Vegan funds: From plant to pocket

Vegan WideFunds tapping into the growing vegan theme are buoyed by increasing sales of plant-based food, finds Piyasi Mitra.

Struggling to end your love affair with bacon for climate’s sake should be easier now than ever because “smart” protein offer guilt-free indulgence.

Also known as alternative or sustainable proteins, smart proteins are plant-based and food-tech alternatives to consumable animal products. Taste, texture, colour, or umami (savouriness)… you name it, and these faux food items can mimic it.

A recent Boston Consulting Group (BCG) report predicts that 8% of all meat, seafood, eggs, and dairy eaten globally would turn "alternative" by 2030. It is not just vegans driving this trend. More and more people are choosing a flexitarian life, opting for less meat due to concerns about animal welfare, health, climate or just taste.

European edge

Vegan ETF investors in Europe have reasons to cheer. A Good Food Institute (GFI) survey recorded a 21% increase in plant-based food sales between 2020-2022 across 13 European countries and reached €5.8 billion last year.

Despite global economic headwinds, the GFI analysis found that Europe's sustainable protein companies raised 24% more investment in 2022 than in 2021. France and Spain witnessed investments increase across all sustainable protein categories, and investment in the UK’s cultivated meat industry increased almost fourfold. Scandinavia is reportedly becoming a "fermentation powerhouse", with investment in Swedish companies more than tripling and funds raised by Finnish companies more than doubling.

As Simon Hopkins, CEO, Milltrust International Group, puts it, there has probably “never been a better time” to raise investment capital in the sector. Milltrust International's smart protein fund, for example, invests in companies focusing on the “future of food”, including plant-based protein, precision fermentation, cultivated meat, infrastructure and scalable production.

The fast-growing vegan food segment is estimated to become worth $61.35 billion in 2028 (Fortune Business Insights). Although high energy prices coupled with inflation continue to pose challenges, Hopkins is hopeful that the "next phase of consolidation" would emerge from large-scale platform manufacturing for plant-based protein companies.

Veganuary connection

Vegan or not, there’s no way you are alien to the concept of ‘Veganuary’. Matthew Glover, co-founder of Sentient Ventures, is also the co-founder of this celebrated initiative. Voted a top innovation fund by the World Economic Forum, Sentient Ventures is a £30 million UK-domiciled, early-stage growth fund that invests in international companies developing animal product substitutes.

The other two cofounders are Alexandra Clark and Manish Karani. All three are committed vegans.

Consumers are demanding better alternatives to traditional animal products, with startups and incumbents alike innovating as the industry moves towards “plant-based 3.0”, says Sentient Ventures.

La Fauxmagerie, one of its portfolio companies offering taste, texture, and prices akin to dairy cheese, were recently introduced in 104 UK Waitrose stores.

The longer-term trend is a shift from the proof-of-concept period of adoption exemplified by the last three years of market growth towards an industry tipping point and exponential growth, observe the founders.

Sentient Ventures aspires to make a difference in the ill effects of meat consumption with a £100 million fundraise in 2024 by investing in companies that accelerate the removal of animals from production and significantly contribute to mitigating climate crisis while also making “market-beating returns”.

Cruelty-free indices

Beyond Investing - issuer of the “world’s first” vegan-friendly and climate-conscious exchange traded fund - was founded by a team of ethical vegan professionals and environmentalists to bridge the gap in the market for indexes that incorporate animal, climate and environmentally friendly themes.

According to Claire Smith, CEO of Beyond Investing, food, agriculture and alternative proteins seized the spotlight at the 2022 United Nations Climate Change Conference (COP27), and she also adds that a GFI survey has indicated that 80% of investors who invest on behalf of an ESG or impact fund reported that alternative proteins were part of their funds' core mandates.

Smith says a “zero animal exploitation” policy underpins all investment products in the vegan world index by Beyond Investing. It comes with a Swiss-listed certificate and provides targeted thematic exposure to the plant-based trend.

The current 60 index constituents are ranked for revenue growth, risk, market capitalisation and liquidity. “The index leans towards stocks with the highest sales growth, most liquidity, larger size, and least risk. The weighted average market capitalisation of the index is $4.8 billion, and the weighted average 1-year sales growth of index constituents is +23%,” adds Smith.

On each quarterly rebalance, stocks that have held an initial public offering or gone vegan are introduced, and the index is reorientated towards stocks fitting the sales, size and liquidity criteria. “The index aims to contain the latest publicly listed plant-based shares and gain exposure to the fastest growers whilst avoiding highly volatile and illiquid penny shares,” Smith says.

"Vegan has broadly kept pace with the SP500 Index since its inception in 2019, demonstrating that over the long-term a low carbon, cruelty-free, environmentally-friendly and sustainable index can provide similar returns compared to the broad market."

With net assets worth $64.35 million, Beyond Investing‘s US Vegan Climate ETF (VEGN) offers an expense ratio of 0.60%. VEGN had a “great first quarter 2023” up 11.43% year-to-date on a net-asset-value basis, while the S&P 500 index was up 7.5% over the same period. The “best-ever quarter” for VEGN saw it outperform the S&P500 Index by 3.93%.

“Performance of VEGN has broadly kept pace with the P500 Index since its inception in 2019, demonstrating that over the long-term a low carbon, cruelty-free, environmentally-friendly and sustainable index can provide similar returns compared to the broad market whilst not compromising on an ethical stance,” says Smith.

On the other hand, Beyond Investing's Europe Vegan Climate Index (VEGANE) is a passive, rules-based index of European large and mid-cap stocks excluding companies engaged in animal exploitation, defence, human rights abuses, fossil fuels extraction and energy production and other environmentally damaging activities.

Smith opines it is time the wider public, including investors, recognise the ongoing shift towards sustainable consumption. “This necessarily means less meat, dairy, fish, and a larger market share secured by companies in food, agriculture or materials not exploiting animals,” says Smith.

These companies have the potential to outperform, whereas companies in animal agriculture and selling animal-derived products risk ending up with stranded assets and losing market share, Smith adds.

Market mantra

Last year’s global turmoil impeded many companies from listing on stock exchange listings, which Smith considers a necessary pause in what was an “overhyped” sector with “unrealistic” growth expectations. However, Smith envisages more plant-based and foodtech companies entering the market once their revenues are higher, demonstrating positive earnings before interest, taxes, depreciation and amortisation.

“Private markets - currently the most active in funding startups and scaleups - is where the highest returns would be available for investors who can lock up money for five years or more,” Smith says.

On a similar note, Stuart Forbes, co-founder of RizeETF – which offers, among others, the Rize Sustainable Future of Food Ucits ETF - sees valuations as more reflective of fundamentals and realistic growth expectations.

“Since the end of Q3 2022, we have seen markets begin to rebound following broad risk-off sentiment earlier in the year,” he says. Interestingly, it is not just the "cool" innovators driving returns. Many old-economy companies, such as Deere & Co, a manufacturer of agricultural machinery based in the US, have pivoted towards innovation and technology to strengthen their economic moat, Forbes points out. "They also tend to have strong balance sheets, ample free cash flow, and less debt than early-stage companies. Recently, the top performers in our index have been high-quality or profitable transition companies contributing to environmental objectives in the food system.”

Forbes adds: “You’ve got funds with meat companies in, and you’ve got funds without meat companies – as simple as that.” He says the USP of Rize Sustainable Future of Food Ucits ETF lies in its thematic classification system underpinned by research on various factors.

The no-meat policy is embedded explicitly in the firm’s Sustainable Future of Food thematic classification system. The fund also features a list of excluded companies on the website to ensure transparency.

Thematic ETFs require time to research and ensure only eligible companies make it into the fund universe. Domiciled in Ireland, the VanEck Sustainable Future of Food Ucits ETF under the MVIS Global Future of Food ESG Index tracks the largest and most liquid companies offering products and services related to meat and dairy alternatives, organic foods, food flavours, or agriculture technologies.

With a total expense ratio of 0.45% and net assets of US$7 million, the fund focuses on alternative protein and food manufacturers and flavour-enhancing businesses that make vegan patty taste just like beef patties, shares Dmitrii Ponomarev, ETF product manager at VanEck.

While this entails higher prices than “vanilla” funds, sustainable food investment funds are closer to the average fee among other thematic ETFs, says Ponomarev.

Red flags in the green

Many funds leveraging the popular investment theme of alternative protein or sustainable food lack research-backed strategies, cautions Forbes. He recommends that investors “lift the hood” and look at the holding companies. “Look for the documentation explaining the breakdown of the food theme the fund purports to represent. How are companies identified and selected for the strategy? How are they benefitting the theme's environmental and/or social objectives?”

Ignore any United Nations Sustainable Development Goals (SDG) highlighted by the fund's marketing strategy, as most of the companies held by public funds are investing in developed markets, he says. “Promoting plant-milk consumption in developed countries is great, but what about improving food insecurity and health for consumers in poorer regions, which is what the SDGs essentially intended to target?” argues Forbes.

"Recently, the top performers in our index have been high-quality or profitable transition companies contributing to environmental objectives in the food system.”

Some exposure to the companies (or funds) positioned within sub-sectors that are also poised to benefit from the rise of conscious consumerism and global initiatives targeting the food system would be a good bolt-on to an overall diversified portfolio, recommends Forbes.

As per GFI’s Europe data, vegan meat product sales increased by 21% between 2020-2022, sales of plant milk rose by 20%, while animal-based meat and milk sales dropped by 8% and 9%. respectively. The alternative seafood sector saw a whopping 343% growth in unit sales.

“There is a shift towards more plant-based and flexitarian diets,” shares Forbes, highlighting GFI data showing the plant-based meat category was less impacted by inflation and price increases in 2022. Plant-based meat prices increased by 1%, whereas conventional meat prices increased by 11%.

Milk alternatives take the cake in the world of sustainable food investments-probably as there are a sizeable number of lactose-intolerant people. The most developed plant-based category now constitutes 11% of the total milk market. Plant-based cheese sales surged by 153% between 2020 and 2022, while dairy cheese sales fell by 4%, according to the GFI data.

Regulatory reinforcements

Forbes addresses an ugly truth: how the world’s mainstream media, until very recently, has had a tunnel vision on climate change. Even if the world were to halt all non-food-related greenhouse gas emissions today, our remaining emissions would exceed the 1.5°C target set by the Paris Agreement by 2100. (To limit global warming to 1.5°C, greenhouse gas emissions must peak before 2025 at the latest and decline 43% by 2030, according to the Agreement). On the other hand, increasing the global market share of alternative proteins from 2% to 8% by 2030 could yield an emissions reduction equivalent to decarbonising 95% of the aviation industry (BCG).

There’s light at the end of the tunnel, though, assures Forbes. Haarlem, the Dutch city, has become the world’s first city to ban meat advertisements from public places from 2024 to arrest greenhouse gas emissions from the meat system. The European Commission has also proposed a law to ensure that products sold within the EU do not come from deforested land and also launched a regulation last year to help reduce toxic pesticide use by 50% in agriculture by 2030.

The market mantra is clear. These changemakers are ready to offer investors the best of three worlds - mitigate climate damage, make money, and munch on those meaty-tasting treats.

© 2023 funds europe

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