How Does Agtech Fit an Impact Investing Thesis?

Editor’s Note: I recently attended SOCAP, the largest conference for the impact investing community, and was excited to note a growing enthusiasm on the potential for food and agriculture technology to promote positive change in the world. The food and agriculture track has been a feature of the event for many years, attendees told me, but it was hard to ignore that the content during this track had a clear emphasis on technology. Panels ranged from how agtech is impacting the world’s smallholder farmers to innovation in food waste to the rise of alternative proteins. Based on my conversations with impact investors at this event and afterward, it became clear that there’s still a lot up for debate when it comes to evaluating the impact of ag technologies environmentally and socially. In the hope of making a start, I’ve laid out 5 key issues I think will be useful for impact investors to think about if they’re considering making an investment in agtech. Constructive comments below are appreciated.

What is Impact Investing?

Impact investing is the act of funding companies, organizations, and funds with the intention of generating positive social and environmental impact alongside financial returns, according to the Global Impact Investment Network (GIIN). GIIN is the industry’s leading association and database, which was established shortly after the term ‘impact investing’ was coined at the Rockefeller Foundation in 2007.

The impact space has gathered momentum in recent years driven by increasing global awareness of the world’s most pressing challenges, such as climate change, poor access to education and healthcare, and hunger, and the potential for the investing elite to deploy their capital for social or environmental good at the same time as generating financial returns.

Before the term was coined, impact investing took many forms. Development finance institutions and non-profit organizations have long supported microfinance initiatives in developing nations with the aim of supporting the world’s most vulnerable people, and they were soon followed by foundations, many of which contributed to the term’s current definition.

Other earlier forms that are still employed today by commercial investors include socially responsible investing (SRI) and environment, social and governance (ESG), which some investors have called Impact Investing 1.0 and 2.0 respectively. 

For the purposes of this article, we’re going to focus on GIIN’s definition of impact investing; it’s most relevant to the private investment market in which we operate because it centers around the need to generate a financial return.

Impact investors can come from all the main investor classes: institutional investors — including pension funds, sovereign wealth funds, and development finance institutions — family offices, foundations, high net worth individuals and other financial investors. And there is now a growing ecosystem of dedicated impact funds serving these clients.

The size of the impact investment market is hard to quantify, but GIIN offers a few metrics to look at including ImpactBase, its database of 2,068 investors and 375 funds that have a collective $25 billion under management. GIIN’s annual survey of the impact investment market with JPMorgan details some $15.6 billion of impact investment occurred in 2015 from the survey’s 157 respondents.

These impact investors seek measurable and positive social and/or environmental impact across many sectors from education to housing to healthcare to energy and agriculture.

Impact Investing in Agriculture

Essential for feeding every human on the planet, agriculture is an obvious sector of interest for impact investors. It represents 10% of global GDP, employs close to 40% of the global workforce, and accounts for 30% of the world’s greenhouse gas emissions, making it an easy target for both social and environmental goals.

In GIIN’s 2015 annual survey, the greatest number of survey respondents (56%) were invested in food & agriculture, although in dollar terms it was the 5th largest portion. Even more interestingly, the largest number of respondents (34%) said they planned to increase their allocation to food & agriculture over any other sector.

Nearly 60% of respondents were fund managers, with foundations the next-largest category at 13%. Other categories include banks (6%), development finance institutions, family offices, and pension funds/insurance companies (2% to 3% each).

It’s taken time for most established commercial impact funds globally — those investing other people’s money with the intention of making a competitive, market-rate return — to make any real headway in food and agriculture. “As in all things related to impact and investment, there’s been a lot more talk than action when it comes to food and agriculture,” said one single family office at SOCAP, the impact investment industry’s largest conference, where 2,500 attendees convened in San Francisco last month.

In recent years this is starting to change within agriculture and food.

An example among the established commercial impact funding community is Bridges Ventures, the UK specialist impact investment firm which launched in 2002 and has £800 million ($1 billion) under management across the UK and the US. The fund, which has focused on sectors closer to home like education, health, and property, today closed its first food and agriculture investment, into a UK plant-based foods company.

Bridges is also looking at agriculture technology, which has emerged as a new destination for investors looking to generate market rate venture capital returns while producing positive social and environmental impact.

As you’ll read in the Impact Issues in Agtech section below, there is a diverse group of agricultural technologies that stand to make a positive environmental impact, ranging from water-saving software to precision machinery and robotics to biological pesticides, while social impact can be found through smallholder farmer empowerment via a range of different technologies.

“MissionPoint Partners views agriculture as a key impact area to focus on given the resources that the ag system takes,” says Sarah Vared, partner at MissionPoint Partners, a multi-sector impact fund. “We broadly look at agtech through the lens of how to increase the resiliency of food systems.”

A growing number of agtech-specific commercial venture capital funds, such as Omnivore Partners, Closed Loop Capital, and Fifth Season Ventures, are also recognizing the potential for their portfolios to have a positive impact globally, while focusing on generating strong financial returns.

“Omnivore defines itself as a “financial first” impact fund,” says Mark Kahn, founding partner of Indian agtech fund Omnivore Partners. “Omnivore seeks to deliver market-rate returns for investors, comparable to other venture capital funds in India. At the same time, by investing exclusively in technologies for food, agriculture, and the rural economy, Omnivore impacts the lives of farmers and rural communities across India.”

And, given that a large number of agtech companies are incidentally generating positive social or environmental impact — in other words, they’re disrupting existing, unsustainable farming practices or improving farmer livelihoods — without making concessions to financial returns, agtech may grow to become a key destination for impact investors alongside other impact sectors.

“We are looking for companies that want to solve big problems, but we are pragmatic and realize that saving the world might not be the primary driver for a company’s founders, but an ancillary one,” says Brian Dawson, founding partner of Fifth Season Ventures, which invests with an impact lens.

How to Define Impact Investing in Agtech

There are many different ways that investors can make a social and/or environmental impact through investing in agriculture technology. In researching this story, it quickly became clear that there are no set guidelines or rules for either measuring or defining impact investing in agtech.

The industry has yet to define the issues that relate to impact in agriculture technology, and put together criteria to evaluate it. We take a stab in the next section at a list of leading issues that impact investors can and do look at currently.

Currently, there are a few guidelines and metrics that investors can use to help define the impact of their investments. GIIN’s IRIS metrics and a B-Corporation certification are two of the most-used examples, and both were supported by the Rockefeller Foundation, where the term impact investing was coined.

IRIS has a wide range of agriculture metrics that could help inform an investor about which themes to pursue in her portfolio, but it’s not exhaustive across the sector. And a B-Corporation certificate is more generalized around the operations of a company, such as its governance, internal carbon footprint, treatment of workers or community engagement.

The existing metrics can also be complicated, time-consuming and costly for investors to follow, as many investors have noted. At SOCAP this year, for example, many of the panel discussions at the conference focused on the need to try and simplify impact investing metrics if the market is going to continue to grow.

To make impact investing more accessible and easy to understand, speakers highlighted one way to do that starts with every investor defining which issues matter to them most, which problems they want to solve, and what outcomes they want to see.

From here, they can create their own impact thesis and narrative, and then use the metrics for further guidance.

“There are areas we want to target that might not have an IRIS standard such as food waste prevented by technology, so that will be a metric we need to do on our own and develop a framework as we go,” said Ian DeWeerdt from Fifth Season Ventures.

Closed Loop Capital, a family office-funded food and agriculture venture fund, developed its definition of impact based on the future potential of its investments. Closed Loop seeks venture level returns with an impact lens.

“If we were to measure the amount of water, for example, that one of our emerging enterprise portfolio companies has saved while we are invested, will we be driving the change we seek?  Probably not, but we want to know we’ve set a good foundation so when that company scales through acquisition or IPO, it will have meaningful impact,” says James Macon, partner of the firm.

“Impact is in our DNA; every deal we look at passes through an impact filter before even landing in our pipeline,” he adds. “From there, it’s all about building outstanding, impactful companies.”

Many agtech funds have clear missions and theses on how agtech can solve social and environmental issues across the global food chain, but they do not necessarily want to subscribe to the impact label as they’re concerned it implies weaker financial returns (which it shouldn’t, according to 59% of GIIN survey respondents who seek market-rate returns). However, their process and approach to making investments can largely reflect what impact-dedicated funds do.

1955 Capital is a good example. Founded by ex-Khosla partner Andrew Chung, the venture capital fund raised $200 million to give investors market-rate venture capital returns, but is doing so by targeting companies and technologies that can solve world challenges across the energy, environment, food, agriculture, health, and education sectors. It’s also focused on exporting tech from the US and Europe to emerging Asian markets in most need, particularly China.

S2G Ventures is another example. “We are focused on sustainability, health and decentralization,” Sanjeev Krishnan, partner at the firm told us last year. Many of the firm’s investments have impactful metrics such as Terramera, the biopesticide company that’s aiming to reduce the amount of synthetic chemical applied to land, or Beyond Meat, which is aiming to replace animal-based meat with a plant-based alternative.

Another sustainability-focused agtech fund said: “Our fund is not designated as an impact fund—we are a thesis-driven ag fund. That being said, most of the investments that we have made could be classified as “impact,” but this is not the core thesis of the fund.”

Impact Issues in Agtech

Here are some key issues where ag technologies stand to make an impact that can help investors develop theses around the sector. There is a lot more we could cover here, such as soil health, animal welfare, food distribution, and we could cover all with more granularity, but in the interest of space and simplicity, we’ve started with the five below.

For each area, we’ve included a few examples of ag technology companies we believe are contributing positive impact under each section; some of these are AgFunder alumni companies. This list is not exhaustive; there are many other categories of agtech that stand to have an impact and many other companies beyond those listed below that are tackling these issues.

1. CO2 EMISSIONS

Agriculture contributes 30% of the world’s total greenhouse gas emissions, more than any other industry, and could increase by another 30% by 2050 without greater efforts to reduce them.

Between 2001 and 2011 enteric fermentation by livestock was the greatest contributor to agricultural emissions (40%), followed by manure left on pasture (16%), synthetic fertilizers (13%), rice cultivation (10%), manure management (7%) and burning of savanna (5%). The use of synthetic fertilizers is the fastest-growing emissions source in agriculture, having increased some 37% since 2001. You can find a breakdown of the carbon footprint of all components of agriculture here.

What technologies can positively impact agriculture’s carbon footprint?

a. Digital precision agriculture and big data technologies can increase the efficiency of inputs, including chemical fertilizers, pesticides, and water, and reduce their use. They aim to do so by providing farmers with data-driven recommendations on when to apply inputs, or by enabling farmers to apply inputs more precisely for more efficacy.

• Farmers Edge is a global precision agriculture company combining software, hardware, and agronomy to improve a farm’s efficiency, sustainability, and productivity. In addition to bringing on-farm efficiencies, which reduce input costs, Farmers Edge has incorporated carbon offset tracking that rewards farmers’ best practices in no-till farming. It also helps farmers manage their nitrogen fertilizer applications to ensure that less nitrogen is lost to the environment.
• Adapt-N is a software tool for agronomists that combines data around soil types and weather with crop modeling and field management to produce farmers with detailed fertilizer prescriptions, to avoid overuse and wastage.
• AgDNA automates data collection off farm equipment, allowing farmers greater management and prescriptive control over their farms. With sub-field level data, farmers can limit input costs and control exactly how much fertilizer gets applied to any point in the field.

b. Precision machinery and robotics enable farmers to be more precise in the application of inputs to avoid wastage or overapplication, and in some cases uses less energy for power.

• Blue River Technologies has built a robot that uses computer vision and machine learning to observe and identify plants in need of chemical treatment, weeding or thinning, and execute what’s needed in real time. The company claims that this precision application of inputs — in comparison to the broad-based application of fertilizer and chemicals that traditional equipment allows — will reduce the amount of chemicals used in agriculture by 90 percent.
• The Autonomous Tractor Company (ATC) is developing a self-driving tractor kit for transforming regular tractors into self-driving tractors that can run 24/7, shortening the harvesting window to minimize harvest loss and weather risk. As part of the conversion package, ATC has also developed a diesel-electric drive-train that is 25% more fuel efficient.

c. Biological input technologies aim to replace or severely reduce the amount of synthetic fertilizer or pesticide applied with microbial and biological alternatives. It can also reduce the potential for water contamination from runoff that’s associated with synthetic counterparts.

• Terramera enhances the efficacy of biopesticides with a molecular delivery system that coats the bioactive materials of a biopesticide, enabling it to perform more efficiently by “shuttling” it into a pest’s cells. It can increase the efficiency of biopesticides on the market by three to five times, according to the company. BiOWiSH is doing a similar job but in improving the efficacy of fertilizers, aiming to reduce the need for synthetic chemicals.
• AgBiome is using microbiome research to manufacture biofungicides and other bio-control products that can be stored for long periods of time or at high temperatures to replace synthetic alternatives completely.
• Anuvia manufactures high-efficiency, multi-nutrient, slow-release specialty fertilizer products which use a natural binding mechanism to create homogenous products that require no artificial polymers or coatings.

d. Alternative protein technologies aim to replace or dramatically reduce the world’s reliance on animal agriculture for food products by manufacturing protein-rich, plant-based or cultured alternatives. Livestock is agriculture’s biggest carbon emitter, by some estimates accounting for nearly 50% of total emissions in the sector. Enteric fermentation alone — when methane is produced by livestock during digestion and released via belches — accounted in 2011 for 39% of the sector’s total GHG outputs.

• Memphis Meats is culturing meat in a laboratory in a nutrient-rich environment consisting of oxygen, minerals, and peptides produced in-house. The company acquires cells for reproduction from living animals and claims to use fewer inputs and resources than are required to grow meat from animals.
• Perfect Day Foods (formerly Muufri) is manufacturing molecularly-identical milk in a laboratory using yeast and fermentation techniques.
• Impossible Foods makes a beef burger alternative using proteins which aim to completely mimic the cooking process and taste of a beef burger, complete with “blood”.

2. CLIMATE CHANGE ADAPTATION

The world’s environment is becoming increasingly volatile and inhospitable to a variety of species worldwide, due to increasing carbon dioxide emissions, global warming, and general climate change. The agriculture sector and food chain need to adapt and prosper in this changing environment and climate, and this is what’s known as climate adaptation.

Since the year 1750, nitrous oxide levels have risen 20%, and extreme weather events have caused significant yield reductions for farmers globally. By 2050 climate change could reduce irrigated wheat yields by 13%, irrigated rice by 15% and African maize by 10% to 20%. Viable farmland is decreasing too; abandoned farmland represents a quarter of the two billion hectares of degraded, once-productive land worldwide and we continue to degrade another 12 million hectares of land every year. The world’s oceans have become 30% more acidic since pre-industrial times.

Investment in climate adaptation has lagged climate mitigation, but this is starting to change.

Climate adaptation will cost between $70 billion and $100 billion a year by 2050, according to the World Bank.

Which technologies can help farmers adapt to a changing climate?

a. Weather data and information technologies can help farmers prepare for extreme weather events and plan their activities accordingly. Eighty-five percent of the world’s 580 million farmers are responsible for feeding two-thirds of the world’s population. These farmers are particularly at risk to weather events that can cut yields by up to one third, but have little access to technology.

• Understory is a weather sensor hardware and hyper-local data network company, which can detect weather events at the earth’s surface instead of in the atmosphere like traditional weather stations, giving farmers hyperlocal weather reports.
• Colorado-based aWhere uses satellite and other remote sensing data to generate farmer-level recommendations and alerts direct to farmers. aWhere can let farmers know when to plant and harvest, thereby minimizing yield loss due to climatic events.
• Skymet Weather Services has a network of automatic weather stations (AWS) in India providing farmers with hyperlocal forecasts to help with decision-making. It also enables crop insurance claim settlements across India.

b. Genetic technologies can produce crops and livestock that can grow in harsh, inhospitable environments. Demand for animal protein is estimated to grow by nearly 73% in the next 35 years. At the same time, nearly 82% of the world’s 1.2 billion cattle can be found in developing countries where heat tolerance is considered to be one of the most important adaptive aspects for cattle. They also reduce the need to clear rainforest and other ecosystems for grazing.

• Caribou Biosciences is using the CRISPR-Cas 9 gene editing tool to produce drought-tolerant traits as a way to protect plant health, increase crop yields and develop healthier crops in harsh climates.

c. Biological seed treatments and soil amendments can be applied to crops to help farmers grow in severe environments alongside or replacing existing, synthetic enhancement and protectant inputs. Technologies in this segment today are particularly focused on aiding growth in hot climates at risk of water shortages. These are also a good tool to prevent the degradation of soil health.

• Adaptive Symbiotic Technologies (AST) is a non-GMO biotech company producing a natural formula applied to seeds (a “seed treatment”) that can help a variety of crops thrive in the face of abiotic stress such as drought, temperature stress, and salty soils.
• Indigo is using microbiome research to manufacture microbial seed coatings for cotton crops to promote water efficiency in the crop. It is expanding to other crops in the near future.

d. Indoor agriculture provides an alternative to outdoor-grown food, often resulting in the use of less water and fewer, if any, pesticides. Indoor farms can be located closer to their end market, also reducing Co2 emissions related to transportation and increasing inner-cities’ access to food. And being fully enclosed indoors, they can largely control their environment and avoid the weather risk in farming.

• Large indoor vertical farms aim to build facilities that can grow the equivalent of multiples of acres of food in one facility, much like a factory. In fact, they are called plant factories in Asia. One company, Japanese-based Spread built the world’s largest plant factory that produces 21,000 heads of lettuce per day indoors, highly automated, and their next factory plans to take the technology to the next level fully automating much of the process from seed to harvest. TruLeaf, based in Nova Scotia, Canada, builds and operates vertical farms with an emphasis on maximizing the nutritional value of the plant. Aerofarms has raised large sums for its New Jersey-based facility that utilizes aeroponic technology applying water directly to plant roots.
• Container farms are small-scale models of larger indoor vertical farms built inside a used ocean freight container, typically either 20ft or 40ft in size. There are many startups building companies around this concept such as Freight Farms, Modular Farms, and LocalRoots to name a few. And recently Kimbal Musk, brother of Elon, launched a new company Square Roots that’s training young food and ag entrepreneurs in container farms.

3. WATER

Some 1.1 billion people worldwide lack access to water, and a total of 2.7 billion find water scarce for at least one month of the year. Agriculture uses 70% of the world’s water supply, some 2.8k km square per year and irrigation is set to put an extra 19% of demand on the world’s water supply by 2050. Agriculture is also the leading source of water pollution in the US. Not only is contamination an issue for drinking water, but also in the ability of farmers to irrigate their land and produce food. This will be a particular problem for developing nations, where around 80% of the world’s irrigated land is located. The water crisis is the #1 global risk based on impact to society as a measure of devastation, as announced by the World Economic Forum in January 2015.

Which technologies focus on conserving and optimizing the use of water?

Many of the above-mentioned technologies can help the agriculture industry to use less water and reduce the potential for contamination, but here are a few more specific to the water crisis.

a. Water management technologies can help farmers to monitor and measure their water usage. It can also help them to effectively return water to the system for others to use.

• Colorado-based SWIIM Systems gives farmers the ability to monetize the water rights on their land, thereby creating a market-based solution that incentivizes better water management practices. A typical farmer can expect to earn $250/acre in new revenue while using 25% less water using SWIIM, according to the company.

b. Irrigation technologies can help farmers to maximize the potential of the water they’re using by optimizing the time and amount that’s applied to crops using a variety of data inputs.

• AgSmarts is a precision irrigation technology that monitors soil moisture and provides equipment automation to optimize water use on the farm. AgSmarts claims farmers can save up to 25% water and 25% on their irrigation-energy costs.
• Hortau’s irrigation management system captures and analyzes data to inform farmers on where and when they need to water their crops.
• PowWow’s software helps manage daily water use by fitting into existing equipment with analytics and alerting farmers to problems in the field in time to avoid crop loss from issues like pump failures.

4. FOOD WASTE

The US spends over $218 billion, or 1.3 percent of GDP, growing, processing, transporting, and disposing of food that is never eaten, according to ReFED. That translates to around 63 million tons of food waste, which is 40 percent of all food grown, including food that’s left unharvested on farms. The figures are similar for developing nations such as Africa, where the FAO estimates that the continent loses enough food annually to feed 300 million, or nearly a third of all of Sub-Saharan Africa. The reasons for food waste differ from region to region. In developed countries, it’s largely wasted at the consumer end whereas in developing nations it’s usually due to infrastructural problems such as a lack of refrigeration and cold chain technologies as well as unreliable transportation and communication channels.

Which technologies can help to reduce, avoid or repurpose waste?

a. Post-harvest technologies can help to reduce food waste by providing food companies with more information about the state of their food throughout the food chain, by increasing the shelf-life of produce through packaging and transport, and by detecting pathogens early enough to save produce.

• BluWrap’s fuel cell technology can extend the shelf life of proteins beyond 40 days by reducing and monitoring oxygen levels in refrigerated shipping containers.
• Food Freshness Technology manufactures sheets that are included in boxes of fruit and vegetable and act as sponges to ethylene, a gas given off after the fruit has been picked. There are other ethylene removers on the market including AgroFresh, BluApple, and Hazel Technologies.

b. Waste repurposing technologies make the most out of wasted food by converting it into biogas, fertilizer and more.

• California Safe Soil (CSS) is converting fresh food waste from grocery stores and converting it into a high-value fertilizer to return the nutrients back to the soil. Soils treated with CSS show improved soil health, require less irrigation and show yield increases of up to 25%.
• Full Harvest, Cerplus, and Imperfect Produce are some examples of companies trying to utilize the produce rejected by large buyers like grocery stores. This produce can be sold directly to consumers, chefs as ingredients, or as inputs into end products like juice companies.

5. FARMER WELFARE AND SMALLHOLDER EMPOWERMENT

Agriculture employs a third of the world’s workforce, a figure that is almost double in Sub-Saharan Africa where over 60% of the workforce is employed in agriculture. Child labor in agriculture is also very high, at around 60% of all child laborers, and more than two-thirds of them are unpaid family members. “The agricultural sector has the highest incidence of both unpaid child labor and early entry into the workforce, which often occurs between the ages of five and seven,” reads an FAO report. A limited supply of adult labor and access to affordable agricultural technology is a key driver of this, alongside a lack of access to quality education.

In this context, a wide variety of technologies will have an impact in developing countries. Many impact investors focus on providing access to the simplest of ag technologies, such as seed, fertilizer, and pesticide, while there is also a huge demand for digital technologies, such as those providing farmers with information about the weather, markets and pricing like Skymet Weather Services and aWhere. Limited connectivity and power can be a challenge here, but there are startups like Gotham Analytics that are providing off-grid network solutions. Access to affordable machinery to help bridge the adult labor gap is another focus area for impact investors; HelloTractor and SunCulture are both providing asset financing models to purchase tractors and solar-powered irrigation kits respectively. There is a lot of potential for genetic technologies to help smallholder farmers grow more or have improved resilience in the face of growing climate challenges. Crop Enhancement has created a water-resistant pesticide for cocoa farmers in the tropics that suffer from heavy rainfall, for example. Food logistics and cold chain technologies are also very impactful for smallholder farmers such as Ecozen, with its solar-powered micro cold storage units.

There is also potential for agtech to improve farmer livelihoods in developed countries. Distribution technologies can help farmers to make better margins on their produce, while various of the on-farm technologies mentioned above can help an ageing farmer population struggling to enlist the younger generation. Green Collar Foods is helping create a new type of farmer; inner-city indoor farmers, empowering people that have struggled in other parts of their lives.

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