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Sustainable Investing

How Ecolab, IFF Are Shaping the Future of Food

These companies may not be food producers, but they impact the way we eat.

Editor's Note: This article is based on the 2022 edition of Morningstar's Best Companies to Own. Read about our selection methodology here.

The future of food is more than what's in your fridge or grocery aisles.

Consumers are looking for more sustainable and healthier food options than ever before, accelerating the transformation of food production. This transformation creates investment opportunities. While companies like Beyond Meat BYND and Oatly OTLY have made a splash in the industry, it's worth looking at companies that support the evolving industry without producing food themselves.

Consumer preference isn't the only factor that's driving innovation. Food producers face the dilemma of making more with fewer resources. Global population growth is on track to seriously constrain food production, and we've lost over 30% of arable land over the past 40 years, according to a 2015 study. These constraints are forcing businesses to rethink conventional food production and seek out more sustainable practices.

"We're nearing an inflection point that will redefine food," said Ammar James, one of the portfolio managers of VanEck Future of Food ETF YUMY, which invests in companies in and around the food supply chain that support or stand to benefit from innovation.

James said he sees a shift across the whole supply chain, both through new IPOs and established companies pivoting their businesses through mergers and acquisitions and proprietary research and development.

What Makes Ecolab and IFF Stand Out?

To find the cream of the crop, we started with companies in the Morningstar Global Food Innovation Index, which looks at food innovation across four subthemes: alternative proteins, agriculture technology, nutritional innovation and safety, and sustainable food production and packaging. From there, we cross-referenced our list of best companies. According to Morningstar equity analysts, the best companies have durable competitive advantages that can drive their long-term growth. While our analysts consider environmental, social, and governance factors in their assessments, the screen for best companies does not make exclusions based on ESG risk. (You can find the full set of criteria here.)

Ecolab ECL and International Flavors & Fragrances IFF were the only two companies included on our list of best companies and in the food innovation index.

Ecolab plays an important supporting role in the food industry by supplying cleaning and sanitation products. It stands to benefit from two trends affecting the food supply chain. The first is the shift in consumer preferences toward fresh food. According to Morningstar senior equity analyst Seth Goldstein, "As food-service providers serve more fresh food, their cleaning needs become more complex. Ecolab can help its customers make the transition." As a result, Ecolab will become an even more important part of its customers' businesses.

The second trend that Ecolab can capitalize on is the shift to water conservation. Water scarcity may drive up the cost of fresh water, so companies will try to limit their water use by seeking out more efficient solutions. Ecolab can help companies implement systems that reduce their water and energy usage.

International Flavors & Fragrances, or IFF, plays a more direct role in the food industry as a leader in specialty ingredients. Its products are used in food and beverages, fragrances, personal care, enzymes, probiotics, and pharmaceuticals. The company has grown quickly through acquisitions; its most recent was DuPont's nutrition and biosciences business in 2021.

IFF has four segments. Nourish is the largest segment, which generates around half of revenue. This segment holds IFF's legacy flavors business and DuPont's ingredients business, including plant-based protein formulations and other ingredients like texturants and emulsifiers that affect the texture and feel of foods.

IFF's business is particularly appealing to companies producing plant-based meat alternatives or healthier versions of other foods. IFF can tailor its products to achieve the desired taste, smell, or mouth feel based on its customers' needs. By working with IFF, companies can remove ingredients like fat, sugar, or sodium without affecting the consumer experience. While consumer preferences are shifting to more sustainable and healthier foods, specialty ingredients companies like IFF make widespread adoption of alternatives more feasible.

According to Goldstein, IFF's proprietary formulas make it an important player in the food space. However, "IFF will need to continue investing in research and development to stay ahead of the curve." As the industry continues to evolve and consumer preferences shift, IFF will need to meet new demand, he says.

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