Sustainable Diets: a New Theme on the Menu for Investors?

Original content: AXA IM

The shift towards a more sustainable diet continued throughout 2020, illustrated by a ramp up in targets for emissions and food waste from a number of leading players in the food industry.

Consumer interest in clean and sustainable diets continues to focus on a broad range of issues including food waste, air miles, clean labels, meat free, lab grown meat and organic, amongst others.

Veganism is one such diet and lifestyle choice that is increasingly becoming more commonplace, and its rise in popularity was highlighted by the 500,000[1] people who signed up to the Veganuary challenge this year – twice the number who pledged to go vegan for January 2019.

Veganism can also tie in with governments’ plans to reduce carbon emissions, with less meat consumption meaning lower emissions at a national level. However, while it is a growing trend for consumers, investing in it is far from straightforward.

Read more: What investors need to know about the clean economy

One of the main problems is a lack of pure play companies in the space. For example, there are only a few vegan-only, direct-to-consumer companies entering the market, and mainstream supermarkets are gaining traction in the sector at the point of sale with their own-brand vegan meals.

While supermarkets offer exposure to vegan products, the impact of vegan food sales on supermarkets’ bottom lines is currently so minute that to class them as vegan stocks would be a gross exaggeration. Nonetheless, there are other options.

Sustainable food stocks

Although there are few pure-play vegan names in listed global equity markets, there are other ways to eat more sustainably and many companies are busy making a positive difference to the outlook for not only food stocks, but also the environment.

One such example is DSM, which operates in the food ingredients market. DSM is working to produce alternative food sources for fish farms, which currently rely on a type of protein called fry to feed them. DSM uses algae instead of fry to provide better nutrient delivery for their stocks of fish, and this is helping to make fish farms more sustainable going forward.

Read more: The changing climate for sustainable investment

Precision agriculture is another area to look to for companies aiming to make a real difference in the delivery of food, and one name here is John Deere, the farming machinery business. The US company has developed its business extensively in the last decade, and I believe its use of technology and data analysis potentially stands to make a real difference to food production going forward.

Deere is using an open architecture platform to allow its customers to analyse, to a very granular level, how their fields are performing, what methods (and chemicals) are being used across different fields, and then share this data with customers so they can say with increasing certainty exactly what is in the food they produce.

Additionally, there is also the trend to increase yields from animals themselves. Scientific progress means breeding modifications to livestock can improve the quality and quantity of the meat that is produced, for example.

One business we believe is at the forefront of this is Genus, which is pioneering animal genetics, to help create more efficient breeding programmes for farmers. Again, this has the knock-on effect of lowering the environmental impact of meat production, and this is important because, while a greater number of people are making the choice to go meat-free, many will opt to keep eating meat.

Long-term trend

More and more governments and corporates are placing lower emissions at the heart of their policies and company charters, and this decade is shaping up to be a pivotal one for action on climate change.

The food we consume has a huge, long-term impact on this. According to one report, meat and dairy production are on track to overtake the fossil fuel industry as the biggest contributor to global warming in the coming years. Non-profit organisations the Institute for Agriculture and Trade Policy and GRAIN claim it will account for 80% of the allowable global greenhouse gas budget by 2050[2].

With this kind of dynamic, this is a global problem which requires global solutions, and companies which can deliver them may enjoy greater popularity. The key is to be discerning. Not all sustainably focused businesses will deliver the desired returns over the long-term - stock selection is key.

What is not in dispute is the need for solutions to these very real problems, and we expect this theme to potentially become more prevalent in investors’ portfolios over the coming years.

Read more: The future of autonomous vehicles: China in the driving seat.

*Stock/company examples are for explanatory/illustrative purposes only. They should not be viewed as investment advice or a recommendation from AXA IM

[1] veganuary.com – January 2021

[2] Meat and dairy companies to surpass oil industry as world’s biggest polluters, report finds | The Independent | The Independent

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