Commentary: How to improve global food supply — incentivizing a more sustainable system

Each year, the global economy is taking on a $4 trillion loss to finance a food system that is unsustainable, inequitable and one of the biggest contributors to climate change. Many investors may not realize it, but today's global food system is responsible for 70% of global water use, over 50% of biodiversity loss and a third of greenhouse gas emissions. Food producers are significant contributors of GHG emissions through not only the cultivation of crops and livestock, but the full cycle of food production, including supply chain distribution, packaging and retail.

Our food system is both a major driver and a victim of climate change's far-reaching effects. Further, food system GHG emissions are creating a negative feedback loop; as GHG emissions and temperatures rise, food nutrient levels and farm yields fall. According to the Food and Agricultural Organization of the United Nations, by 2050, the global food system will need to produce 70% more food than today to feed more than a billion additional people. The World Resources Institute estimates this additional food production will require a land space equal to roughly two-thirds of the United States. To hold global warming below the internationally agreed upon 2 degrees Celsius, the agricultural sector will need to increase food production while simultaneously reducing GHG emissions.

The global food system faces substantial challenges ahead, and its much-needed transformation will need to be financed. If investors expect the food industry to meet this moment, the asset management industry must provide the capital for innovation. Specifically, the banking sector has a key role to play in financing the food system of the future. Investors stand to benefit in two ways:

1. Investors can find interesting opportunities in banks that consider biodiversity and climate change risks in their financing and lending practices for the agricultural industry.
2. Investors can mitigate existing risks within their portfolios by supporting the development of reporting frameworks and standardized disclosures on climate change and biodiversity risks.

Recognizing the intertwined challenges of climate change and biodiversity loss — and the food chain's key role in both — is an important lever to drive change. In addition to mitigating the food system's negative effects on climate change, a more sustainable food chain will need capital to improve crop production, develop alternative proteins and build supply-chain resilience. Therefore, investors must consider the banking industry's current role in the financing of global food chains.

Banks have the power to direct capital flows to sustainable businesses. Domestic financial institutions, including national development and private banks, can set eligibility criteria for financing, such as precluding the conversion of forest lands or ecosystems. International bodies, like the World Bank, can use targets focused on agricultural productivity or protection of forests, or ideally in combination, to help support both goals. Lastly, supply-chain financing can have a broader influence with buyers or financiers supporting "conversion-free" supply chains, whereby financiers choose to buy or finance only those agricultural commodities that are not linked to deforestation or the conversion of other ecosystems.

There are several banks already leading the way in their approach to agricultural lending. For example, HDFC Bank Ltd. in India, which is the country's largest private sector bank, supports food producers by connecting them to government initiatives and expert advice on weather, soil health and cropping patterns for agriculture-related loans with higher credit risks. HDFC Bank has also specifically outlined a goal to provide access to capital for environmentally sustainable projects that contribute to climate change mitigation. Another Indian bank, ICICI Bank Ltd., has a specific group that seeks to find and lend to projects promoting biodiversity or environmental sustainability. ICICI has intervened with many rural agricultural businesses and farmers to provide education to help transition their crop rotation, paddy cultivation, pest control and food security.

We also see other best practices from National Australia Bank. NAB has clearly identified finance as a potential driver for more sustainable agricultural practices and is the only Australian bank to sign the Natural Capital Declaration, which is a global statement recognizing the potential risks and opportunities that natural capital — the world's stock of natural assets, including geology, soil, air, water and all living things — poses to the finance sector.

To make more informed decisions on the risks and opportunities within the agricultural and food sectors, banks and investors need more reliable and robust biodiversity data. Two frameworks — the Principles of Responsible Banking and the Task Force on Nature-related Financial Disclosures — provide strong starting points for the financial sector to approach these issues. Both investors and banking institutions will benefit from further development and broader application of these frameworks.

The Principles of Responsible Banking recognizes that, to date, the financial sector has failed to channel significant capital into biodiversity, whether it be conservation, restoration or sustainable use. The aim of the PRB framework is to address the financing gap by establishing key performance indicators and targets that are understandable, relatively easy to measure, reported and verified alongside robust guidance for lenders.

On the other hand, the TNFD is a market-led global initiative that aims to support financial institutions and companies in assessing nature-related risks and opportunities. The TNFD's framework is expected to be launched in 2023 and will play a key role in enabling consistent and comparable reporting. With more consistent and reliable data, and by applying a value to natural capital, flows can be redirected to more sustainable businesses alongside promoting emerging best practices.

Investors stand to gain from considering the impacts of the changing food system on their global investment portfolios. Banks are beginning to recognize their impact on climate change and biodiversity loss, and those leading the way will both seize opportunity and effectively manage the potential risks associated with the sector. Investors can take advantage of these opportunities by investing in the banks and encouraging existing holdings within their portfolios to consider climate risk in their financing practices. Finally, both investors and banks may benefit from supporting frameworks such as the PRB or TNFD, which will aid in the identification of companies with the highest potential exposure to biodiversity and nature-related risks.

David Sheasby is head of stewardship and ESG for Martin Currie Investment Management Ltd., based in Edinburgh. This content represents the views of the author. It was submitted and edited under Pensions & Investments guidelines but is not a product of P&I's editorial team.