Venture capital is pouring into sustainable farming and biotech, as supply chains and food sovereignty enter political debate. The potential for impact-linked outcomes here is growing too…
Much like the surge of venture capital (VC) in renewable energy and cleantech in the mid-2000s, food and agriculture investment is going through a transformation, powered by changing consumer habits, climate change and new technology.
Traditionally, VC investment into food and agriculture flows downstream – to retail products, restaurant delivery, and e-grocery. But last year, upstream took the majority of investment with 52 per cent going to start-ups in agtech, food science and vertical farming.
A record USD5 billion was invested in agtech in 440 funding deals to VC-backed start-ups last year, according to Crunchbase data – a leap from USD3.3 billion in 2020.
For impact funds, the agriculture sector offers measureable outcomes at the cross-section between rural poverty, climate change and social justice.
“Agtech is definitely becoming more ‘impact’-based as it lends itself well to the E, S and G,” says Zac Williams at Monument Group. “It is a massive industry with a large environmental footprint so there are lots of levers to pull and this resonates quite nicely with ESG goals.”
Critical capital
Covid-19 has highlighted the role for impact funds in natural capital (which includes forestry and biodiversity) but also in supply chains and cold storage to bring food closer to consumers and reduce food miles.
Speaking on a Private Equity Wire panel in January on the opportunities for private equity and climate impact-based investment, the head of climate impact at Unigestion, Joana Castro, said that agtech is a broad sector which will be “critical” to sustain population growth in the coming decades.
By 2050, feeding a planet of more than nine billion people will require an estimated 50 per cent increase in agricultural production, according to the World Bank. As well as a growing preference for plant-based and organic foods in the West, rising wealth in parts of the developing world means people there are consuming more protein and fresh fruit and vegetables.
How these demand trends intersect with climate change will become a major investment thesis of private equity funds in the coming years, says Sophie Flak, head of ESG at Eurazeo.
“We know that food resilience and agriculture’s adaptation to climate change is going to become a huge topic,” she says. “Humanity will face damage first from a biodiversity crisis, which comes as a direct consequence of climate crisis. The pressure to secure our food supplies has started and food sovereignty is becoming a huge geopolitical topic.”
Given its traditionally heavy dependence on pesticides, fertilisers and genetically modified crops, agriculture has not always been easily associated with ESG. But sustainable agriculture is increasingly being understood as more than just small, organic farming, say sources in the sector.
“The ESG angle around food and agriculture has started to draw people’s attention,” says Darren Rabenou, head of food and agriculture and ESG investment strategies at UBS Asset Management, which is the second largest institutional owner of farmland in the US.
“Investors want to understand how to make scalable investments in organic-oriented strategies that have a clear ESG angle. While organic farming has a number of ESG attributes, it is also important to understand the challenges.”
Technology risk
On the point, greenhouse agriculture may use significantly less water than traditional farming but it typically relies on enormous power needs to heat and cool facilities. As a result, investors are asking follow-up questions on how sustainable energy can be incorporated into regenerative agriculture like greenhouses, says Rabenou.
“Investing in agtech can have a significant impact on helping traditional farming be more sustainable, but venture and growth equity firms that back agtech need to figure out how to access traditional farmers in order to validate new technologies that address sustainability.”
Many agtech opportunities may remain firmly in the high-risk VC space until this question can be answered and the transformational levels of investment required make more financial sense to traditional buy-out funds.
“There is always a complexity in our line of business around when is value going to crystallise,” says Flak. “We know [sustainable agriculture] is a mega trend, but when is going to be the right window? We’re working on that. If you arrive too soon, it’s not good.”
Flak cites the example of household cleaning products eight years ago, when the wall of investment needed to transform the industry did not yet match consumer demand patterns. “It really depends, industry by industry, where is the switch point,” she adds.
The food and agriculture sector may align well with impact and ESG-based strategies in some places but there are also number of negative externalities and a higher risk of ‘impact-washing’.
“Oftentimes there is something you need to ‘net out’ when you invest in the sector,” says Kater at Bridgespan. “So maybe you are you are taking unused food and finding ways to innovate and avoid landfill or there’s transportation of all of that from point A to point B, or it could be excessive water use for farming.”
She cites the example in the downstream food sector of impact fund-backed healthy snack products, which often end up being sold to the type of consumer who already buys healthy food.
One unintended social consequence of increased organic farming in less developed countries can be higher food costs for consumers, says Rabenou.
Sector-specific ESG metrics might therefore include water use, energy use and carbon emissions or considering food security issues in countries that are disproportionately reliant on food imports. Questions of ‘impact’ and ESG outcomes have never been more relevant.
Read the rest of the Private Equity Wire Insight Report: Creating Values: Behind the ESG Revolution in Private Equity
