Agri proves a natural fit for impact investors

A shift towards sustainability is fueling interest in impact investing.

The way we produce and consume food has to change. Food systems today are responsible for around a third of global greenhouse gas emissions. Agricultural expansion is the single largest driver of deforestation.

This sobering reality is why impact investors see agriculture as a natural fit. The sector is critical for both food security and poverty reduction, yet climate change caused by unsustainable agricultural practices is exacerbating these very problems.

The need for private capital is also clearly there. The UN estimates that the global funding gap to transform food systems, and meet climate mitigation targets, will climb to $350 billion per year by 2030. No matter the level of government support, public resources alone will not be enough to close the gap.

Emerging markets particularly need to attract more investment and are the most vulnerable to climate change. These economies typically depend far more on agriculture and resource extraction than more developed economies. Any climactic impact on future yields or soil quality could significantly hurt GDP and poverty levels.

The world is also already playing catchup and risks slipping behind. The pandemic, economic pressures and geopolitical volatility have all influenced where investors allocate their funds. Over the past five years, investors have taken a more conservative stance and prioritized developed markets because of perceived volatility and risk in emerging markets.

However, this dynamic is always evolving. A 2022 report from the Global Impact Investing Network found that 56 percent of impact investors planned to invest in sub-Saharan Africa over the next five years, the highest of any region. Sixty percent of impact investors also expected to invest in food and agriculture over the next five years, the second highest sector after energy on 69 percent.

Going back to nature

Eradicating hunger and feeding the world’s ever-growing population is only going to become more challenging. The global population recently passed eight billion and by 2050 the UN forecasts this figure could climb as high as 10 billion.

Huge demographic growth over the past century has already pushed the limits of agriculture and transformed the landscape of our planet. Yet this could be just the start. A 2021 study in UK journal Nature predicts that global food demand could rise by 35-56 percent through to mid-century.

Unsustainable agricultural practices pose serious risks to the planet, and rising global temperatures will further reduce major crop yields. Agriculture is also the primary consumer of freshwater and loss of biodiversity combined with overuse of fertilizers will only compound the problem.

Against this backdrop, the concept of regenerative agriculture is gaining traction across the industry, aimed at promoting a more sustainable approach to farming. Curbing soil degradation is a particular priority as the vast majority of our food depends on the health of our soils.

Encouraging regenerative agriculture is obviously a step in the right direction, but the movement still lacks universal definition plus a set of metrics or framework to track and measure positive outcomes.

Studies so far also tend to focus on North American and European geographies, making it problematic to extrapolate results to other regions. Considering the overweighted impact of climate change on the Global South, more robust data collection will be needed as well as a framework that recognizes the diversity of different geographies and environment.

Testing the waters

Aquaculture also has a role to play in satisfying global food supply needs and restoring damaged ecosystems. Building sustainable aquatic systems and fisheries could help reduce pressures on strained supplies while providing economic opportunities to less developed areas.

Yields from captured fisheries are in decline in many places, while degraded aquatic ecosystems provide an opportunity for local communities to restock economically valuable species. Greater diversification could also bring in more financial support, for example mixing rice and fish systems together. This strategy helps the environment recover while also providing economic growth and availability of nutritious resources for poorer communities.

“Unsustainable agricultural practices pose serious risks to the planet”

Several multilateral initiatives have already been launched in recent years. The UN Food and Agriculture Organization (FAO) published its Blue Transformation Roadmap in 2022, aimed at expanding and promoting sustainable aquaculture.

The FAO estimates that by the end of the decade global fish production will account for 106 million metric tonnes, an increase of 32 percent in just 10 years. This will put enormous strain on the world’s oceans, but also create impact investment opportunities.

The long-term resilience of aquaculture value chains depends on including everyone. Small-scale fisheries and aquaculture provide food for around one billion people and support over 100 million jobs, according to the World Economic Forum. Impact investing, particularly in emerging markets, could provide an important opportunity to generate financial returns while also safeguarding the planet’s long-term food security.

Breaking new ground

Feeding billions more people over the coming decades may depend on restoring soils and adopting more sustainable forms of food production, but it will also rely on advances in technology. Artificial intelligence could play a starring role and its potential impact is already being widely discussed.

Improvements in plant genetics, harvesting, soil health, water use, supply chain management, as well as many other potential applications, could be unlocked through AI adoption and greater data collection.

However, AI is not without its own challenges and potential barriers. AI often requires a high flow of field data and computational power, often impractical at field level, while 5G and internet connection is frequently unreliable in rural areas.

Greater automation also has the potential to create opportunities as well as risks for the agriculture labor market. A 2023 report from the European Parliament on the potential impact of AI cautioned that it could widen the digital divide in farming communities. Affordable broadband access could become even more important as smaller businesses struggle to pay for critical digital solutions.

Ownership of data is another challenge. The EU’s proposed digital data act aims to give farmers direct copyright over their generated data, but currently there is little legislation or regulation in Europe or elsewhere.

Like much of the digital world, technology often runs well ahead of government oversight but has the potential to transform the asset class.