How to Integrate Agtech Into Client Portfolios

Even if your client has shown interest in sustainable investing, not every investment product with a “green” label will align with their goals.

Advisors can use tangible topics like food as a gateway into sustainability conversations. By capturing the why behind the what clients say they want to invest in, advisors can build a fitting portfolio.

Agtech Companies Ramping Up Productivity for Zero Hunger

The United Nations Sustainable Development Goals aspire to end world hunger, an S issue of ESG. The U.N. predicts that the global population will rise to 9.8 billion by 2050. More people will create a surging demand for food as climate change turns up the heat on production.

Just five countries produce about 60% of the world’s food, and any disruptions to growing conditions could cascade around the world. As climate change accelerates, shifting temperatures will affect where and how long growing seasons last. Hotter summers and more rainfall could also cause more harvests to fail.

To combat food scarcity, some companies have launched tech to grow more on existing land.

• Agricultural biotechnology uses scientific advancements to make crops more resilient and productive. Agrichemical companies like Corteva have produced new seed traits and chemicals to resist weeds, bugs, and fungi.
• Robotics and farming automation companies use robotics to tackle time-intensive tasks. In 2021, Deere snapped up a startup that retrofits farming machinery with self-driving capabilities.
• Drones and imagery analytics companies gather data on in-field and soil conditions. Sensors can identify issues early to reduce damage from flooding, disease, and pests.
• Agrifinance and e-commerce firms support growers with central resources and more control over distribution.

Agtech Pioneers Safeguarding the Environment

The agriculture and food production industries are major contributors to climate change. Dairy and beef farms churn out methane, which traps heat in the atmosphere. Unsustainable farming practices can also release runoff chemicals that feed toxic algal blooms.

Investors from Florida, who know the rotting smell of red tides on their beaches, might be more critical of agtech companies as a sustainable opportunity.

Other agtech companies hope to address the E of ESG with more precise, sustainable ways of farming.

• Precision agriculture uses technology to reduce emissions and save money on operations. Sensor-fitted drones can measure crop health and surgically apply fertilizer and pesticides.
• Vertical and indoor farms replace rain with sprinklers and sunshine with LED lights to extend growing seasons. Vertical farms also take up less real estate. Growing vegetables near cities can reduce carbon emissions from transportation.

Financial planning tools can also help you measure a client’s level of interest in sustainability. Coming soon in Morningstar Advisor Workstation, the new ESG questionnaire will help clients express their preferences on a sliding scale. Accurate data can quantify client opinions on sustainable investing so you can implement them in investment proposals.

Sustainable investing isn’t a yes/no box to check off. As an advisor, you can calibrate your approach to each client's financial goals, risk tolerance, and values.

The Sustainable-Investing Framework can help you build the right portfolio for each client in two ways.

1. Exclude Strategies and Companies to Avoid Negative Impact

Under this approach, clients can exclude funds that hold certain companies based on products, services, or corporate activities.

If clients are passionate about the environment, you can screen out strategies with any amount of product involvement in pesticides or genetically modified crops. If clients feel strongly about safe access to food, you can filter out companies with food-safety controversies.

Exclusions will tilt the balance of a portfolio toward one style or another. Advisors can build clear lines of communication by showing clients how they chose new strategies to offset any over- or underexposure. Show clients how choices affect their risk-adjusted returns with hypotheticals to help them make confident decisions.

Would applying exclusions be worth the potential trade-off of returns? If so, how much? Would it affect the risk balance of their portfolio, shifting clients out of their comfort zone?

2. Target Sustainability Themes in Your Investments

Themed funds hope to take advantage of predicted long-term trends that will redefine an industry. Themed funds can seek to capture sustainability trends, like renewable energy, or target performance through trends in one industry, like tech. Instead of going all in on one company, themed funds hope to take advantage of an overall trend across more diversified companies.

The private equity market shows investors’ appetite for food innovation. Global agtech companies raked in $3.3 billion in funding across 222 deals in the first quarter of 2022. This comes after a banner year in 2021, when venture capital firms invested $10.5 billion in agtech startups.

As an advisor, you can help clients seek opportunities in food with transparent data.

One impact metric you can consider is revenue exposure—the percentage of revenue that companies derive from sustainable activities. Does agtech make up a significant portion of their business model? Or is most of the company value driven by other functions?

Food innovation funds reflect companies producing more food, more nutritious food, or improving efficiency through tech. These funds are often not defined by ESG in their prospectus. Some could have a positive social impact but fall short on their environmental practices.

The Morningstar Global Food Innovation Index is designed to deliver exposure to companies well positioned to benefit from the growth of innovations that aim to improve nutrition, food production practices, food safety measures, and the sustainability of related packaging.

Morningstar research shows that thematic funds often tilt toward growth. This shouldn't be a surprise, since most thematic funds look to tap emerging themes with significant potential. Themed funds can also come with steeper management fees, which could offset some of their performance.

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With experienced advisors, investors don’t have to navigate ambiguous and confusing ESG data alone. Armed with research, financial advisors can show their value and their commitment to understanding clients’ goals.

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