2021 saw a series of seminal events that have resulted in structural changes to capital markets. The parallel crises of Covid-19 and climate change have shifted perspectives and priorities, and as a result, we are witnessing market events not seen in our lifetimes.
Our latest research report, 2021 Market Review and the Implications for Food and Ag Investing, explores the public and private market trends we saw in 2021 and considers how they will impact the food and agriculture industry going into 2022. We are watching three core shifts going into 2022.
ESG is now required by the markets and will propel the agrifoodtech sector.
We are living in a sea change for capital markets with respect to the value placed on a company’s Environmental, Social, and Governance objectives. In response to Covid and climate change, investors are changing how they allocate capital. Three quarters of investors in a 2020 survey said it was very important to measure the success of sustainability initiatives.
The expectation to have an ESG strategy is coming from all directions. Every board room is contemplating their strategies, because of shareholders and lenders. The central banks and regulators are building climate resilient lending practices which will have an impact on capital markets. It is becoming increasingly difficult to go public without an ESG story and firms must seriously consider environmental reporting well in advance of their offering. Private companies hoping to align with public companies as vendors or partners may be expected to meet ESG requirements.
While private markets are not subject to the same reporting or disclosure frameworks as their public counterparts, we are seeing private investors, funds and companies adapting to get ahead of ESG regulation and position themselves to operate in a new regulatory environment. Companies looking to secure VC funding would want to proactively scope ESG engagements to ensure they meet the criteria for investors. Companies that took ESG factors into consideration saw an aggregate growth of $30T in 2018.
Innovation in the food and agriculture sector is substantially being shaped by the move towards higher ESG standards. Technologies that support ESG goals as well as enable better reporting are poised to excel as private and public markets increasingly value compelling environmental and social outcomes. As the agrifoodtech sector becomes increasingly sustainability oriented due to global trends as well as sector specific pressures, it stands to benefit from and become a target for ESG investing.
Funding for climate-tech innovation will grow through 2022.
Throughout 2021, we researched past pandemics to formulate a perspective on what the implications of the Covid pandemic would be for capital markets and specifically food and agriculture. Our prediction was that it would result in an age of innovation and positive structural changes in the sector.
Looking at the market activity in 2021 shows that this was indeed the case. The vast majority of value creation came from companies focused on innovation. Nineteen companies alone drove half of the market’s $7.6 trillion pandemic gain, and many of them were named the most innovative of 2020.
Despite general uncertainty from an ongoing pandemic well into its second year, the VC market is more active than ever. As of October 2021, there are 800 unicorns globally worth more than $2.6 trillion and YTD mega-rounds have nearly doubled 2020 mega-round activity. Unicorns and mega-deals are now, quite literally, average for the VC market. The increase in venture activity is in turn fueling further innovation. We are seeing companies lose talent to entrepreneurship, creating even more opportunity for VC investment.
Public market success stories as well as a deeper appreciation for the urgency of climate solutions have resulted in the climate-tech sector being a major focus of the increase in VC activity. 1,000 unique investors have collectively participated in funding ~600 venture capital climate tech deals since Q2 2020. As of June 2021, global investors have closed as many climate tech funds as in the prior five years combined. The rate of VC investment in climate tech outpaced rate of global VC funding overall from 2013 – 2020 by 5x.
Innovative climate-tech and tough-tech companies such as Rivian and Tesla that are not yet profitable are being valued by public markets because the market wants to fund innovation, particularly in the climate category. We believe the acceleration of activity in innovation funded by public and private markets will continue in 2022, particularly in climate and tough tech categories.
Investment in the agrifoodtech sector will continue to break records, propelled by the convergence of rising interest in climate-tech and the Covid-19 pandemic. Agrifoodtech startups globally raised $24 billion in the first half of 2021 – getting very close to the total for all of 2020, which broke records with around $30 billion in funding for the category. The dire consequences of unmitigated, agriculture-induced climate change and disrupted food supply change necessitate extensive and timely agrifoodtech investment.
Continued supply chain issues will create food inflation through 2023.
We are currently experiencing an uneven and unstructured recovery from Covid. This chaotic recovery has led to inflation and supply chain issues. Supply chain disruptions are in turn, further spurring food inflation that is most acutely impacting the poor and most vulnerable. According to S2G research, nearly 50% of brands have increased prices in 2021, compared to 10% of brands on average in a typical year. In fact, some companies are pushing off product SKUs until 2023 due to shortages in input.
Supply chain issues will continue to put pressure on companies, especially in the first half of next year, and this level of inflation will stay for at least 18 to 24 months. The cycle of hiccups and shutdowns might become the new normal, but it will be less tumultuous in 2022 than
But this supply chain imbalance and volatility will also create a window of opportunity for innovation in a number of areas. Supply chains disruptions and shortages will necessitate creativity and new technologies, many of which will also propel sustainability efforts. Inflation is driving food insecurity in a number of countries which is forcing them to devise new solutions and fund innovation. These conditions have fostered a momentous opportunity for companies developing technologies for alternative and resource efficient methods of food production to partner with countries who are looking to bolster their food security.
The Coming Food Transition: The Consumer, the Climate and Capital Markets
The Energy Transition was a multi-decade effort of over $4 trillion of capital formation, the birth of new industries and the destruction of equity value and stranded assets across the value chain. That transition is scaling and at the precipice of mainstreaming the energy industry.
Food is still in its infancy but aided by seismic tailwinds: massive demographic change spurring new consumer demand, significant advancements in the biology, chemistry and physics of food production to create new choices and now capital markets, anchored by ESG, that want to fund high growth, disruptive companies that both challenge and change incumbent behavior - just like many are doing in transportation, power generation and many sectors of the energy transition.
It is an exciting time for entrepreneurs and consumers alike - we are transitioning the food system to be more climate smart and healthy. It may happen quicker than we think but we should be in it for the marathon.