Humans depend on agriculture for the most basic of our needs – farming is also the main source of livelihood for more than 2.5 billion people around the world – and the sector has a key role to play in the fight against climate change. For asset owners seeking to achieve positive environmental and social impacts alongside financial returns, agriculture is therefore an obvious place to focus their efforts.
The Global Impact Investing Network’s most recent survey found that only 9 percent of impact investors’ AUM was allocated to food and agriculture. However, 57 percent of the survey’s respondents had some allocation to the sector – and 54 percent said they planned to increase their allocation in the coming years.
There are multiple different routes to achieving impact in agriculture. Some strategies focus on reducing emissions, others seek to reduce waste and improve efficiency, while many investors see agriculture as a way to strengthen rural livelihoods in emerging markets. There is also growing interest in models that seek to bring more fundamental changes to agriculture, with a focus on regenerative practices that improve soil health and help restore biodiversity.
The Intergovernmental Panel on Climate Change stated in 2019 that around 23 percent of emissions come from agriculture, forestry and other land use. Other researchers believe the figure is much higher, but there is no dispute that reaching net zero depends on reducing agricultural emissions. These emissions come from multiple sources, including deforestation to allow farming to take place. Agriculture is particularly associated with emissions of methane – a gas that has 84 times the global warming potential of carbon dioxide over a 20-year timeframe.
Livestock are notorious for emitting methane. Less well known is that methane is also released through rice production, mainly caused by bacteria that grow in flooded rice paddies.
“Leveraging additional financial support is really key, because we see that these are win-win options”
International Fund for Agricultural Development
But methane is a “low-hanging fruit” in efforts to reduce emissions, according to Jo Puri, associate vice-president in the strategy and knowledge department at the International Fund for Agricultural Development. IFAD, an international financial institution that invests in agriculture, is one of many organisations supporting the Global Methane Pledge, an initiative announced at COP26 in 2021 that aims to cut methane emissions by 30 percent by 2030.
Puri notes that achieving the goal will depend on private sector investment. “Leveraging additional financial support is really key, because we see that these are win-win options. We can increase production, increase efficiency, reduce food loss and waste, and reduce methane all at the same time,” says Puri. “But for that transformation to occur, we clearly do need to bring in a step change in financing.”
Investing in livelihoods
Impact-focused investors also seek to improve food systems to combat global hunger. Disruption to grain supplies caused by the war in Ukraine has compounded chronic food insecurity in large parts of Asia and Africa, adding to problems caused by covid-19 and increasingly erratic weather patterns. The World Food Programme warned in June that 345 million people globally are struggling to meet basic food needs.
Francisco Machado, vice-president for investments at impact-focused private equity firm Vital Capital, says his firm has made the food system in Africa a key focus area. “From an impact perspective, it meets our goal, in the sense that increased availability and affordability of basic nutrition leads to improved health,” says Machado. “And the fact that we rely on the smallholder farmers also then taps into increased financial resilience.”
However, for many impact investment fund managers that operate in emerging markets, a focus on food does not translate into a willingness to invest directly into primary agriculture. Machado notes that investing in primary agriculture requires “very specific skillsets”, as well as patient capital that can invest beyond the typical 10-year length of a private equity fund.
Nyaradzo Nyimo, a principal at Spear Capital, another Africa-focused fund manager, adds that LPs are typically deterred from investing into primary agriculture because of land ownership concerns in many countries. “There’s not a lot of capital that’s been directed to the agriculture space from the financial institutions… they are saying there is no security.”
Some private sector investors, Nyimo suggests, prefer to observe the experience of development finance institutions in agriculture before considering allocating to the sector.
It is more common for impact investors to target midstream actors in food and agricultural value chains. “One of the key challenges when you look at Africa has been the lack of means to process as well as to market their harvest,” says Nyimo. “Most of their harvest is fresh and the infrastructure does not allow them to distribute their products fresh, so there is need for some value addition. By getting into the processing space, we’re actually supporting the farmers because we’re becoming an offtaker of their produce.”
Waste not, want not
Machado agrees that infrastructure for agricultural logistics in Africa is “a huge bottleneck”, noting that improving cold chain infrastructure is an important priority. This would help ensure more produce can reach markets before it spoils, helping to improve rural incomes and reduce waste.
Investors in new projects in agriculture are never slow to point out that the global food system needs to be able to feed a continuously growing global population. The world’s population reached 8 billion in November 2022; the UN estimates there will be 9.7 billion people on the planet by 2050.
Does this demographic trend mean that food production will need to increase by a corresponding amount? While it is hard to dismiss this argument entirely, it is worth remembering the colossal scale of food waste. Up to 30 percent of food is lost or wasted – and, staggeringly, food waste accounts for as much as 10 percent of total greenhouse gas emissions.
“We need to be really clear about what outcomes we’re expecting from our food system”
Transformational Investing in Food Systems
Much of the solution to food waste lies with retailers and consumers, especially in developed markets. But there is also plenty of room for innovation and investment on the producer and midstream sections of the agricultural value chains, including through investments in cold chain infrastructure, as well as in processing and logistics companies.
Other advanced technologies are increasingly being employed. For instance, vertical farming techniques – which were first pioneered in the Netherlands and are fast becoming popular in the US – can bring food production closer to consumers, as well as reducing the resources and inputs required to produce food.
It is not hard to find voices that suggest true impact will involve more fundamental changes to how we produce food. Rex Raimond is the director of Transformational Investing in Food Systems, an initiative that promotes a ‘holistic’ approach to investments in agriculture. He calls for a more systematic approach to measuring the positive and negative side-effects of agriculture, arguing that this will help policymakers understand the need for a balance between food production and other objectives. “We need to be really clear about what outcomes we’re expecting from our food system,” he says. “Without having those clearly articulated, we’re kind of floundering.”
It would be hard to dispute that the dominant methods of agricultural production across much of the world impose significant costs on the environment and societies. As well as being a major cause of methane and carbon dioxide emissions, intensive agriculture is a major driver of soil degradation and of damage to ecosystems and biodiversity. The global food system also fails to ensure humans receive the nutrition we need – the UN’s Food and Agriculture Organization says that 3.1 billion people are unable to afford a healthy diet.
“If we want to have food systems that contribute positive outcomes,” says Raimond, “then we also need to look at different business models and then the financing stack, the capital stack that supports those different business models.”
Raimond believes that many asset owners, including family offices and even some pension funds, are “sympathetic to the goals and objectives of a regenerative agriculture movement”.
“There’s still a lot of hurdles,” he concedes. “We’re not seeing the catalytic capital flowing into the sector.”
Nevertheless, Raimond can point to many examples from Zambia to India where “creative finance” has enabled producers to combine financial success with practices that have helped regenerate ecosystems damaged by conventional methods of production.
Attracting investors to help scale up innovative approaches that prioritise sustainability will be a long journey. But, as global food insecurity worsens and addressing agriculture’s contribution to environmental damage becomes an increasingly urgent priority, there has never been a more important time to focus on impact in agriculture.
Reducing methane emissions
How to meet the Global Methane Pledge
There are multiple technologies and improved production techniques that can be employed to help reduce methane emissions. Biogas digesters, for example, can produce energy from manure and waste products from rice production. IFAD’s Puri says these have “huge potential” to reduce methane releases if they can be scaled up in rural areas of developing countries.
Yet reaching the goals of the Global Methane Pledge will not be easy, given that demand for meat and dairy products shows no signs of abating. The OECD predicts that meat protein consumption will rise by 14 percent between 2020 and 2030.
In view of the urgency of the situation, Puri notes that public sector organisations such as IFAD need to continue to work on facilitating projects that private sector impact investors can finance.
“Having a pipeline of bankable projects which the private sector can come and invest in is really important,” she says. “We need blended financing solutions, and that will require, of course, the public and private sectors to come in.”