In focus

Podcast: Re-imagining our food and water system

James Williams (JW): Hello everybody, and welcome back to the Schroders ‘Making An Impact’ podcast. In today's episode, we will be talking about our food and water system, why the current system is not sustainable and needs to change, and what this could mean for investors.

I'm James Williams, Head of Product and Content Marketing for Asia Pacific, and I'm delighted to be joined by my colleague Yashica Reddy, who's an Investment Director on our global equities desk, and specialist in thematic investing. Welcome to the podcast, Yashica.

Yashica Reddy (YR): Thank you, James. It's such a pleasure to be here.

JW: So let's dive right into this hugely important topic. Our food and water system is under a huge amount of pressure. Yashica, can you explain what the actual challenges are that we face today and the magnitude of these challenges?

YR: You're absolutely right, James. Our global food and water system is experiencing a confluence of different pressures, and this is only going to accelerate over the next 10, 20 and 30 years. So on the one hand, we have a global population that will increase from nearly 7 billion today to nearly 10 billion by 2050, and as this population starts to grow and people become wealthier, we'll start to see an increase in demand for a more varied and high quality diet, and it will start to place additional strains on global resources. But at the same time, from a supply perspective, we will also see greater pressures on things like fresh water, on arable land, on natural resources. And this is only being aggravated by unprecedented weather patterns as the effects of climate change become more and more apparent.

So, to put it very simply, our current food and water system is absolutely not sustainable, and in order to provide food security, we need to produce 70% more food and water while reducing our carbon emissions by two thirds from 2010 levels. And we have to do all of this while using 70% less resources. So no mean feat.

JW: So significant change clearly does need to happen and has already started to happen. Can you provide a brief overview of the structural shifts taking place? And maybe the key drivers that are enabling these changes?

YR: Yes, as you mentioned, some of these changes are happening. Three key structural changes that I'd like to touch on that will enable this transition, enable the step change to happen. Now, the first structural shift that needs to happen is that we have to become a lot more efficient in how we produce food. We need to essentially bridge that yield gap. We need to nearly double agricultural yield, but we also have to do this while significantly reducing water and resource intensity in order to ensure food security. For example, in Singapore, 90% of food is imported. But plans are in place to produce 30% of that food locally by 2030, which I think is a really good initiative by really restoring that agriculture back into cities. Now, governments and farmers, they're all embracing technology, embracing innovation to really improve that quality, improve that efficiency. And this is a good example, I think, of where vertically stacked indoor farming will enable this change to take place.

The second shift, it's not just about how we produce food, it's also very much about what we eat. We need to fundamentally change global diets. And by doing that, we actually begin to solve some of the other sustainability challenges, things like biodiversity loss, pollution, waste or emissions. And here the consumer plays a very, very central role.

The third shift is that we need to reduce our waste and emissions. If this part is left unchecked, it will use the world's entire carbon budget by 2050. The urgency of the change means that government action will accelerate the change to the food and water system. And we're increasingly seeing initiatives, not just in Europe, but also in countries like Malaysia working with farmers, working with wholesalers to reduce post-harvest food loss. India has imposed a ban on single use plastics to tackle increasing levels of plastic pollution. China, again, is increasingly focusing on tackling the waste problems.

JW: And Yashica, how are these challenges and these structural shifts that you've outlined to us opening up new opportunities for both companies and investors? Could you walk us through where these opportunities lie and how investors can actually access these opportunities?

YR: That is a really good question, James. I would say there are two parts to the investment opportunity for sustainable food and water. I would say the first one is the long term structural drivers for companies in the food and water value chain. And two is cyclical opportunity we're seeing from higher agricultural prices and the huge focus on food security. Now, if I come back to my first point. As I said, we will see a huge step change in the coming decades across the entire food and water value chain. And this would require a huge reallocation of capital, both in terms of sunk infrastructure CapEx, as well as a shift in OpEx. If you look at the estimates by the FAO and OECD, they estimate that about 30 trillion dollars of capital expenditure would need to be made between now and 2050 to mitigate essentially the climate impact of agriculture, and meet the world's water requirements. So this will create new growth drivers for companies that can successfully allocate capital in a disciplined fashion, and those companies that can make a decent return on that capital.

The second point is the recent food inflation and disruption from the Ukraine crisis has really accelerated trends that were already very latent in the system. A focus on food security and the need for diversification of crops has become very, very important. We're also seeing higher food prices, and our commodity prices will be a key driver in incentivising a huge amount of this capital that we need to be allocated to solve the food and water problem. So there are opportunities across the entire food and water value chain, and that is one of the reasons why we think we need to take one, value chain approach to investing, but two, an active approach to investing in the theme. There's a huge depth to the value chain, and our value chain from agriculture inputs to agriculture equipment, to companies that are within food production and processing, things like packaging, distribution, recycling and water management. And having this flexibility really helps to navigate and move around over time, depending on where risk reward looks best.

 JW: Thanks Yashica for your time today, and for your great insights. This is obviously a hugely important topic, and I feel we've only just skimmed the surface of this. But I did want to thank you. For our audience who are hungry to learn more about this topic, do visit the Schroders website and search sustainable food and water. So with that, thanks Yashica.

YR: Thank you, James. Such a pleasure to be here to talk about such a topical topic. Thank you.

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