Investors bet on meat-free proteins for sustainable returns

11 Aug 2020

Jo Raven manages engagements with global food companies for The FAIRR Initiative, a collaborative investor network that raises awareness of the ESG risks and opportunities caused by intensive animal production.

For investors, sustainable food isn’t just a question of morality. It’s a question of materiality. 2020 looks set to be a watershed year in the rise of sustainable alternatives to animal food products.

Consumer demand is surging, innovation is occurring at pace and the sector has enjoyed a flush of investment in the first half of the year. Venture capital investment in alternative protein start-ups has already exceeded $1.1bn (£853.8m) this year, more than double last year’s investment of $534m (£414.5m).

The bulk of this funding has gone to manufacturers of plant-based products that are already flying off the shelves. But it is cell-cultured meat (meat grown in a lab) that could prove to be the star of the alternative protein landscape, in particular since it has already seen an injection of $290m (£225.1m) this year. This trend shows no sign of slowing; the alternative protein market is predicted to grow to $17.9bn (£13.8bn) by 2025.

By contrast, the meat industry has been rocked by coronavirus outbreaks in meatpacking plants and a fall in demand as consumers turn away from animal products. Analysts said in July that it is highly unlikely that the meat sector will recover any time soon. It is no surprise, therefore, that traditional food producers and retailers are rushing to cash in on the booming alternative protein market, an arena historically dominated by start-ups.

In July, FAIRR published the results of its engagement with 25 of the world’s largest food retailers and manufacturers, including the likes of Nestle, Tesco and Walmart. We found that 40% of these companies now have dedicated plant-based teams, focused solely on plant-based product development.

But not all companies are seizing the moment. Though Nestle has now devoted 10% of its R&D workforce to the development of plant-based products and Unilever recently invested $94m (£72.9m) into plant-based innovation, laggards such as Kraft Heinz and Costco have barely started their transition towards sustainable product portfolios. For long-term investors, the failure to adapt to key trends such as the rise of alternative proteins will be seen as a red flag.

Companies that fail to put in place strategies to capitalise on soaring demand for sustainable products will, ultimately, be left behind. As one responsible investment director at an asset manager has noted: “Investors will be watching closely to identify the leaders and laggards in this sustainable food transformation.”

For investors that are conscious of their exposure to animal agriculture risks (or, conversely, their exposure to the opportunities presented by the faux meat and dairy explosion), it is crucial to understand how the food companies they invest in are planning for the future.

FAIRR’s Sustainable Proteins Hub is a great place to start, enabling investors to compare company progress year-on-year and access exclusive data, individual company assessments, engagement questions and best practice examples.

In addition to assessing the make-up of their portfolios, investors should consider engaging with their material holdings to encourage them to seize the opportunities on offer.

And many are doing just that. Since it began in 2016, FAIRR’s Sustainable Proteins Engagement has grown ten-fold to include 88 investors managing more than $13trn (£10trn) in assets.

Just this year, three other asset managers have joined the engagement. This engagement is the first-of-its-kind to work with the world’s largest food companies to shift away from animal proteins and to diversify into more sustainable options.

But it is unlikely to be the last. Given current market trends, this is no longer purely a question of morality. For companies and investors alike, sustainable food is now very much a question of materiality.

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