On the minds of impact investors

Our panel

Stephen Brooke
Partner, Hambro Perks

 

Hélène Henry-Prince
Head of the PE regenerative agriculture practice, Tikehau Capital

 

Roman Frenkel
Director, head of food and agriculture equity, British International Investment

What is driving impact investing in the food and agriculture sector?

Stephen Brooke: Food and agriculture is a $10 trillion-plus industry; agriculture generates around one-third of the world’s carbon emissions, excluding the contribution of supply-chain processes before it reaches the consumer, such as food processing, transportation and retail. It also uses around 70 percent of global water consumption. So, any serious attempts to reduce carbon emissions and sustain natural resources must include a massive effort to reduce the negative environmental impact of the agriculture sector.

The size and urgency of this problem has led to a major increase in sector innovation, with initiatives such as vertical farming grabbing headlines. This innovation is driving an increase in venture capital investment – 2021 was a record year for agtech with nearly $5 billion invested, versus $3.3 billion invested in 2020, according to Crunchbase data.

Hélène Henry-Prince: Agriculture, land use and deforestation represent the second-largest source of greenhouse gas emissions globally and the primary driver of biodiversity loss. By investing in regenerative agriculture practices, we can reverse climate change (leveraging the soil as a natural carbon sink) and play an important role in addressing environmental challenges and health issues.

Roman Frenkel: At the moment the key topic is food security. The traditional impact thesis remains – climate, sustainability and improving macro situations – but anything that touches food security has the highest priority. This is largely driven by the geopolitical situation, rising inflation and the fragility of food security in many developing countries.

Could you explain the trends and challenges associated with impact investing?

SB: There is an ongoing and well-publicized challenge to measuring impact in a standard way that all stakeholders can be familiar with and understand. We are some way off standard measures, but in the meantime it’s still important for companies in the sector to measure what they can as best they can, such as GHG emissions reduced, water saved, fertilizers reduced, etc.

HHP: We have seen a strong development in impact investing strategies. However, one of the main challenges that remains is changing the perception of impact investing from a short-term cost burden to a long-term investment strategy. It is important that investors recognize impact investing in agriculture as the positive transformation of existing practices which, over time, will improve soil fertility and generate financial returns.

RF: Rising interest rates globally, driven by the US and in most major economies, will make the availability of private impact investment capital more constrained. There is a significant trend toward increased impact investing around the world, but capital could become scarcer in the medium term.

What do you look for when investing in an agri impact fund?

HHP: We identified two main categories when investing in regenerative agriculture. Firstly, regenerative agriculture is facilitated through various ‘enablers,’ which include farming tools, equipment, machinery, biofertilizers or financing solutions.

Secondly, we look at how we can improve agricultural practices, for example, by improving training or recruitment and developing new technological solutions, to accelerate the transition to regenerative agriculture.

RF: Diversification of the supply chain is important. It is also important to see a diverse approach around sub-sectors of the agriculture value chain. It is harder to commit to a fund that is too focused on a specific niche of the agri sector.

What does the future hold for impact investing in agri?

SB: Due to the scale of the problem and rate of innovation, impact investing in agtech is set to increase substantially over the long term – it has to if we are going to sustain the world’s resources and meet climate targets.

HHP: The food and agriculture value chain is critical for the future of our society: 95 percent of our food comes from our soil. By 2050, we will need to increase food production by 70 percent in order to feed the population. Conducting a scaled transition to regenerative agriculture practices that promote soil fertility is essential to generate meaningful impact and financial returns. It requires commitments from all stakeholders, which will enable a strong future for impact investing in this space.

RF: The future is bright. Given the vitally important focus on food security – agriculture investment has become front of mind for DFIs and other investors. Food inflation creates issues, but, on the other hand it also makes parts of the agri value chain more profitable. The greater focus on the sector also shines a light on the opportunities that exist within it.

What are the most important KPIs/metrics for measuring impact?

SB: There are a number of metrics that are commonly used today, including GHG/CO2 reduction, yields, water saved, fertilizer used, energy costs/use per unit of production, waste reduction and more.

HHP: Defining a clear impact framework is key to ensuring a positive outcome for impact investment. Some of the most important impact KPIs that we measure are the biodiversity footprint of a business (such as the level of deforestation), its carbon emissions and impact on water pollution, as well as its social and health-related impact.

RF: In the world today, sustainability and climate metrics are very important. Agriculture is a significant contributor to greenhouse gas emissions, so we always have to be very mindful of that. But agriculture investment also tends to be very inclusive, particularly when it comes to uplifiting the income of smallholder farmers and large-scale job creation.