Case study by Sustainalytics

In the spirit of showcasing leadership and raising standards of responsible investment among all our signatories, we are pleased to publish case studies of all the winning and shortlisted entries for the PRI Awards 2021.

Provide a short overview of the research innovation being proposed for the award

Sustainalytics’ flagship thought leadership report, 10 for 2021: Investing in the Circular Food Economy, aims to support investors interested in gauging ESG risks and opportunities in the global food value chain. With investor interest building around many systemic ESG risks, including COVID-19 impacts and strengthening ESG policies around the world, this report focuses on the food value chain because of a confluence of factors: critical concern about global food security, heightened by the pandemic, alongside the growing environmental and social footprint of food production, distribution and consumption.

The authors of the report survey key subindustries – from agrochemicals, agriculture and aquaculture, to packaged food, food retail and restaurants – in search of solutions that may support circular economy principles. These principles include minimising waste and pollution, extending the use-phase of products, and ecosystem regeneration. The report identifies 10 publicly traded companies in the space that are taking steps to manage the ESG impacts of their operations, supply chains and product offerings while also developing related solutions. Finally, the authors assess a set of circular economy-themed investment funds and discuss approaches to portfolio construction, engagement and financing strategies.

Provide a description of the research innovation or report your organisation has introduced or published, and why you decided to undertake this approach

The UN Food and Agriculture Organization forecasts that the world’s population will reach 9.7 billion by 2050. Meanwhile, a recent study published in the journal BioScience estimates an increase in demand for food of between 25 and 70% over the next 30 years. This growth may suggest that portfolio exposure to the food economy can present an upside. However, meeting this growing demand while limiting negative environmental and human health impacts remains challenging.

Taking a deep dive into key industries directly connected to the global food economy, 10 for 2021 explores practical cases of circular economy-themed funds and related strategies in asset management. The authors take an innovative approach to addressing ESG risks and solutions by drawing on key components of Sustainalytics’ ESG Risk Ratings, including Material ESG Issue (MEI) analysis, management indicators, controversy records and solutions research.

The findings shed light on how companies in this space manage risks and pursue opportunities supportive of the circular economy. For example, agrochemical products play a significant role in assuring food production worldwide. As agricultural land is limited, pesticides and fertilizers are valuable inputs to increase land productivity. However, Sustainalytics’ research indicates that agrochemical manufacturers are underprepared to manage key environmental and social risks linked to product production and application. Material risks include carbon intensity, emissions, effluents and waste and the environmental and social impacts of products and services.

Similarly, farming, fisheries and aquaculture play a vital role in feeding the world’s population and supporting economic and social development. However, as societies have moved from traditional to industrial modes of production, negative environmental and social impacts have reached unprecedented magnitudes. Material impacts include emissions, water use, deforestation and biodiversity loss. While mitigating the negative impacts of industrial agriculture remains crucial, solutions on offer include certified sustainable coffee, cocoa and sugar and certified organic food and animal feed.

Solutions in the seafood industry, meanwhile, include steering away from wild stocks and moving from monoculture aquaculture to integrated multi-tropic aquaculture. Seafood production on land can exploit new technologies and approaches, such as recirculating aquaculture systems, that help maximise energy and water efficiency while avoiding the risks of operating in open water.

Food and packaging waste present both environmental problems, such as over-exploitation of natural resources, water stress, biodiversity impacts and climate change, and social issues, such as world hunger and inefficient resource use. These issues pose risks for investors because they can affect portfolio companies’ costs, revenues and reputations. On the positive side, businesses can tap into opportunities to integrate circular approaches into their value chains. With regulations around waste emerging around the world, firms at the forefront of addressing these issues through strong waste management programmes and solutions will be well positioned.

Outcomes, benefits, challenges and next steps: provide an outline as to:

  1. why you believe the report, process or approach is different and the aspects you believe are innovative;
  2. the value this approach has provided or a summary of the key conclusions;
  3. what you have you learned from this approach or report that can be applied more broadly.
  1. 10 for 2021 offers four significant innovations to the field of responsible investing:

    • It represents a systematic analysis of a crucial topic by applying key data points that contribute to companies’ overall ESG risk ratings, including MEI analysis, management indicators and controversy records.
    • It draws on solutions research to identify and measure company offerings and revenues from solutions. By assessing the percentage of revenues that companies derive from sustainable solutions, the report provides a quantitative analysis of companies with upside exposure.
    • It presents an original analysis of key investment funds. Beyond looking at companies directly exposed to the food value chain, the authors assess related funds on the market, focusing on fund growth, returns, volatility and other fundamental criteria for comparing portfolios.
    • The authors develop ideas for investors to consider when constructing ESG strategies. This contribution is a practical example of how ESG data can be integrated into financial analysis and investment processes, including portfolio construction, engagement and financing.
  2. 10 for 2021 offers a wealth of specific findings and conclusions across the sectors it analyses. For example:

    • Agricultural Chemicals: Pesticides, Fertilizers and Preservatives – firms offering biological pesticides stand to benefit from growth in this market, which is poised to reach US$7.1bn in 2025, up from US$2.8bn in 2018. The precision agriculture market is expected to grow from US$3.9bn in 2018 to US$9bn by 2025. The natural food preservatives market, valued at US$796m in 2018, is on course to reach US$1.06bn by 2028.
    • Agriculture and Aquaculture – Agricultural intensification is set to continue as demand for food grows. Momentum is building for organic food producers, with the global organic food market surpassing US$110bn in 2018, up from US$15bn in 2000. The aquaculture industry, valued at US$230bn, has enjoyed average annual growth of around 6% since 2000. Fish oil and fishmeal feedstock prices are set to increase from 72% to 92% by 2030 from 2010, partly due to supply constraints.

    The report also provides insights into asset management, engagement and financing strategies. Eight circular economy funds investing in the sector outperformed the FTSE All World Index by an average of 18 percentage points in the year to end-December 2020 with similar levels of volatility. There are clear opportunities for engagement – for example, the beverage and food subsectors accounted for less than one-fifth of signatories to the New Plastics Global Commitment in 2019. Meanwhile, the sector could take advantage of growing investor demand for green, social and sustainable financial products.

  3. Key learnings from this exercise include that, despite circular economy-themed funds remaining relatively concentrated in certain sectors, investors can achieve a diversified portfolio using strategies covered in the report, such as the core-satellite approach. They can also develop engagement programmes by addressing a set of key risks and opportunities associated with a circular economy thesis. The rise of green and sustainability bonds suggests companies are progressively incorporating circular activity in their approaches to corporate financing.