Sustainability

Decarbonisation on the menu: Is the food industry being adequately incentivised to achieve net-zero?

Food production is altering the trajectory of net-zero: the industry generates as much as 40% of global greenhouse gases – but investing in innovation to improve yields and energy efficiency, and reduce waste, can help.

We believe it may only be a matter of time before we see more investor scrutiny of food sector emissions: regulatory momentum and shifting investor sentiment highlight the importance of understanding companies’ carbon footprint.

How food is affecting the trajectory of net-zero – and what can be done about it

It is hard to overstate the impact of food production on the environment. The industry generates as much as 40% of global greenhouse gas emissions (GHG), depending on how much of the supply chain is factored into the equation, and has risen in past decades – see chart below. Some believe that could rise further as rising incomes among growing populations in developing countries beckon higher-protein diets that will likely, to a great extent, be fed by domestic meat and dairy industries (amongst the highest emitters in food production).

GHGs emissions in food production have risen in recent decades, across pre- and post-production (billions of tonnes of CO2)

Sources: Tubiello et al, "Greenhouse gas emissions from food systems: building the evidence base" IOP Science

Yet it’s even more difficult to overstate the impact of the environment on food production (particularly in emerging market countries), which is why the scale of those emissions presents a huge challenge – and opportunity – for businesses,  markets, and policymakers.

What can be done? As the chart below suggests, embracing innovation and changing what food we eat can help. The bars at the right show the combined effect of implementing 50% and 100% of all the different strategies, which are the only viable paths towards a decent chance of reaching the 1.5-degree limit prescribed by the Paris Climate Agreement.

From going ‘plant-rich’ to using tech to reduce waste and improve yields: Impact on GHG emissions from food production under different scenarios (gigatons of CO2 from 2020 to 2100)

Sources: Clark et al, "Global food system emissions could preclude achieving the 1.5° and 2°C climate change targets" Science

Is there a link between financial performance and emissions among food producers? Given the rising importance of sustainability, we would expect to see food companies that have successfully reduced their emissions or emit less GHGs to be rewarded with stronger investment flows. But is that the case?

Emissions intensity in the food sector hasn’t changed much over the past 5 years

To chip away at that question, we first looked at emissions intensity for 250 companies across the food product sector, primarily fresh agricultural products and packaged foods & meats producers, with minimum market cap of $300 million – across 40 countries. We used their reported or estimated emissions from direct fuel combustion (Scope 1 emissions) and electricity used by the company (Scope 2), sourced from  , and their reported sales to help understand emission intensity for every dollar of sales in a given year (and allow us to look at the trend over time).

Although emissions intensity varies widely across the industry (40 tonnes of CO2/$ for the 50 lowest emitters to 320 tCO2/$ for the 50 highest in 2020) and across geographies (Americas saw 177 tCO2/$ vs 115 tCO2/$ in APAC and 132 tCO2/$ in EMEA the same year), average emissions intensity for the global food industry has barely budged since 2015 – and even increased slightly in 2018 before retreating again.

At face value, the lack of progress on reducing emission intensity is discouraging despite broader market and policy momentum. But it’s not all doom and gloom; in fact, we found 15 companies – large and small, and across geographies – that were able to reduce emissions intensity by at least 35% between 2015 and 2020. In one instance, a large Swedish confectioner was able to trim its carbon intensity by 65% during the same period.

Financial performance and emissions: are investments flowing in the right direction?

To answer this question, we analysed the stock market performance of food producers over 1 and 5 years by region depending on their carbon intensity and split them into four quartiles – from the lowest emitters to the highest.

If sustainability considerations were playing a role in asset allocation, we should see a negative correlation – higher equity returns for companies with lower carbon emissions. Yet we saw no clear pattern holding across groups or regions. In some cases, stock performance decreased as emissions rose for companies in the Americas, but not among the highest emitters.

And when looking at changes in emissions and stock performance over time, to see if markets reward those that reduce emissions and punish those that increasingly pollute, there was nothing to indicate investment was shifting towards the former and away from the latter. In fact, equity returns for the 10 highest emitters and 10 lowest emitters were essentially the same over a 5-year period.

The path forward for food producers and markets

Clearly, emissions performance is not persuading investors to reward or punish food producers on that basis – which means climate risk isn’t being adequately priced into their assets.

But given what we’ve seen in other sectors, and regulatory momentum globally, we feel it may only be a matter of time before we see greater scrutiny of emissions. Without a supportive climate, food costs will spiral out of control and production will be constrained, leading to slimmer margins for producers, lower returns for investors and less choice for consumers.

For investors, understanding how emissions and climate risk could affect portfolio companies is an essential starting point, and will help nudge markets towards more accurately pricing climate risk into food producers’ assets – and incentivise producers to reduce emissions.

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