One of the most challenging sectors of the market for ESG investors today is the meat and dairy industry, which is up against a wide range of environmental and social hurdles. By most measures, plant-based alternatives offer a sustainable alternative. But even the most environmentally friendly companies in this space and in other markets can benefit from the watchful eye of ESG investors.
If you’re thinking of investing in alternative proteins, here are five things you should know.
- Suppliers Need Transparency
Beyond Meat has earned widespread name recognition since introducing its plant-based Beyond Burger in 2016. But the company recently received an ESG score of 46.7 from Sustainalytics, indicating severe risk. Take this rating with a grain of salt. Apparently, the main problem is that Beyond Meat does not release enough detailed information about its supply and distribution practices. Other upstarts are likely to experience similar growing pains as they develop more robust reporting systems.
- Beware of “Theme Washing”
As Morningstar recently pointed, some mutual funds and indexes that focus on ESG themes like alternative proteins are made up of companies that earn only a small fraction of their revenues from these themes—a practice called “theme washing.” Morningstar’s own Global Food Innovation Index has a threshold of just 10%. But a newer offering, the actively managed VegTech Plant-based Innovation & Climate ETF, invests in companies with at least 50% of their revenues or assets in plant-based products. As always, it’s important to know what you own.
- Investor Appetite Is Strong
Beyond Meat’s share price dropped 75% in the first nine months of 2022, which CNN attributed to concerns that the market has peaked. But keep in mind that meat alternatives command a premium in the supermarket, where prices are rising at their fastest rate in four decades. Despite market volatility and sky-high inflation, alternative protein companies continue to gain market share. They also attracted $1.7 billion in venture capital in the first half of 2022 and $5 billion from all investors in 2021.
- The Competition Is Fierce
The market for alternative proteins is highly fragmented. Beyond Meat, Impossible Foods and other independent players are competing against established food giants like Kellogg’s/MorningStar Farms (Incogmeato brand), ConAgra (Gardein Ultimate Burger), and Kraft Heinz (Boca burger). Kellogg’s plans to spin off its plant-based food operations into a new company called Plant Co. and Impossible Foods is considering an IPO. As the market matures, consolidation is likely.
- Plants Are Just the Beginning
In addition to plant-based proteins, alternatives to farm-raised meats include fungus/mushroom proteins, lab-grown meat, and algae/fermented proteins. The Good Food Institute maintains an online database of more than 1,100 alternative protein companies. It also joined with FAIRR to create two new ESG grading systems—one for pure-play alternative protein companies and another for diversified firms.