Impact investing in agriculture

Impact investing refers to investments in projects, enterprises, or funds that achieve positive social or environmental outcomes while also generating financial returns for investors. While impact investing may seem similar to socially responsible investing (SRI), it differs in its primary goal: SRI attempts to avoid investing in companies that may cause harm, while impact investors actively seek out investments that produce beneficial outcomes, even if their returns are limited.

Historically, the lack of financial incentive presented an obstacle to impact-driven investments. As a result, most attempts to enact change or reduce harmful practices were limited to regulatory or philanthropic groups. However, by combining impact goals with commercial profit, impact investors are now able to pursue both societal benefits and financial returns without compromising on either. They can support emergent technologies, access new markets, and enhance their brand reputation while working toward sustainable development goals and demonstrating a commitment to positive change.

According to the Global Impact Investing Network (GIIN), food and agriculture is the most common sector for impact investment. This should come as no surprise as the agrifood industry has a major impact on global environmental and societal issues. Food production accounts for 26% of global greenhouse gas emissions, while agriculture uses up half of the world’s habitable land. Additionally, many contemporary farming practices are associated with high water consumption, environmental pollution, biodiversity decline, and deforestation. Beyond its environmental impact, food production also plays a significant role in addressing societal challenges such as food insecurity, food safety, and malnutrition.

Impact investing in agriculture takes many forms and offers a diverse array of investment opportunities, including funding or investing in technology-focused agribusinesses, organic farms, alternative protein producers, and more. Technology-driven agribusinesses that utilise methods such as precision farming, smart irrigation or controlled environment agriculture, offer the promise of enhanced productivity while minimising use of water and pesticides. Meanwhile, organic farms and alternative protein producers provide solutions that reduce environmental impact while taking advantage of changing consumer demands.

Impact investors often differ on expected financial returns. Some intentionally invest for below-market-rate returns in line with their strategic objectives, while others pursue market-competitive and market-beating returns. Surprisingly, 79% of investors have seen their investments meet or exceed their financial targets, while 88% of investors have met or exceeded their impact targets.

Impact investing in agriculture attracts a wide range of investors, including corporates, NGO’s, private foundations, banks, and even religious institutions. Private sector investors are supported and incentivised by governments and DFI’s, who provide proof of financial viability for investors as well as tax breaks and regulatory benefits to enhance their return on investment. This supportive environment has been further enriched by the introduction of the EU Green Bond Standard and the Sustainable Finance Disclosure Regulation (SFDR).

The EU Green Bond Standard serves as a framework to facilitate impact investing, and makes it an increasingly attractive option for investors, while SFDR guides capital toward sustainable finance by mandating ESG transparency among financial market participants. SFDR creates a more supportive environment for impact investing by enhancing investment transparency, which curbs greenwashing and false sustainability claims.

According to the SFDR’s classification system, a fund will either be classified as an article 6, 8 or 9 fund – depending on their characteristics and level of sustainability:

• Article 6: Funds without a sustainability scope.
• Article 8: Funds that promote environmental or social characteristics.
• Article 9: Funds that have sustainable investment as their objective.

In Q2 2023, Article 8 and 9 fund assets surged by 1.4%, exceeding EUR 5 trillion. Approximately 180 funds upgraded from Article 6 to Article 8, while only six downgraded from Article 9 to Article 8. The application of SFDR 9 classification will play an increasing role in food and agriculture impact investments being marketed within the EU.

Notable examples of successful impact investing in agriculture include the USAID-funded Kenya Climate Smart Agriculture Project, which has enhanced food productivity and implemented climate-smart practices in Kenya. Startups like Impossible Foods which have attracted significant venture capital from firms such as Google Ventures and Khosla Ventures for their plant-based meat alternatives. Aqua-Spark, a Dutch investment fund, which has enjoyed considerable success by investing in sustainable aquaculture businesses that offer both financial returns and ecological benefits. With an estimated $9.5 trillion in agrifood investment opportunities forecasted over the next decade, more successful investment cases will surely emerge.

At Farrelly Mitchell, we are committed to supporting sustainable and profitable business ventures. Our food and agribusiness experts provide a wide range of investment supports tailored to the specific goals of our clients. By combining key commercial recommendations with in-depth ESG knowledge, we can guide investors who are looking to make a positive change through green finance initiatives such as impact investing in agriculture.

Our commercial services include feasibility studies, market intelligence, and market entry strategies. We offer critical insights into the latest agtech, food security and sustainability initiatives – such as impact investing in agriculture. Our expertise also covers policies such as SFDR, where our regulatory experts can guide clients on navigating laws and making the most of government supports and interventions.