The sustainability trends set to shape the food system in 2022

• The next twelve months will see more pressure to act on livestock emissions after the UN found almost a third of the world's methane output comes from ruminant animals
• Environmental rules will see hopes grow around carbon farming and its potential to generate new and green revenues for the agriculture sector
• Agri-food companies will also need to start seeing greater progress towards reducing emissions in their supply chains
• The food industry will be watching whether plant-based products can go more mainstream and use the market to push the food system back within planetary limits
• Sustainable labelling is likely to focus on nutritional aspects in 2022, but new environmental claims could also be incoming

This year could see a big step towards a more sustainable food system - if businesses and policymakers turn their words into actions and show that their on the right path forward.

Pressure to deliver is growing after the world's governments agreed at COP26 that limiting global warming to 1.5°C requires "rapid, deep, and sustained reductions in global greenhouse gas (GHG) emissions" - with most legislators identifying agriculture as a top focus area to achieve this goal.

This context will see environmental progress obtain even greater prominence within the agri-food sector over the next twelve months and beyond - which requires scaling up solutions at each step of the supply chain, particularly where quick wins can be found. However, farmers will be facing the dual challenge of reducing their environmental footprint while maintaining, or increasing, economically viable production during an ongoing pandemic, which makes the green path forward a perilous one. It is not an easy task, but the impact of inaction has already been felt further up the supply chain, where around three-fifths (58%) of EU businesses reported weather events are currently impacting their operations and inaction risks making the situation worse.

FARMING

Methane momentum building

Pressure to act is likely to grow in 2022 after a recent UN report on methane showed reducing this greenhouse gas is "very likely the strategy with the greatest potential to decrease warming over the next 20 years". This already propelled over 100 countries to sign up to the Global Methane Pledge at COP26, where they committed to reducing their emissions by 30% by the end of the decade.

Agriculture is responsible for roughly one-third of climate emissions, and as the world shifts toward eating more meat that proportion may go up. However, eliminating these emissions is scientifically impossible if methane from ruminants and nitrous oxide from manure decomposition continue at its current rate of growth.

Pressure to act is likely to grow in 2022 after latest UN report on methane showed reducing this greenhouse gas is "very likely the strategy with the greatest potential to decrease warming over the next 20 years". This already propelled over 100 countries to sign up to the Global Methane Pledge at COP26, where they committed to reducing their emissions by 30% by the end of the decade.

Two of the biggest emitters - the EU and US - also introduced new methane reduction strategies in 2021, both of which focus more on mitigation measures for agriculture, rather than introducing targets or reducing herd sizes. This likely came as a relief to many agriculture groups, but it will still see more expectations on livestock farmers to reduce emissions, whether from rolling out more anaerobic digestors to better grazing strategies and manure management.

This will subsequently see greater hopes fall on innovative methane reducing feed solutions, such as insects and algae, with anticipation growing on when such products can reach the market. This could spark a sustainable animal feed race between different parts of the world and Europe appears in the lead after approving insect frass as a substitute for animal feed in late 2021.

Carbon farming foundations

Environmental pressures will see hopes grow around carbon farming and its potential to generate new and green revenues for the agriculture sector - if they can eventually sell the amount of greenhouse gases stored in soils to green-minded organisations.

According to Rabobank, about one tonne of CO2-equivalent can be removed from the atmosphere per hectare of farmland each year, which also presents a lucrative economic opportunity if carbon farming practices are rolled out. However, Barbara Baarsma, CEO of Rabo Carbon Bank, said more farmers need to adopt more climate-friendly practices for any related profits to materialise.

"No matter which methods are employed, it will take a few years for soil to improve to the extent that they will actually be able to absorb more carbon," Baarsma said at a recent FT sustainability event, adding that this is fundamental for a carbon farming marketplace to materialise.

The green finance expert recommends that food producers should start adopting the practices with the biggest gains now, such as no-tillage, growing cover crops and reducing inputs. She adds that even then, it will still take several years to translate these practices into a credit that can be sold to green-minded organisations.

This is likely to see a 2022 focus on both carbon farming pilots and how they link to marketplaces as well as how policies can simultaneously incentivize farmers to adopt the right methods. In the 2022 policy pipeline, the European Commission is set to put forward its proposal on carbon farming certification, while the US is expected to put forward its vision for carbon farming in the first part of this year.

Steps to scale sustainability

Whether its government schemes or corporate programmes, sustainable farming pilots are found in most agriculture sectors, and in most markets, but the diversity of farm systems means wide-scale adoption of tried-and-tested solutions still struggle to materialise at the needed scale. Along with carbon farming, next year will see greater pressure to attract more farmers to join successful pilot projects, from boosting biodiversity to precision practices, and some industry leaders have already begun to see a clear path forward.

PepsiCo wants seven million acres of farmland that they source from to adopt regenerative agriculture practices by 2030 and the agri-food giant aims to go from the current 85,000 acres up to 500,000 in the next few years. PepsiCo's Chief Sustainability Officer Jim Andrew explained that this progress will require everyone taking a fair share of the burden, including policymakers and businesses.

"Regenerative farming in the long term is more practical, more profitable. There's also some upfront costs, we have to help farmers get over those costs," he said, adding that once farmers see the effort-sharing along with the environmental and economic benefits, then adoption in a sector moves quickly.

Data will also grow in importance for the agri-food sector's actions to improve its sustainability. AB InBev are working with some of their farmers to ensure they can track and understand their data, which it hopes can give the drinks company the needed insights to determine their supply chain sustainability and incentivise their suppliers to take further steps forward. Their Chief Sustainability Officer Ezgi Barcenas said: "Access to data allows us to not only benchmark across the farmers and continue to improve them, but also gives them an ability to listen and see the lessons learned from others."

MANUFACTURING AND PROCESSING

Scope 3 collaboration

The push for more data is also coming from agri-food companies because they want to see greater progress towards reducing emissions in their supply chains, commonly referred to as scope three. Each year, more companies commit to net zero emissionsthrough the UN science-based targets initiative (SBTi) and the approval process requires companies to commit to reducing supply chain emissions.

To make this a reality, food service company Compass CFO Palmer Bown said collaboration is going to be increasingly important. "For real change, we need our collective power across the entirety of the chain," Brown said. "This is from governments, NGOs, and industry associations. Working on our side [it is] encouraging more sustainable consumption for clients and consumers."

The company serves around a billion meals a year and sources products from thousands of different suppliers worldwide. Its CFO said that businesses' buying power can do a lot to shape supply chain emissions, which are generally outside their direct control. "The billions of dollars spent on food and beverages through the suppliers puts us in a unique position to help," Brown said, adding this can incentivise their suppliers to make their own net zero commitments and contribute to their emission targets.

This dynamic has the added benefit of strengthening commercial relationships and reinforcing collective action toward sustainability, which is likely to see more companies continue to set SBTs throughout 2022.

Deforestation fight

The focus on supply chain emissions next year will also reinforce discussions around sustainable sourcing of raw materials, particularly to prevent contributing to deforestation. This will continue to affect many agri-food stakeholdersand create stronger sustainability links between the likes of manufacturers and processors with brands and supermarkets.

Rainforest Alliance CEO Santiago Gowland said that while the technology, public finance, industry commitments and consumer demand already exist to fight deforestation worldwide, there is still not enough leadership from corporate executives and governments to take the needed steps to shift the entire food system away from this type of environmental destruction.

"Governments can't do it alone, businesses do it alone and civil society clearly can't do it alone - we need a much stronger alliance that shares the responsibility," Gowland said, adding that an immediate priority is for legislators to lay the legal foundations to fight deforestation.

EU policymakers are taking the lead here and over the next months they will formalise their opinions on the European Commission's proposal to limit products contributing to deforestationinto the bloc's Single Market. The EU executive's proposal will not translate into a direct ban and focuses more on a mandatory reporting system that should show how sustainable suppliers are in their sourcing, which is hoped to push the agri-food sector towards less destructive sourcing - something which could give sustainability a greater competitive edge next year.

Plant-based foods

A lot of the sustainable food trends of 2022 can be concentrated in a single market segment - plant-based foods. And over the next twelve months, sustainability stakeholders will be carefully watching the growth of plant-based products to see if the sector can move from a niche position to a place where it can significantly push the food system back within planetary limits.

US retail sales of plant-based foods have continued to grow in recent years, increasing by 27% in 2020 and bringing the total plant-based market value to $7 billion, according to the Good Food Institute.

Impossible Foods CEO Pat Brown expects further growth, particularly as the company launches a range of new products in 2022, such as chicken nuggets. "We're not having any problems with growth," Brown said. "More than three quarters of consumers who try our product against the bestselling animal-based chicken nugget prefer ours on taste alone."

Opponents to more plant-based foods argue they are not as nutritionally dense as goods obtained from animals, but Brown explained that Impossible Foods is aiming to steal more market share in the future by highlighting their products are not only better in environmental terms, but also on social issues, like nutrition.

"If you look at the actual nutritional profile of our products compared to the animal products, you'll see that we're actually doing that [already]," he adds.

It also looks like a consumer shift towards more plant-based foods will grow in 2022, with over a third of Europeans now saying they are either flexitarian, vegetarian or vegan, according to 7,500 people in 10 European countries. However, these respondents also reported issues when choosing plant-based foods, mainly a lack of options, information and high prices - something which brands will be hoping to address next year too.

Brown acknowledges they are still a start-up, but once they obtain enough scale, he hopes Impossible Foods will eventually be cheaper than animal products and create an economic force in the consumer marketplace that eventually offsets livestock's environmental impacts.

BRANDS AND RETAILERS

Sustainable pricing wars

With more environmental expectations falling on farmers, next year will see pressure also fall on brands and retailers to pay food producers more for sustainable food.

Some brands have already committed to this, such as Pepsico, while Compass CFO Palmer Brown acknowledges that pricing levels may need to evolve, but he said this can be difficult as their industry operates on thin profit margins. In the meantime, he said food companies can take actions to help send more profitable signals to the farm. "There needs to be an increased focus on seasonal locally sourced produce. That reduces food miles and supports local producers and communities," he said.

Executives are also increasingly having their bonuses linked to meeting corporate sustainable commitments, which may see more companies willing to pay a bit more for greener food in the future, but this trend will also have to navigate another commercial dynamic - the one between international manufacturers, brands and retailers themselves.

In recent months, retailers have been pushing back against policies that may weaken their bargaining power towards farmers, arguing that it will leave them at a vulnerable negotiation position to global brands. They blame this situation as the main reason why supermarkets join retail alliances, which farmers accuse as being a powerful driving force in pushing food prices down.

Policymakers around the world may look towards Europe for a solution as EU member states attempt to deal with this sustainability obstacle through new regulations outlawing several unfair trading practices, such as late cancellation of contracts. This will also be rolled out throughout 2022 which may go some way in negating some price concerns among farmers, but this is still likely to continue to irk brands and retailers.

True cost of food: Answers on a fair price for food will need to be found sooner than later as the cost of increasing sustainability could create an economic blockade, one that slows down both green policies and corporate strategies.

This may see calls grow louder for incorporating environmental and social costs in food purchases and help the market better consider the expense from issues like climate change and health issues. The Rockefeller Foundation says that a trillion dollars is spent on food in the US each year, but this cash flow also causes a $1.1 trillion health bill from diet-related diseases and about $500 million worth of environmental costs, excluding the impacts of a loss of biodiversity and ecosystem services, such as cleaning water.

"The immediate solution is to shift the way we're investing and the way we're prioritising the resources we're putting into the food system," said Roy Steiner, senior vice president at Rockefeller, and he believes that approach "can address a lot of those costs without raising the cost of food" in many cases.

This may sound appealing to green-minded politicians, but it remains a high-risk option - on one hand it can stimulate more sustainable production and consumption, but on the other it risks undermining farmers in existing systems that are considered less green.

In Europe, there appears to be some hunger to explore pricing that better reflects environmental and social costs, beyond existing sugar taxes. The Netherland's former agriculture minister recently voiced her support for some sort of sustainable food levy, while UK Secretary for Food and Rural Affairs George Eustice said Britain will "start to move into the realms of things like carbon taxes" to improve farming's environmental impact, although he soon had to back down after annoying the British livestock industry.

Sustainable labelling battlegrounds

Communicating to consumers through branding may be a more favoured approach than changing food prices, but this is likely to evolve on its own over the next twelve months either way.

The European Commission will put forward its proposal for a mandatory EU front-of-pack nutritional labelling by the end of 2022. The food industry is anxiously awaiting what approach the EU executive may favour, whether it is like France's Nutri-Score, Italy's Nutriform or the UK's traffic light label.

Reports within EU circles suggests that the Nutri-Score is the preferred path, but this has already upset some agri-food stakeholders, particularly those in Italy and Spain. Sergio Martin Rubio from the Spanish National Association of Meat Industries (ANICE) said at a recent Farm Europe event that they are "totally against the Nutri-Score" because of its focus on negative nutrients. "They leave aside the overall nutritional contribution of foods, discriminating foods into 'good' and bad'," he said.

Similar 'good versus bad' debates may emerge around other environmental labelling plans, particularly if France moves ahead with its idea to label foods with an EU recognised carbon footprint. This is one of the French agri-food policy priorities for its presidency of the EU Council in the first half of 2022 and it already has some backing within the food industry. Compass CFO Palmer Bown also says they may look to increase the use of carbon labelling on their menus because it can help incentivise a more climate-friendly diet among increasingly green minded consumers.

This article was published by S&P Global Commodity Insights and not by S&P Global Ratings, which is a separately managed division of S&P Global.