May 4, 2021

What Drives Impact Investing in the Food and Agriculture Sector?

Investing in smallholder farmers and solutions to store carbon are just two ways impact investors are advancing social and environmental progress through the food and ag sector.

By: Stephanie Kater, Kate Collins

Profit and impact are often aligned in the food and agriculture sector. Global food production could rise by 60 percent from 2007 to 2050, driven by a growing population and shifting demand patterns. Meanwhile, depleting soil quality and climate change pose challenges for production in a sector that is by far the largest employer in the world.

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It’s no surprise, then, that The Bridgespan Group’s impact investing team has seen a lot of investments in food and agriculture. Since 2016, we’ve analyzed over 400 individual potential investments in privately held companies, mostly in private equity.[1] Over 10 percent of those companies have been in the food and agriculture sector, giving us a bird’s-eye view of themes emerging about the kinds of impact that are possible.

Big Investments for Smallholder Farmers

In such an enormous sector, where are the greatest opportunities for impact likely to be found? A prominent theme in our database is supporting the livelihoods of farmers and agricultural workers. The food and agriculture sector employs over one billion people worldwide; half are smallholders who farm plots to support their families. Thus, some of the strongest impact investments aim to engage smallholder farmers at scale. The farmers typically need reliable markets in which to sell their products; technical support; money for seeds, fertilizer, and other needs; and the ability to make the sometimes small but critical investments necessary to help them overcome the effects of rapidly shifting weather patterns and degrading soil.

Think of TPG Capital’s Rise Fund and its 2017 investment of $50 million in Dodla Dairy, a leading milk processor in India that sources from 250,000 farmers across 7,200 villages every day of the year. Dodla also works with farmers to help them gain access to needed inputs, such as affordable animal feed, veterinary services, and financing to develop their production capacity. Given that two out of every three Indians still live in rural villages, this is the kind of investment whose impact focuses on livelihoods for people who may only be earning a few dollars a day.

Another way to support smallholder farmers is contract farming, through which a company outsources production to smallholders, and in turn has an incentive to invest in farmers’ ongoing production and livelihoods. A body of agricultural and development economic research suggests that farmers who engage in these contract farming operations earn an average of 38 percent more than their peers who sell on the open market. This added income can improve a farm family’s quality of life, schooling, and nutritional status. Yet contract farming can be expensive to operate. Companies must often provide seeds, fertilizers, and hands-on agronomic support to farmers to ensure they can grow a uniform product across many farms. So it mainly works in industries where the margins are high enough to justify these extra services—such as coffee and tea. But we are seeing opportunities to extend contract farming to lower-margin crops by bringing down the cost of service delivery to farmers through peer-to-peer farmer training models and phone extension services.

Investments Heating Up for a Warming Planet

Increasingly, we are also seeing more impact investments at the intersection of food and climate change. Food production is threatened by the effects of climate change, making the sector a climate adaptation priority. And food and agriculture accounts for over a quarter of the world’s greenhouse gas emissions.

Climate scientists have argued that food and agriculture solutions are among the most promising ways to avert additional greenhouse gas emissions, because soil and wetlands are a major carbon sink, capable of storing vast amounts of carbon that might otherwise enter the atmosphere. Globally, croplands and other managed lands could absorb or reduce 242 gigatons of carbon, nearly seven years’ worth of global emissions.

The good news is that there are a wide range of investable solutions to improve carbon stores in soil—everything from low-tech changes, such as shifting to regenerative practices, to high-tech ones, such as novel biopesticides and modified seed coatings that draw carbon from the air and capture it in the soil. A number of companies are working on this issue. For example, Indigo Ag, a vertically integrated seed treatment producer, has launched Terraton, an initiative to pay farmers to sequester carbon in the soil through the sale of carbon credits. Indigo estimates Terraton has the potential to remove one trillion tons of carbon dioxide from the atmosphere.

To be sure, not all investments in food and agriculture have demonstrated impact. Helping smallholder farmers access faraway markets for perishable goods might not be worth the environmental tradeoffs, for example. And efforts to shift consumer behavior to produce socially desirable results have often failed. For example, opening a low-cost supermarket in a food desert results in little change to the consumption of fresh produce or other healthy foods. This may be because of how personal food consumption choices are: one estimate found that more than 90 percent of the difference in nutritional outcomes across income groups is driven by demand factors rather than supply. Government-backed food and nutrition programs (such as the Supplemental Nutrition Assistance Program or school lunches in the United States) might do more to improve health than market-based efforts to increase supply.

Indeed, we don’t mean to suggest the private sector is the source of all solutions. There are considerable roles for the public sector and nonprofits. For example, in contract farming, some farmers work too far below subsistence to be reached by contract farming companies that need a certain quality of production. Here, nonprofit organizations like the One Acre Fund could meet the needs of these smallholder farmers. In carbon storage, philanthropy plays a meaningful role to fund new technologies, such as work by the Salk Institute to store more carbon through turbo-charged seeds. Yet given the central role that food and agriculture play in the global economy and climate change, impact investors could also play a transformational role in developing and scaling solutions that support rural livelihoods and reduce greenhouse gas emissions.

Stephanie Kater and Kate Collins are partner and manager, respectively, at The Bridgespan Group, based in Boston.

[1] Our database is drawn from anonymized engagements for a dozen clients based on four continents of potential investments around the world. Information about specific companies mentioned in this article is drawn from public information.

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