Columbia Threadneedle - Food security challenges put spotlight on sustainable transition
The events affecting the food system from 2020-22 have been remarkable, and may become more widespread. Tackling this brings investment opportunities.
For many around the world, 2022 has seen a dramatic rise in food prices. This has been caused by the compounding effects of climate change, supply chain interruptions linked to the Covid-19 pandemic, trade disruptions and rising energy prices resulting from the war in Ukraine.
While prices have come down from the highs seen earlier this year, the global food situation may remain tight until 2023 or beyond due to declines in grain stores, low/ending commodity stocks, high fertiliser and energy prices and the impact the conflict in Ukraine is also having on agricultural production.
Figure 1: number and percentage of population that is undernourished
Source: FAO, IFAD, UNICEF, WFP and WHO
The State of Food Security and Nutrition in the World 2022, 6 July 2022
Unfortunately, this risks a continuation of the upward trend seen in global food insecurity since 2019 (Figure 1). It also increases the risks of social and political disruption, particularly in countries most dependent on food and fertiliser imports, while increasing inequality in developed countries.
The convergence of events effecting the food system between 2020 and 2022 has been remarkable, but it may not be a rarity in the future. The physical impacts of climate change, volatility in energy pricing along with the energy transition, increasing water stress and the degradation of biodiversity will only further increase pressures on the food system over the coming years and decades. As we have seen this year, such pressures and shocks can lead to protectionism and disruption to trade and have an impact on food security.
In our view, the increased awareness of these pressures will accelerate the shift toward a more resilient and sustainable food system. Recent policy developments have begun to highlight this, drawing connections between food security issues and sustainability. For instance, the US Inflation Reduction Act (IRA) passed in August includes funding for “climate smart agriculture”, while the recent White House summit on biotechnology highlighted the role of innovations such as synthetic biology in achieving food security and environmental objectives.
The transition towards a more sustainable food system will be wide-ranging and multi-faceted. To identify the investment implications of this shift we have developed a framework of five cross-cutting themes that will underpin and shape the transition: increasing resilience to climate and water stress; finding new ways to improve productivity; decarbonising food production; producing protein, more efficiently; and improving access, affordability and health outcomes.
Ultimately, each of these five themes will need to be pursued concurrently and in ways that are complementary and mutually reinforce one another. As highlighted in Figure 2, each theme will require the adoption of policy measures and a scale-up of related technologies, bringing risks and opportunities for the food sector.
Looking ahead we plan to use this framework to explore the sub-themes, supporting technologies and implications for both incumbent food and agricultural companies and potential disruptors.
Figure 2: mapping the elements of the sustainable food transition
Source: Columbia Threadneedle Investments, 2022
A wasted opportunity?
Taking the theme of “new ways to improve productivity” as an example, a major area of focus is food waste. With a third of food estimated to be lost or wasted across the value chain, reducing waste is arguably among the most critical drivers needed to improve productivity in the food system. Reducing food waste could also mitigate around 8%-10% of global greenhouse gas emissions and lessen environmental pressures through reducing the water, land and agricultural inputs required to produce the food which is currently wasted. In addition, there are social benefits that will come from improving efficiency and availability of food.
Food waste is a well-known problem but, due to its complexity, the historically low price of food and misaligned incentives, addressing it has generally not been a high priority. However, with global food price inflation and increased awareness of food insecurity we believe this will change with the introduction of more incentives for consumers, companies and governments to reduce food waste.
As this unfolds, companies will increasingly need to account for, and take action to reduce, food waste within their operations and supply chains. This must become an integral component of relevant companies’ routes to meeting both net zero and biodiversity goals.
Despite the challenges that reducing food waste brings, it also provides opportunities (Figure 3). At each stage of the food value chain, reducing food waste can create markets for new technologies, products and business models; help companies to engage customers; spark innovations in supply chains; and reduce costs.
Figure 3: opportunities in the food chain
Continued research and collaboration across our fundamental and responsible investment teams will help us identify implications that will arise as this theme evolves and enable us to advise our portfolio companies on how they can reduce costs and capture the opportunities coming from food waste strategies.
For use by professional clients and/or equivalent investor types in your jurisdiction (not to be used with or passed on to retail clients). This is an advertising document. This document is intended for informational purposes only and should not be considered representative of any particular investment. This should not be considered an offer or solicitation to buy or sell any securities or other financial instruments, or to provide investment advice or services.
Investing involves risk including the risk of loss of principal. Your capital is at risk. Market risk may affect a single issuer, sector of the economy, industry or the market as a whole. The value of investments is not guaranteed, and therefore an investor may not get back the amount invested. International investing involves certain risks and volatility due to potential political, economic or currency fluctuations and different financial and accounting standards. Risks are enhanced for emerging market issuers.
The securities included herein are for illustrative purposes only, subject to change and should not be construed as a recommendation to buy or sell. Securities discussed may or may not prove profitable. The views expressed are as of the date given, may change as market or other conditions change and may differ from views expressed by other Columbia Threadneedle Investments (Columbia Threadneedle) associates or affiliates. Actual investments or investment decisions made by Columbia Threadneedle and its affiliates, whether for its own account or on behalf of clients, may not necessarily reflect the views expressed. This information is not intended to provide investment advice and does not take into consideration individual investor circumstances. Investment decisions should always be made based on an investor’s specific financial needs, objectives, goals, time horizon and risk tolerance. Asset classes described may not be appropriate for all investors. Past performance does not guarantee future results, and no forecast should be considered a guarantee either.
Information and opinions provided by third parties have been obtained from sources believed to be reliable, but accuracy and completeness cannot be guaranteed. This is an advertising document. This document and its contents have not been reviewed by any regulatory authority.