Fossil fuels, food, and farming - investors need to look through the same lens

Investors know that the economy is not going to stay the same. When stock market indices were introduced in the 1800s, only two types of equities were tracked: railroads and industrials. By 1917 the largest US sector was steel, by 1967 it was oil and gas, and in 2017 it was technology.

Picking and managing a portfolio of winning stocks means staying up to speed as new technology, legislation, consumer demand and global policy drive markets forward.  

This is especially true in today’s environment of rapid change as the shift towards a more sustainable economy – one that meets the needs of the present without compromising the ability of future generations to meet their own needs - gathers pace.

When we talk about a sustainable economy, we don’t just mean clean energy and energy efficient technology. Just as investors need to ensure their portfolios transition away from expensive fossil fuels and towards new opportunities in wind, solar, batteries and insulation, so too do they need to address their exposure to other parts of the economy set to evolve.

It is vital, for example, that our food and agriculture system shift away from a reliance on practices like deforestation, which causes 15% of global climate emissions and is the number one cause of biodiversity loss. Three quarters of deforestation is driven by agriculture, mostly from the beef, soy, palm oil and logging industries. These sectors need to shift to more sustainable practices such as sustainable agroforestry, where farming incorporates trees or woody vegetation, expanding soy production on degraded pastureland, and diversifying product lines to include meat-free alternatives.

National policies to halt nature loss and deforestation across the world's biggest economies have doubled to 22 over the last year and pose a serious risk to unprepared investors. For example, the US Forest Act seeks to outlaw products linked to deforestation, and the European Union Deforestation Regulation (EUDR) aims to guarantee that products EU citizens consume do not contribute to deforestation.  

Investors need to get serious about backing the businesses in the food and agriculture sectors that are up to speed with, and adapting to, the changes ahead.

But right now, that’s not happening. Far more money is going into companies driving nature destruction than adapting to find new solutions. Since 2015, banks and private finance have channelled over half a trillion dollars to the world’s largest 55 industrial livestock companies, causing unsustainable increases in global meat and dairy production.

This trend is at odds with the rising risks to portfolios. Deforestation is already hitting companies' bottom lines, and the food and agriculture sector worldwide could face losses equal to those of the 2008 financial crash if it fails to shift towards zero-deforestation practices.

Beef companies are already being affected by worsening climate impacts, with US beef prices last year at a record high as years of drought made cattle more expensive to raise. Indeed, the beef sectors woes are very much in limelight at present, with the world’s biggest meatpacker, JBS - a company attempting to IPO on NYSE - under heavy scrutiny as the state of New York sues the company for misleading customers over its climate goals.

In 2020, exports from JBS were linked to the clearance of 232,000 ha of forests and other ecosystems - almost three times the size of New York City, and the company is associated with human rights abuses, land grabs and corruption scandals. JBS recently published much weaker-than-expected results as cattle supply restrictions in the United States weighed on business.

Investors with portfolio exposure to JBS should be concerned. JBS’s listing plans include issuing "dual class" shares (often seen as a governance risk) with unequal voting rights which could effectively eliminate the influence of minority shareholders. In JBS’s case they could result in the owners (the Batista family) alone having a meaningful say over the company’s future course – which needs to see a massive correction if it is to keep pace with global legislation and changing consumer demand.

It’s crucial that investors stay attuned to the kind of risks associated with a stock like JBS and instead choose to invest in companies that are leading the charge towards sustainable agriculture.

Transitioning portfolios toward investments that support a healthy climate and food system will not only reduce risks, but also bring investment opportunities - such as in food  and nature technology and reforestation. Global investment opportunities in sustainable land management are likely to increase fourfold from US$63 billion in 2025 to US$241 billion by 2050.

We don’t know what the economy will look like in 2067, but we can be fairly sure that companies like JBS, and others failing to shift towards a sustainable climate and food system, will get left behind. It’s up to investors and portfolio managers to ensure they are positioned to benefit, not lose, from the next big market transitions.

Annie Sanders is director of shareholder advocacy at Green Century Capital Management.