Methane Rising: Three questions investors in the food sector should ask their portfolio companies

By Josh Torres and Andrew Howell, CFA

Starbucks and Clover Sonoma said this week they would track and disclose methane emissions within their dairy supply chains, joining the Dairy Methane Action Alliance in the latest sign of accelerating action on food sector methane emissions. Launched in December at COP28, the Alliance has quickly grown to include eight global food and dairy companies representing over $230 billion in annual global sales. Investors should throw their full support behind it.

As the world grapples with the challenges of a changing climate, there is a growing understanding of the impact of agricultural emissions. Commitments made at COP28 underscore the importance of transitioning the food and agriculture sector to net zero, with new pledges of more than $7 billion for climate mitigation and adaptation. The net zero transition will reshape food and agriculture companies as the industry grows to meet the nutritional needs of 9.8 billion people in 2050 – 20% more than today – even as it dramatically reduces greenhouse gas emissions. For asset managers, understanding the key drivers of risk and opportunity in the transition will be crucial to navigating this period of change.

Key Focus: Agricultural methane

Methane is a major source of global warming, with over 80 times the potency of carbon dioxide over 20 years. According to the IPCC, human-related methane emissions have caused one-third of the observed global warming to date. Agriculture is the largest source of anthropogenic methane at 40% of annual emissions. Emissions from cattle – both digestion and manure – are the largest source of agricultural methane.

Despite the important role that methane plays in warming the planet, few major food and dairy companies have set methane-specific climate targets. This is starting to change, with Danone’s announcement in 2023 of a 30% methane reduction target by 2030. Against this backdrop, the time is ripe for investors to raise the importance of methane management with food and dairy companies in their portfolios.

Three questions investors should ask food and dairy companies about methane

As leading food and dairy companies begin to take actions to measure and reduce methane in their value chains, investors should emphasize the importance of this issue and gauge corporate progress. We recommend three questions to get the conversation started.

  1. Methane measurement and disclosure: What is your plan to measure and disclose methane in your value chain?

Agricultural supply chains are highly disaggregated, with numerous intermediaries along the value chain. The multiple custody changes as commodities flow from farm to consumer make it difficult to trace a product’s origins, gather data, and measure emissions. Moreover, direct measurement technology in the market today is expensive, so adoption is low.

In the absence of affordable direct measurement tools, there are increasingly sophisticated estimation models[1] that companies can use to assess their methane emissions. Such tools are used by companies even when they lack granular, on-farm data. Food and dairy companies can adopt these tools as a crucial first step down the path of methane management.

In addition, companies can improve data quality over time by supporting research on estimation models and by engaging with suppliers to improve data collection.

  1. Methane action planning and supplier engagement: What is the company’s action plan to reduce methane, and how are you engaging with suppliers?

The role of methane emissions in the livestock industry argues for a strategic approach to management through a methane action plan. Such a plan should be an important component of an overall climate transition plan and can send crucial demand signals to accelerate research and funding for solutions. Supplier engagement is a critical element to any plan, since purchased goods and services are often the largest source of emissions in food and dairy company supply chains.

To achieve methane reductions, food and dairy companies need to work with an array of players such as cooperatives, commodity traders, aggregators, and farmers to design strategies that address emissions throughout the supply chain. Methane action plans can build from shared goals and knowledge exchange platforms and grow to include tailored contract terms and co-investment partnerships.

  1. Methane solutions: How does your planned spending align with your methane action plan?

As in other industries, emissions reduction technologies are still evolving in animal agriculture. However, there are methane abatement solutions that have demonstrated impact at scale. These include improved feed and grazing management, manure solutions such as biodigesters, and enteric feed additives. Recently, methane feed additives have seen breakthroughs in markets around the world, but cost recovery and pricing remain barriers to mass adoption. As the interest in methane abatement grows, more investment is needed for agricultural methane innovations.

When engaging with food and dairy companies, investors can inquire about the company’s budget for methane mitigation research and innovation. Visibility into how capex spending aligns with methane action plans shows how serious a company is about methane management.

For dairy companies, a new alliance offers a path for leadership

With an eye to the enormous impacts and opportunities of agricultural methane, eight global food and dairy brands – Bel Group, Clover Sonoma, Danone, General Mills, Kraft Heinz, Lactalis USA, Nestle, and Starbucks – have joined Dairy Methane Action Alliance (DMAA).

DMAA brings together leading food and dairy companies through commitments to measure and disclose methane emissions in their dairy supply chains, collaborate on solutions, and develop methane action plans. EDF supports the initiative with technical guidance and strategic support for measuring and mitigating methane emissions. This collaborative alliance sets the stage for a transformative shift in methane action across the industry. Asset managers can leverage DMAA as a resource to engage the food and dairy sector by encouraging companies to join the coalition.

Agricultural methane emissions trace a complex path through the food and dairy industries, but by asking simple questions, investors can gain insight into the enormous opportunities at hand.

[1] Some of the commonly used tools are: Cool Farm Tool, Farm ES, COMET-Farm, GLEAM, and CAP’2ER