazing, it is also seen with palm oil production.

“This is where people kind of get confused. A lot of people look at natural capital solutions to climate and say, hey, it’s still forest,” she said. “But the forest that sequesters the very most carbon is a natural forest – a diverse forest … So as soon as you establish a monoculture, you’ve lost at least half your climate benefits.”

Biodiversity suffers immensely, as native species are not equipped to live in the changed environment, as seen with the encroachment of palm plantations on orangutan habitats. And the loss of a keystone species can cause further collapse of ecosystems, Gorte said.

It is difficult to engage directly with palm oil plantations, which is why the sustainable investing world has focused its campaigns on retailers and their supply chains, she noted.

Existing products

Globally, Morningstar Direct identifies about two dozen thematic funds and ETFs that are focused on food production, though that does not represent all products investing in agriculture. Most of funds are not specifically designed to be sustainable, though many incorporate ESG factors in their investment process.

One of the first ways the investing world explored social responsibility was taking agriculture out of commodities funds, said Kenneth Lamont, a manager research analyst at Morningstar.

“Many of the providers offer ex-agriculture versions of those products,” he said. “If you’re making money from the price of wheat going up – good for you – not great for the bottom half of the world who needs that wheat to survive.”

Alternatives to meat

One of the newest products investing in agriculture is the VegTech Plant-based Innovation & Climate ETF, which currently represents about $4m in assets. The ETF focuses on investing in companies such as Beyond Meat that are making animal-free alternatives.

“You’re not going to significantly impact climate change if you don’t address animal agriculture,” said Elysabeth Alfano, CEO of VegTech Invest. “We need to produce more food, more nutritiously, in shorter amounts of time, using fewer resources, creating less damage.”

All food includes stored energy that comes from the sun – and plants are simply more efficient at delivering it.

Chickens, for example, must be fed seven to nine calories in order to produce about one calorie for the humans who eat them, Alfano said. Cows require even more, at 25 to 30 calories she said.

“These are very poor returns,” she said.

There are also social factors to consider with animal agriculture, such as the waste produced by factory farms that affects local, often low-income communities with high rates of cancer and depression, she said. The jobs in meat processing plants are also notoriously hard on workers.

Another social element is food availability, Alfano said.

“The inefficiency of animal agriculture is partly responsible for food insecurity,” she said. “If we just grew food and gave it to people – and not animals – we’d have a lot more food. We waste so much in the [energy] conversion. We’d also use less land and water.”

The ETF’s investments are required to be almost totally animal-free in their operations, although some, like Anheuser-Busch InBev, include a small amount in some products.

That company, however, is contributing significantly to the development of alternative proteins, providing repurposed barley to startups and sharing fermentation knowledge that is used in making meat substitutes, Alfano said.

Another approach

VanEck launched its Future of Food ETF in November, and the product now represents about $3m in assets. It differs significantly from another thematic fund from that shop investing in agriculture, the $1.6bn Agribusiness ETF, an index-based product that is not marketed as sustainable. The company also recently launched a Ucits ETF on the London Stock Exchange.

The relatively new US-based ETF focuses on “precision agriculture,” sustainability and food technology, Reynolds said. The first category includes efficiency, sometimes driven by artificial intelligence, which can tell farmers which fields to treat for insects.

“It’s growing more food in less space with less water,” he said.

Meanwhile, agricultural sustainability includes fertilizers, seed genetics and food preservation. Food technology covers alternative protein sources, novel ingredients, sustainable aquaculture and different types of animal feed, such as seaweed that can reduce methane output from cows.

One holding, Nestlé, is an outlier from the small- and mid-cap companies in the portfolio, but it hints at where the industry is going, Reynolds said. That company has been on a tear in buying up smaller businesses focused on sustainability, he noted.

For corporate engagement, the VanEck ETF uses its own criteria for “planet, land, air and water” as part of the overall strategy and has a meeting every other year with portfolio companies specifically on their broad ESG issues, he said.

“The management teams love talking about that,” rather than specific areas of concern, he said. “They just want to talk about hard data, numbers … We’ve gotten a great response to that.”