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Food and water system needs a reform, but why and how?

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This is a sponsored article from Schroders.

Mark Lacey, head of Global Resource Equities
Felix Odey, Global Renewables analyst

The global food and water system will come under intense pressure in the coming years from two separate forces.

Firstly, the world’s population is expected to increase from around seven billion today to eight billion by 2030 and nearly ten billion by 2050. Producing enough food for the extra population will be a major challenge, the WWF estimates that we will need to produce more food in the next four decades than we have in the entire 8,000 years of human history thus far.

Secondly, as it stands the food and water system is not sustainable from a carbon, water intensity, biodiversity, physical waste, and health perspective. The effects of climate change are likely to lead to unpredictable weather patterns, putting additional pressure on arable land and fresh water supplies.

The food and water system itself is responsible for c.25% of global greenhouse gas emissions, and 65% of fresh water usage, meaning it is both a major contributor to climate change and water stress, and a sector that will be severely disrupted by it. Likewise, the system accounts directly or indirectly for around 60% of the two billion tonnes of waste produced globally each year.

But even without these two challenges, it is clear that the current food and water system is not fit for purpose in the nutrition it provides. Currently around two billion adults globally are overweight (measured by having a BMI of 25 or above) and 650 million are malnourished. Additionally, suboptimal diets have long weighed on society, causing an estimated 20% of deaths.

We see three structural changes that must take place to make the food and water system more sustainable:

  • higher agricultural yields and greater efficiency;
  • a change in diet and eating patterns;
  • a major reduction in waste and emissions.

Detailed analysis on these changes can be found here.

Investment opportunities from the transformation

From an investment perspective, we anticipate that these three interlinked structural shifts will lead to a wealth of opportunities across the food and water value chain.

Everything from land use to animal feed to food production, processing and technology, transport, retail, packaging and waste recycling has a role to play in transforming the system as a whole. Likewise, water testing and management, equipment and capture, treatment, infrastructure, and, recycling, will all need to change drastically as this resource becomes more strained.

A vast amount of investment is required to make the system sustainable. We estimate that US$30 trillion needs to be spent across the different food and water value chains by 2050.

“Food and water” is an area where problem-solving technology is becoming more widely available, consumers are more aware of health and the environment, and governments are starting to focus on food sustainability, not simply food security.

Brought together, these factors indicate a food and water system on the cusp of dramatic change. And as equity investors, we see potential for attractive returns to be made by investing in those companies with the products and technologies to make this change happen.

Lots of these companies are producing good cash flows but have become lowly-valued because investors perceive the space as “old economy” and unexciting, rather than as offering growth. This is partly as a result of low food prices which mean there has been little investment.

We think that is going to change as the imperative to make food and water sustainable creates opportunities for new sources of growth in companies that many investors may have written off as old economy, in mature sectors.

Find out more about Schroders’ insights and capabilities on sustainable investing here.

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This is a sponsored article from Schroders.