A sustainable approach for the future of Food & Agri - Karin Huizinga
Colesco’s Responsible Investment Officer, Karin Huizinga, explains why supporting businesses spearheading sustainable innovation in the food & agribusiness sectors is both an opportunity and a necessity.
Sustainable food and global demand
Food is the ultimate non-discretionary spend: it may be a truism, but everyone needs to eat after all. Globally, the number of mouths to feed is rapidly increasing. By 2050, the UN expects the global population to reach 10 billion , up from around 8 billion today.[1] The pressure to increase crop yields and streamline the food supply chain while minimising climate impact is already intense and will only increase. It requires rapid innovation along the value chain from field to fork to successfully meet these challenges and it comes with a huge opportunity for investors.
Steering towards sustainable market dynamics
Fast-moving trends require equally nimble and flexible financing solutions. As traditional lenders retrench due inter alia to reducing risk appetite, capital constraints and regulatory pressure, private debt managers like Colesco are stepping forward to plug the funding gap, particularly for businesses in the mid-market space often overlooked by conventional lenders.
With a reduced number of counterparties, streamlined transaction execution and bespoke products, direct lending aligns with the funding demands of ambitious enterprises seeking growth capital and a collaborative relationship with their lender. As a flexible financial product, private debt can accommodate the complexities of the global food supply chain, which is vulnerable, and can be easily impacted by any combination of variables, including seasonality, weather, commodity price shifts, consumer tastes, inflation and geo-political conflict. For instance, the war in Ukraine directly impacted grain and oilseed exports which inflated prices and also caused significant volatility in the energy market. As grain prices rose, the entire supply chain, from producers to consumers, felt the consequences.
When selecting a financial partner, businesses and their financial sponsor owners should select a lender that understands these dynamics. The Colesco team is agile, with close, long-standing relationships with private equity sponsors and their portfolio companies. The team has deep F&A sector knowledge and experience, and understands the financing products that best serve our borrowers’ needs.
Colesco’s approach
While most direct lenders focus on the front-end of the food supply chain, supporting food and beverage brands and foodservice / retail, we have extensive experience of lending to businesses along the entire value chain, from seed producers, fertiliser businesses and primary producers to supermarkets and restaurants by way of packaging specialists and consumer food businesses. Looking ahead, segments of the market where we see a need for financing and ambition to make their processes more sustainable include alternative protein production, organic food production, aquaculture equipment manufacturing high-precision farming machinery and businesses addressing improvements in crop nutrition amongst others, while doing no significant harm to, for example, biodiversity.
Core to our borrower-selection is a commitment to serve our environmental, social and governance goals. In addition to our initial ESG negative screening process, we seek to finance companies that have the capacity and ambition to operate sustainably. There is huge potential to assist businesses that have a strong ESG base and are run by management teams which demonstrate a commitment to evaluate, evolve and expedite more sustainable business practices. In addition, we finance companies that deliver a positive contribution to the transition towards a more sustainable future, e.g. companies active in ecological food production and distribution.
Advancing sustainability
Borrower selection requires more extensive research than it might appear at first glance. In terms of ESG, plastic packaging is an example of a product in the food supply chain where substantial efforts are being made to enhance sustainability. At first sight, investments in this sector seem debatable, but as a critical component of safe food packaging, transportation, and delivery, it will not disappear from the food value chain in the short or even medium-term. Furthermore, it can actively support the carbon neutral transition by reducing food waste. There is huge scope to invest in the ongoing development of plastic alternatives, but also to help existing plastic manufacturers, packaging companies and their end-user consumer foods businesses to change now. Rather than excluding businesses based on their current ESG profile, we recognise that there is a real benefit in helping them on a transformative journey. Manufacturers are already reducing the amount of plastic in their products, which are also becoming easier to recycle, and so the percentage of reused plastic in products is materially increasing. Supporting a plastic packaging manufacturer to reduce the harm its product causes to the environment and recognise what it contributes (e.g. food safety and reduce food waste) has a significant and positive impact across the entire food value chain.
Beyond the sustainability benefits of implementing a robust ESG and impact programme, there are also sound commercial reasons for pursuing these goals. Sustainable business practices add value and make a business more attractive to acquirers, including private equity funds aligned with their investors’ ESG and impact goals, and can and will improve the credit profile of a company. There is ample qualitative evidence to suggest that management teams engaged in and across the full spectrum of ESG run higher-performing enterprises.
The complexity of the global food & agribusiness
Looking forward, one of the big themes we see that continues to dominate the food & agribusiness sector concerns competition for water resources and, closely related, food security. The World Bank estimates that agricultural production will need to expand by more than 70 percent by 2050 to meet soaring global demand and that has huge implications for water use[2].
As an example of the complexity inherent in these markets, consumers who recognise that dairy production is a major source of greenhouse gases are switching to alternative milks, such as plant-based milks. However, growing almonds, for instance, uses an extraordinary amount of water.[3] These apparently conflicting interests are found in all corners of the global food & agribusiness markets.
There are also implications for food transportation. Questions are being raised globally about its rising cost, the length of supply chains and the environmental impact of transporting food – whether by air, sea, or road – across long distances. Increasing amounts of people are questioning whether it is sustainably justified to consume avocados grown in Mexico and Peru, or green beans from Kenya, here in Europe.
The need for investment
Finding answers to these complicated questions requires the investment in strong industry leaders who want to work together with all participants along the value chain and together make the transition to sustainable food reality, supported by innovative financial partners such as Colesco.
[1] Population | United Nations
[2] Land and Food Security (worldbank.org)
[3] Almonds are out. Dairy is a disaster. So what milk should we drink? | Food | The Guardian