M&G Investments: Nature and biodiversity series: The importance of sustainable food systems

By Nishita Karad

Biodiversity is essential to the ongoing survival of life on this planet. We need healthy ecosystems to provide us with air, food, water and more. Our nature and biodiversity insights series covers a range of topics that are central to solving the nature and biodiversity crisis, while highlighting the opportunities for investors to make positive contributions. In part one, Nishita Karad focuses on the importance of a sustainable food system. 

A sustainable food system – and why it matters

According to the Food and Agriculture Organisation (FAO) of the United Nations, a sustainable food system is a “food system that delivers food security and nutrition for all in such a way that the economic, social and environmental bases to generate food security and nutrition for future generations are not compromised¹”.

This means that, for a food system to be sustainable, it needs to; be profitable throughout (economic sustainability); have broad-based benefits for society (social sustainability) and have positive or neutral impact on the natural environment (environmental sustainability).

Given the strong interconnectedness of the food system – how food is produced, provisioned, distributed, and consumed – and human development and nature, a sustainable food system is key to achieving all 17 of the United Nations’ Sustainable Development Goals (SDGs). Furthermore, providing food for an expected global population of around 9 to 10 billion by 2050, while reducing net emissions to zero to align with Paris Agreement climate change targets, will require food systems that are sustainable, inclusive, healthy and efficient.

“Catering to higher demand without increasing land and water use, and while reducing emissions, will require advances in the way food is produced.”

The current food system is not sustainable

Today’s food system is problematic for both people and the planet, with an estimated $10 trillion of value lost via hidden costs to health and the environment (or 10% of global GDP)².

It is responsible for 21-37% of global GHG emissions, with the livestock sector alone representing almost half of these emissions³, according to IPCC estimates. If unchanged, this is expected to rise to 50% of all GHG emissions by 2050⁴. Furthermore, agriculture also accounts for around 70% of freshwater use globally and occupies about 40% of global land, while driving more than 90% of tropical deforestation⁵.

The food system creates negative impacts for people as well. In 2022, more than 1 billion people were categorised as obese and almost 2 billion as overweight because of overconsumption, contributing to a rapid rise in associated health problems⁶. At the same time, approximately 700 million people face hunger⁷. Industrial animal farming operations that rear large numbers of animals in confined spaces can breed lethal viruses and spread antibiotic-resistant ‘superbugs’, while unhealthy diets now pose a greater risk of morbidity and mortality than unsafe sex, alcohol, drug and tobacco use combined⁸.

Three themes for investors to help solve the challenge
 

Reduced food losses and waste

Food losses and waste are estimated to generate 8-10% of global GHG emissions⁹. Globally, an estimated 30% of food is lost or wasted on average, with 14% of food being lost between harvest and retail, and around 17% wasted in retail and at the consumption level¹⁰. The below chart highlights the average annual food waste generated per person in different regions, although notably there is insufficient data for the food service and retail categories in middle-income countries, and across all categories in low-income countries.

Annual food waste across different income regions

Source: UNEP Food Waste Index Report, 2021.

There are potential solutions to the challenge in several areas:

• Waste management: Solutions offering innovative waste collection and processing across the food chain. In particular, consumer-facing solutions aimed at reducing wasteful consumption patterns can significantly reduce food waste, especially in developed economies.
• Waste to energy: Technological developments allowing for food waste-to-energy transformation provide a promising solution for reducing the impact of food waste. 
• Better storage and refrigeration: Solutions offering better food storage and refrigeration opportunities, especially in light of changing climatic conditions.
• Circular production and improved product design: Opportunities allowing for transition from linear to circular production, as well as designing products for easier recycling and longer shelf life can help to reduce waste from the beginning of the value chain.

Within M&G’s public equity impact strategies, one investee company providing solutions in this area is Darling Ingredients, which specialises in the collection and recycling of food waste. The company collects a variety of animal by-products, commercial bakeries’ waste and used cooking oils. These are refined and recycled, before being used in a broad range of ingredients and products, such as animal feed, organic fertilisers, collagen, renewable diesel, and biogas for clean energy generation.

Better food production practices

Catering to higher demand without increasing land and water use, and while reducing emissions, will require advances in the way food is produced.

We have noted several areas with the potential to improve the efficiency of food production:

• Efficient use of fertilisers and pesticides: While the widespread overuse of fertilisers and pesticides has significant negative environmental impacts (including biodiversity loss, land degradation and soil acidification), it will be impossible to keep up with increasing demand without using these. Solutions such as precision spraying, organic fertiliser substitutes and fertiliser mitigation practices and technologies can help to overcome this.
• Agritech: Technology to optimise farming while reducing the use of water, fertilisers, and pesticides can help to unlock efficiencies in the food production process. Solutions can include software that analyses weather and soil data, companies developing precision tools for planting, and those manufacturing harvesting equipment to mitigate the risk of yield failures.
• Innovative soil management tools: Innovative techniques can help to restore lost biodiversity and carbon in soil. Soil degradation is, perhaps surprisingly, one of the less recognised negative impacts of intensive food production, given its knock-on effects on crop yields, rising desertification and the increased likelihood of flooding. This provides further evidence of the interconnectedness of Nature’s four realms (as defined by the Taskforce on Nature-related Financial Disclosures).
• Adapting to climate change and water scarcity: Solutions to help food producers manage climate-related issues such as water quality and scarcity of water resources will be important in the transition to a sustainable food system.

One M&G public equity impact strategy investee company, Tomra, is creating positive outcomes in this area. The company uses its optical scanning technology to create food sorting and grading solutions. Its automated food sorters can quickly and effectively detect unwanted items in food processing lines, by analysing characteristics such as colour, shape, size, structure, and even biological characteristics. This helps to reduce food waste, increase yields and ultimately improve efficiency.

A shift to plant-based food

Research shows that meat and dairy comprise approximately 60% of agricultural emissions despite providing only 18% of calories and 37% of protein globally. The food system can therefore become more sustainable by reducing the consumption of animal-based protein and moving towards more plant-based foods.

To accelerate the shift towards plant-based proteins, various food technology innovations have been seen in the last few years. Demand for such technologies has risen in recent years, driven by increasing consumer awareness of the health, welfare and environmental impacts of animal protein, as well as positive response from the market to alternative protein-based offerings, and is expected to grow over the next few years.

There are several alternative protein technologies currently available in the market:

• Advanced plant-based protein: Alternative proteins are revived from plant sources and optimised for taste, texture and nutrition, utilising either novel plant sources (such as mung bean, lupin and algae), or through novel processing methods (such as shear-cell technology).
• Fermentation: The creation of specific proteins (such as casein and whey) through a brewing process, whereby yeast organisms are programmed to produce the proteins.
• Cell culture: Growing meat cells (muscle and fat) in a nutrient-rich culture medium, to create whole pieces of tissue.

Within M&G’s public equity impact strategies, we are actively seeking impactful companies in this relatively nascent area. We carry out rigorous analysis of potential investees. They must deliver material, measurable and intentional positive impacts, while also demonstrating that they are quality companies with the potential to deliver attractive long-term financial growth. We are yet to identify any candidates meeting our strict impact and investment criteria, but we continue to do work in this area. We note that there are also promising innovators in private markets, with whom our private asset colleagues are working and whose progress we follow closely.

The need for an efficient and sustainable food system is of critical importance not just to deliver healthy nutrition for a growing population, but also for the climate, the protection of nature and equitable outcomes for the world’s millions of farmers. The scale of the challenge grows daily, amplified both by population growth and by the effects of climate change The role of innovative solutions in supporting the move towards a more sustainable system cannot be underestimated and provides an exciting opportunity for investors.

¹ Food and Agriculture Organisation, ‘Sustainable Food Systems - Concept and Framework’, (fao.org), 2018.
² Food and Agriculture Organisation, ‘The State of Food and Agriculture’, (unep.org), 2023.
³ IPCC, ‘Climate Change and Land: An IPCC Special Report on Climate Change, Desertification, Land Degradation, Sustainable Land Management, Food Security, and Greenhouse Gas Fluxes in Terrestrial Ecosystems', (ipcc.ch), 2019.
⁴ IMF, ‘Why sustainable food systems are needed in a post-COVID world’, (imf.org), 2020.
⁵ Food and Agriculture Organisation, ‘Water for Sustainable Food and Agriculture’, 2017, ‘Land use in agriculture by the numbers’, 2020, ‘COP26: Agricultural expansion drives almost 90 percent of global deforestation’, 2020.
⁶ World Health Organisation, ‘World Obesity Day 2022 – Accelerating action to stop obesity’, (who.int), 2022.
⁷ Food and Agriculture Organisation, ‘Hunger and food insecurity’, (fao.org), 2023.
⁸ EAT-Lancet Commission, ‘Healthy Diets from Sustainable Food Systems. Food, Planet, Health.’, (eatforum.org), 2020.
⁹ United Nations Environment Programme, ‘Food Waste Index Report’, (unep.org), 2021.
¹⁰ United Nations Environment Programme, ‘Driving finance for Sustainable Food Systems’, (unep.org), 2023.

By Nishita Karad

The value of investments will fluctuate, which will cause prices to fall as well as rise and investors may not get back the original amount they invested. Past performance is not a guide to future performance. The views expressed in this document should not be taken as a recommendation, advice or forecast.